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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 [FEE REQUIRED]
For the fiscal year ended October 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission file number 1-5725
QUANEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1900 WEST LOOP SOUTH, SUITE 1500
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 961-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
COMMON STOCK, $.50 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
RIGHTS TO PURCHASE SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
DEPOSITARY CONVERTIBLE EXCHANGEABLE
PREFERRED SHARES, EACH REPRESENTING
1/10TH OF A SHARE OF 6.88% CUMULA-
TIVE CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK ($250 LIQUIDATION
PREFERENCE) NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No________
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the registrant's voting stock held by
non-affiliates as of November 30, 1994, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $294,490,013. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.
At January 23, 1995, there were outstanding 13,429,533 shares of the
registrant's Common Stock, $.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Reference to this Report
--------- ------------------------
Annual Report to Stockholders Parts I, II and IV
Proxy Statement for Annual Meeting of
Stockholders to be held March 2, 1995 Part III
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ITEM 1. BUSINESS
GENERAL
The Company was organized in 1927 as a Michigan corporation under the name of
Michigan Seamless Tube Company. The Company reincorporated in Delaware in 1968
under the same name and changed its name to Quanex Corporation in 1977. The
Company's executive offices are located at 1900 West Loop South, Suite 1500,
Houston, Texas 77027. References made to the "Company" or "Quanex" include
Quanex Corporation and its subsidiaries unless the context otherwise requires.
Quanex Corporation is a technological leader in the manufacture of specialized
metals, including carbon and alloy steel and aluminum. The Company's products
include engineered hot rolled carbon and alloy steel bars, cold finished steel
bars, seamless and welded steel tubing and aluminum products. Quanex produces
high quality specialized metal products for selected markets to achieve
attractive profit margins. Through state-of-the-art process technology, low cost
production and engineering to specific customer applications, the Company
believes it achieves competitive advantages. To reduce the impact of cyclical
economic downturns, the Company's strategy is to participate in diversified
markets, including the industrial machinery and capital equipment industries,
the transportation industry (including auto and truck), energy processing and
the home building and remodeling industries.
Since the mid-1980s Quanex has refocused its strategy from being a
manufacturer principally of steel products with a heavy dependence on energy
markets to a diversified specialty metals company serving a broad range of
markets. The Company's future growth strategy focuses on continued penetration
of higher margin markets for the Company's steel products and the continued
expansion of its aluminum products manufacturing operations. Quanex also has
implemented programs to increase capacity utilization by selectively producing
certain commodity grade products at some of its facilities.
The Company has invested significantly in technologically advanced continuous
manufacturing processes to meet demanding quality specifications and to achieve
cost efficiencies. In its MacSteel operations, rotary centrifugal continuous
casters are used with an in-line manufacturing process to produce bearing grade
and aircraft quality, seam-free, specialty engineered carbon and alloy steel
bars that enable Quanex to participate in higher margin markets. In August 1991,
the Company completed Phase I of a capital improvement program for its MacSteel
operations, at a capital cost of approximately $20 million, that enhanced the
steel refining processes and increased productive capacity by approximately 10%
to 500,000 tons per year. Phase II of the program aims at increasing caster
productivity and modernizing rolling and finishing equipment to achieve
dimensional precision and increase productive capacity by approximately 10% to
550,000 tons per year when completed in early 1995. The Company estimates total
expenditures of approximately $60 million for the Phase II project.
In 1989 Quanex entered the aluminum products business through the acquisition
of Nichols-Homeshield, Inc. to diversify its earnings base and continue its
strategic transition into specialty metals. In early 1990 the Company commenced
a two-year aluminum mini-mill construction project to increase significantly its
participation in the aluminum markets. The plant began commercial production in
July 1992 producing coiled aluminum sheet from scrap using a state-of-the-art
Hazelett thin-slab continuous caster with annual finishing capacity of
approximately 280 million pounds.
The Company's business is managed on a decentralized basis. Each operating
group has administrative, operating and marketing functions. Financial
accounting and controls measure each plant's return on investment; and superior
performance is rewarded with incentive compensation, which is a significant
portion of total employee compensation. Intercompany sales are conducted on an
arms-length basis. Operational activities and policy are managed by corporate
officers and a small staff who provide corporate accounting, financial and cash
management, tax and human resource services to operating divisions.
MARKETS AND PRODUCT SALES BY BUSINESS SEGMENT
The Company's operations are primarily grouped into four business segments,
consisting of (i) hot rolled steel bars, (ii) cold finished steel bars, (iii)
steel tubes and (iv) aluminum products. General corporate expenses are
classified as "Corporate and Other" operations.
Information with respect to major markets for the Company's products,
expressed as a percentage of consolidated net sales, is shown under the heading
"Sales by Major Markets" on page 8 of the 1994 Annual Report to Stockholders and
is incorporated herein by reference. Although Quanex has attempted to estimate
its sales by product and market categories, many products have multiple end uses
for several industries and sales are not recorded on the basis of product or
market categories. A significant portion of sales is made to distributors who
sell to different industries. Net sales by principal market are based upon the
total dollar volume of customer invoices. For the year ended October 31, 1994,
no single customer allowed for more than 10% of the Company's sales.
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A description of each industry segment is shown below:
Hot Rolled Steel Bars
The Company's hot rolled steel bar operations are conducted through its
MacSteel division, consisting of two plants located in Ft. Smith, Arkansas and
Jackson, Michigan. These plants manufacture hot finished special bar quality
("SBQ") carbon and alloy steel bars. Management believes that MacSteel has the
only two plants in North America using continuous rotary centrifugal casting
technology. This casting process produces inherently seam-free bars, without
surface defects and inclusions, thereby reducing the need for subsequent surface
conditioning. The continuous casting and automated in-line manufacturing
operations at the MacSteel plants substantially reduce labor and energy costs by
eliminating the intermittent steps that characterize manufacturing operations at
most larger integrated steel mills. Typically, the Company sells only complete
heat lots, or batches, which are made to specific customer requirements. Heat
lots average 45 tons at Jackson and 50 tons at Ft. Smith. MacSteel's high
quality steel bars currently sell for an average of approximately $520 per ton,
and its specialty products can sell at a considerable premium to that price.
MacSteel has focused its capital improvement programs on production of high
quality specialty steel bars. In August 1991, MacSteel completed the first phase
of a capital improvement program, called MacSteel Ultra Clean Steel Program, at
a cost of approximately $20 million ("Phase I"). This program improved
MacSteel's metallurgical, melting and casting operations and provided ultrasonic
testing facilities at both plants. These improvements enable the Company to
produce bearing grade and aircraft quality steel bars, permitting the Company to
participate in higher margin segments of the market. Phase I increased
productive capacity of the MacSteel operations by approximately 40,000 tons to
500,000 tons per year. Phase II of the Ultra Clean Steel Program will upgrade
and modernize rolling and finishing capacity and increase caster productivity.
This improvement should permit increased participation in the value-added cold
forming and bearing markets and will expand product size ranges. The Phase II
program is expected to increase annual productive capacity by approximately
50,000 tons to 550,000 tons per year when construction is completed, which is
currently scheduled to be in March 1995. Total cost of Phase II is expected to
be approximately $60 million.
MacSteel products are manufactured for customers in the automotive, light
truck, heavy truck, anti-friction bearing, off-road and farm equipment, defense,
capital equipment and seamless tubular industries. These industries use SBQ
steel in critical applications such as camshafts, crankshafts, transmission
gears, bearing cages and rollers, steering components, hydraulic mechanisms,
seamless tube production and track components of military vehicles. Part of
MacSteel's production may be sold to LaSalle Steel for conversion into cold
finished bars. The Company's steel tube business also purchases MacSteel bars
for piercing and extrusion into specialty tubular products.
Cold Finished Steel Bars
The Company's LaSalle Steel subsidiary produces cold finished bars in its
Hammond, Indiana facility. LaSalle Steel is a technological leader in the
production of cold finished and special purpose steel bar products, having
obtained numerous foreign and domestic patents throughout its history. Like
MacSteel, LaSalle Steel features products and manufacturing processes that
emphasize quality and cost effectiveness. LaSalle Steel uses high quality hot
finished steel bars that satisfy exacting quality and metallurgical
specifications. The bars are cold drawn and, through a combination of turning,
grinding and polishing operations, are manufactured into bars with precision
surfaces and guaranteed size and straightness tolerances. These processes,
together with heat treating, enhance the tensile and fatigue strength,
machinability, wear and corrosion resistance, weldability and platability of the
cold finished bar product.
LaSalle Steel's products are sold directly to customers in the machinery,
industrial equipment, tooling and automotive markets and are used to produce
items such as clutch shafts, gear box shafts, ball joints, sprockets and drive
mechanisms. Over one-half of LaSalle Steel's sales are to service centers that
supply the same industries. LaSalle Steel has implemented programs to increase
capacity utilization by selectively producing certain commodity grade products.
LaSalle Steel's Fluid Power plant in Griffith, Indiana is a major producer of
chrome plated steel bars. The plant uses advanced techniques of surface removal,
induction hardening and chrome plating to produce chrome plated bars and
induction hardened chrome plated bars. These products, which represent the
highest value-added products manufactured by LaSalle Steel, are used in
hydraulic and pneumatic cylinders by customers in the construction, material
handling, farm equipment and industrial machinery industries.
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Steel Tubes
The Company's steel tube business consists of its Michigan Seamless Tube
("MST") plant in South Lyon, Michigan, which produces cold drawn seamless steel
tube and drawn-over-mandrel welded steel tube; its Gulf States Tube ("GST")
plant in Rosenberg, Texas, which produces hot finished and cold drawn seamless
steel tube and welded tubular products; its Heat Treating plant in Huntington,
Indiana provides tube and bar heat treating services. A significant portion of
production at all plants is manufactured to specific customer orders. The
Company can deliver small quantities of finished products at competitive prices
in considerably less time than many other mills as a result of its production
efficiencies.
MST produces over 60 grades of carbon and alloy tubing. Major product lines
include customized seamless carbon and alloy mechanical tubing, carbon and alloy
boiler and condenser tubing and carbon and alloy pipe. These products are sold
by MST to customers in the commercial and utility boiler market, industrial
equipment market and capital goods market.
GST produces seamless and welded tubular products in 35 grades to over 100
specifications. The hot finished seamless carbon and alloy pipe and cold drawn
tubing produced at GST are used in petroleum refining, petrochemical, aircraft,
public utility, oil country and mechanical applications. Electric resistance
welded tubing is also manufactured primarily for heat exchangers and condenser
applications.
The Heat Treating plant provides tube and bar heat treating services, such as
quench and temper, stress relieving, normalizing and "cut-to-length".
Metallurgical testing services are also available. This plant serves customers
in the energy, automotive, ordnance, mining and fluid power markets.
Aluminum Products
Nichols-Homeshield ("N-H") manufactures aluminum sheet and fabricates aluminum
products for the home improvement, new construction and light commercial
construction markets. The principal products produced by N-H include aluminum
window screens, patio door screens, window frames, window and screen components,
rain carrying systems, exterior trim, and mill finish sheet. Aluminum reroll
coil is produced by the Company's mini-mill ("N-H Casting"), which began
commercial operations in July 1992. The aluminum reroll coil is cold rolled,
finished and marketed from the existing Davenport, Iowa, and Lincolnshire,
Illinois facilities (collectively, "Nichols-Aluminum"). The Company's aluminum
products are fabricated at the AMSCO plant ("AMSCO") in Rice Lake, Wisconsin,
and at its Homeshield Fabricated Products plant ("HFP") in Chatsworth, Illinois.
N-H's primary businesses are described below.
N-H Casting completed construction of a $60 million aluminum mini-mill in
Davenport, Iowa in late fiscal 1992. The capital costs included site
acquisition, scrap processing and melting equipment, a 52-inch wide Hazelett
thin-slab continuous caster and a three-stand hot rolling mill. The mini-mill
provides N-H Casting with finished capacity of as much as 280 million pounds
annually of hot rolled coiled aluminum sheet for building products markets,
including the Company's fabricated products businesses, and other markets. The
three-stand hot rolling mill is able to reduce aluminum slab from a thickness of
approximately .75 inches to coiled aluminum sheet with a thickness of .055
inches. This hot rolling mill process substantially reduces subsequent cold
rolling requirements. Similar to the more developed steel mini-mill sector, the
advent of aluminum mini-mills offers comparative advantages over large
integrated producers, including labor and energy savings and reduced capital and
raw material costs.
Nichols Aluminum finishes the coiled aluminum sheet produced at N-H Casting
and markets aluminum mill products. This division includes the Nichols Aluminum
Davenport (NAD) plant and the Nichols Aluminum Lincolnshire (NAL) plant acquired
in 1991. Operations include cold rolling to specific gauge, slitting to width,
annealing, leveling and custom coating. The Company currently has cold rolling
capacity of 300 million pounds annually. On August 25, 1993, a fire occurred at
NAL. Damage was confined to the largest of 3 rolling mills and adjacent portions
of the building. Total damage to the facility was approximately $17 million. The
damaged mill was made fully operational in the Company's second quarter of 1994.
The HFP plant manufactures a broad line of custom designed, roll formed and
stamped shapes and residential building and home improvement products. HFP
designs and manufactures custom engineered aluminum products at its plants in
Chatsworth, Illinois, such as window and screen components, wood window cladding
and other custom products for manufacturers of premium wood windows. HFP also
coats and fabricates aluminum coil in many colors, sizes and finishes into rain
carrying systems, soffit, exterior housing trim and painted coiled sheet and
roofing products. These products are sold primarily through distributors and
private label producers for the new housing, remodeling and do-it-yourself
markets. Most of these products are marketed under the "Homeshield" brand name.
The AMSCO plant manufactures aluminum window and patio door screens, window
frames, combination windows and related accessories. All production from this
facility is sold to Andersen Corporation, a major
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manufacturer of premium wood windows, for the home improvement, new construction
and commercial construction markets. AMSCO combines a strong product design and
development emphasis with reliable, just-in-time delivery to service Andersen
Corporation. This exclusive business relationship has been in effect for 50
years.
MANUFACTURING
The Company operates twelve manufacturing facilities in seven states. These
facilities feature efficient plant design and flexibility in manufacturing
processes, enabling the Company to produce a wide variety of products for
various industries and applications. Because the Company typically manufactures
products to customer specifications upon order, it is able to maintain minimal
levels of finished goods inventories at most locations.
Hot Rolled Steel Bars. The Company's MacSteel facilities produce specialty
engineered steel bars by melting high quality steel scrap and casting it in a
rotary continuous caster. MacSteel's molten steel goes through a secondary
refining stage consisting of argon stirring, ladle injection and vacuum arc
degassing prior to casting. This enables MacSteel to produce higher quality,
"cleaner" steels. SBQ products are produced through a continuous in-line process
by which scrap steel is converted into hot rolled steel bars without
interruption. To the Company's knowledge, MacSteel has the only two plants in
North America producing inherently seam-free steel bars using the rotary
continuous casting process.
As a result of its state-of-the-art continuous manufacturing technology, which
reduces labor, energy and process yield loss, the Company believes that MacSteel
is one of the lowest cost producers of SBQ carbon and alloy steel bars. The
Company believes that energy costs at MacSteel are significantly lower than
those of its competitors because its bars are moved directly from the caster to
the rolling mill before cooling, eliminating the need for costly reheating.
MacSteel's unit labor costs are similarly very low, with its highly automated
manufacturing process enabling it to produce finished high quality steel bars
using approximately 2 man-hours of labor per ton compared to an estimated
average of 4.5 man-hours per ton for U.S. integrated steel producers.
Cold Finished Steel Bars. At the LaSalle Steel facility in Hammond, Indiana,
hot finished steel bars meeting quality and metallurgical specifications are
used as raw materials in the manufacturing process. These bars are cold drawn
and, through a combination of turning, grinding and polishing operations,
manufactured into bars having precision surfaces with guaranteed size and
straightness tolerances. Heat treating further enhances the tensile and fatigue
strength, machinability, wear and corrosion resistance, weldability and
platability of LaSalle Steel's cold finished bar products. The Company's
Griffith, Indiana facility uses advanced techniques of induction hardening and
chrome plating to produce chrome plated bars and induction hardened chrome
plated bars.
Steel Tubes. The Company produces seamless tubing at its MST and GST
facilities. The manufacturing begins with solid steel bars that are heated and
then pierced on a rotary piercing mill at MST or extruded at GST. The resulting
hot tube shells are further reduced on draw benches. The product may be shipped
as hot finished pipe at GST or, after cooling and inspection, be again reduced
in size by cold drawing at both plants. After cold drawing, tubing is annealed
to develop specific metallurgical characteristics and mechanical properties to
customer order. Following straightening, the product is cut to length and
transferred to final inspection where various mechanical and non-destructive
tests are performed to insure product integrity. Cold drawn tubing offers a
greater degree of dimensional consistency and better machinability than does hot
finished tubing. GST also produces small diameter welded tubular products.
Aluminum Products. Manufacturing at the Company's various N-H facilities
ranges from the production of coiled aluminum sheet to the production and
fabrication of finished building products such as window and patio door screens
and window frames.
Since commercial production began in July 1992, all of the Company's aluminum
casting operations have been conducted at N-H Casting's mini-mill in Davenport,
Iowa. The single in-line manufacturing process at the facility has 280 million
pounds of annual finished and hot rolled capacity. The mini-mill converts scrap
to aluminum sheet through continuous casting and in-line hot rolling. N-H
Casting also has the ability to shred aluminum to broaden the diversity and
source of its scrap raw material. Additionally, fuel efficient delacquering
equipment improves the quality of the raw material before it reaches the melting
furnaces where it is blended through computer analysis to achieve the desired
alloy composition. After melting and degassing, the molten metal flows into a
single Hazelett thin-slab caster, which casts up to a 52-inch wide aluminum slab
at the rate of 20 to 26 feet per minute. The slab then is fed directly to a hot
mill with three in-line rolling stands to reduce the slab from a thickness of
approximately .75 inches to coiled aluminum sheet with a target thickness of
.055 inches. The combination of capacity increases and technological
enhancements are directed at producing quality coiled aluminum sheet for the
building products, service center, appliance and truck trailer markets. Cost
savings are derived from higher scrap utilization and the ability to use lower
cost scrap, reduced energy cost per pound, reduced cold rolling requirements and
decreases in direct and indirect labor costs.
Further processing of the coiled aluminum sheet from the mini-mill occurs at
Nichols Aluminum. At Nichols Aluminum's Davenport, Iowa, and Lincolnshire,
Illinois, plants, the specific product requirements of customers
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can be met through cold rolling to various gauges, slitting to specific widths,
annealing for additional product formability and tension levelling. Products at
Davenport can also be custom coated, an important feature for the building
products applications of certain customers.
Manufacturing of products and components takes place at the group's HFP
facilities (including residential building products such as rain carrying
systems and engineered products such as window and screen components), and at
AMSCO (including aluminum windows and patio door screens). These facilities
fabricate aluminum sheet into various components, some of which are then
assembled into final products. A significant aspect of the manufacturing process
at HFP and AMSCO is the use of MRP II, a closed loop management information
system in which all stages of manufacturing, including receiving, billing,
accounting, ordering and production, are linked. This process enables HFP and
AMSCO to operate efficiently and effect a just-in-time delivery system, with
minimal levels of raw materials inventory and maximum usage of available
manufacturing capacity.
RAW MATERIALS AND SUPPLIES
The Company's specialty engineered steel bar plants purchase steel scrap and hot
briquetted iron, their principal raw materials, on the open market. Barge
transportation of these raw materials to Company plants can be adversely
affected by cold weather, creating seasonal price increases. Prices for quality
scrap also vary in relation to the general business cycle, typically declining
in periods of slow economic growth. LaSalle Steel's primary raw material is hot
finished steel bars that it purchases both from the Company's hot rolled steel
bars plants and on the open market. The Company's tube manufacturing facilities
also purchase hot rolled steel bars from MacSteel and on the open market. MST
also purchases tube hollows and GST purchases flat-rolled steel as raw material
on the open market.
Historically, the Company's aluminum products business purchased aluminum
scrap, ingot, reroll stock and finished sheet from aluminum dealers, brokers and
producers. With the completion of the N-H Casting mini-mill, the principal raw
material of this business is aluminum scrap. The mini-mill includes a scrap
processing and delacquering facility which enables the Company to use the
broadest and most economical mix of aluminum scrap for its requirements. The
Company also purchases aluminum ingot futures and option contracts on the London
Metals Exchange in amounts that approximate N-H's requirements for fixed price
sales commitments for aluminum products and future sales for which a sales price
increase is expected to lag a raw material cost increase, thereby protecting
against increases in the price of the aluminum used to manufacture the related
products.
BACKLOG
At October 31, 1994, Quanex's backlog of orders to be shipped in the next twelve
months was $182.7 million. This compares to $154.9 million at October 31, 1993.
Because many of the markets in which Quanex operates have short lead times,
backlog figures are not reliable indicators of annual sales volume or operating
results.
COMPETITION
All of the Company's products are sold under highly competitive conditions.
The Company competes with a number of companies, some of which have financial
and other resources greater than those of the Company. Competitive factors
include product quality, price, delivery and ability to manufacture products to
customer specifications. The amounts of tubing, aluminum, cold finished bar
products and steel bars produced by the Company represent a small percentage of
annual domestic production.
The hot rolled specialty steel bar plants compete with two large integrated
steel producers, two large nonintegrated steel producers and two smaller steel
companies. Although many of these producers are larger and have greater
resources than the Company, the Company believes that the technology used at the
MacSteel facilities permits it to compete effectively in the markets it serves.
LaSalle Steel has eight major competitors including both integrated and
independent steel producers. Although a portion of LaSalle Steel's sales are in
specialized products made by patented processes, many of their competitors have
similar products using their own patents and processes.
The Company's steel tube manufacturing businesses compete with numerous
domestic and foreign steel producers. As a specialized producer, the steel tube
segment manufactures seamless steel tubing only in the smaller size ranges.
Currently there are five other manufacturers of seamless tubing in the same size
ranges as those produced by Quanex. Each of these manufacturers is either wholly
or partially integrated in that they produce all or part of the steel used by
them for their production of tubing. The Company's welded tube business is also
highly competitive, with more than 100 companies producing welded steel tubing.
For reasons of geography and product quality, however, the number of welded tube
manufacturers with which Quanex is in direct competition is significantly lower.
Imports are a significant factor in this market. On June 23, 1994, Quanex
announced that its Gulf States Tube Division had filed petitions alleging that
imports of carbon and alloy seamless pipe up to 4.5 inches in diameter from four
countries were being dumped or subsidized. On August 3,
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1994, the International Trade Commission made an affirmative preliminary
determination that imports of small diameter pipe from these countries were
causing injury to the U.S. industry. The Company expects a preliminary
determination on January 19, 1995, from the Department of Commerce on dumping
margins.
The Company's aluminum products business competes with many small and large
manufacturers and fabricators of aluminum products. Some of these competitors
are divisions or subsidiaries of major corporations with substantially greater
resources. The Company also competes with major aluminum producers in
coil-coated and mill products, primarily on the basis of the breadth of product
lines, the quality and design of its products, the responsiveness of its
services and its prices. With the increased production of coiled aluminum sheet
for aluminum mill products markets, the Company will increasingly compete with
major integrated aluminum manufacturers.
SALES AND DISTRIBUTION
The Company has a nationwide system of sales offices. MacSteel sells hot
finished steel bars primarily to original equipment manufacturers ("OEM's")
through its sales organization and manufacturers' representatives. LaSalle Steel
sells its cold finished bars to independent distributors, steel service centers
and directly to OEM's. The steel tube segment's products are sold by its sales
organization to steel service centers and directly to OEM's.
The sales and distribution of products in the Company's aluminum products
business are organized by major product group. Residential products are sold
primarily through distributors; engineered products are sold primarily to OEM's;
and mill products are sold directly to OEM's and through metal service centers.
SEASONAL NATURE OF BUSINESS
The Company's aluminum products business is seasonal as its primary markets are
in the Northeast and Midwest regions of the United States where winter weather
reduces home building and home improvement activity. Historically, this
business's lowest sales have occurred during the Company's first fiscal quarter.
Because a high percentage of this business's manufacturing overhead and
operating expenses is due to labor and costs that are generally fixed throughout
the year, profits for the operations in this business tend to be lower in
quarters with lower sales.
The other businesses in which the Company competes are not seasonal. However,
due to the holidays in the Company's first fiscal quarter and steel plant
shutdowns for vacations and maintenance in the Company's third fiscal quarter,
sales have historically been lower in those quarters. Due to the combined
effects of seasonality, the Company generally expects that, absent unusual
activity or changes in economic conditions, its lowest sales will occur in the
first fiscal quarter.
TRADEMARKS, TRADE NAMES AND PATENTS
The Company's Nichols-Homeshield and MacSteel logos and designs are registered
trademarks. The trade name "Homeshield" and its unregistered name
"Nichols-Homeshield" are used in connection with the sale of the Company's
aluminum products. The Homeshield and MacSteel logos and designs and their trade
names are considered valuable in the conduct of the Company's business.
In general, the businesses conducted in the Company's businesses do not depend
upon patent protection. Although the Company holds numerous patents, in many
cases the proprietary technology that the Company has developed for using the
patents is more important than the patents themselves.
RESEARCH AND DEVELOPMENT
Expenditures for research and development of new products or services during the
last three years were not significant. Although not technically defined as
research and development, a significant amount of time, effort and expense is
devoted to customizing and qualifying the Company's products for specific
customer applications.
ENVIRONMENTAL MATTERS
As a manufacturer of specialty metal products, Quanex is subject to extensive
and expansive regulations concerning the discharge of materials into the
environment, and the remediation of chemical contamination at its plant sites or
offsite disposal locations. Quanex is required to make capital and other
expenditures on an ongoing basis in order to comply with such regulations. The
cost of environmental matters has not had a material adverse effect on Quanex's
operations or financial condition in the past, and management is not currently
aware of any existing conditions that it currently believes are likely to have a
material adverse effect on Quanex's operations or financial condition.
Under applicable state and federal laws, including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), also known as "Superfund," the Company may be responsible for all or
part of the costs required to remove or remediate previously disposed of wastes
or hazardous substances at the locations Quanex owns or operates or at which it
arranged for disposal of such materials. The Company's most significant
involvement at Superfund sites is described below.
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During fiscal 1987, Quanex's LaSalle Steel Company subsidiary paid
approximately $200,000, of which approximately $128,000 has subsequently been
contributed to Quanex by other potentially responsible parties, in connection
with a removal action at the Conservation Chemical Co. of Illinois site in the
State of Indiana in accordance with an order of the Environmental Protection
Agency (the "EPA") pursuant to Section 106 of CERCLA. This matter relates to
hazardous substances sold to owners of the waste site by a company whose assets
were purchased by Quanex and transferred to LaSalle Steel. LaSalle was named in
this matter by the EPA as a potentially responsible party. LaSalle and other
parties named by the EPA as potentially responsible parties took various actions
to comply with the EPA's order. The Company believes that the response actions
contemplated by the EPA removal order have been substantially completed. In
1989, LaSalle withdrew from the group of potentially responsible parties because
its only connection to the site was the purchase of assets, without
contractually assuming liabilities from a company that allegedly sent waste to
the site. Since that time, the Company has had no involvement with the site. The
need for, or extent of, any further cleanup therefore is unknown by Quanex. Even
if the Company is unsuccessful in asserting its defenses, LaSalle was one of
numerous parties contributing cleanup funds and it has no reason to believe that
those other parties generally would not be able to pay costs apportioned to
them. For all of these reasons, Quanex does not believe that its liability, if
any, with respect to this facility, will have a material adverse effect on its
business or financial position.
The EPA has placed on the Superfund National Priorities List the Lenz Oil site
in the State of Illinois to which a company, whose assets were purchased by
Quanex and transferred to LaSalle Steel, had previously sent used petroleum
products. The State of Illinois previously had sent a letter to LaSalle Steel
stating that those materials had been disposed of improperly at that site.
LaSalle Steel, in conjunction with a group of parties who received similar
letters, entered into a consent decree pursuant to which action was taken to
address the matters referred to in the letter from the State of Illinois.
LaSalle paid approximately $8 thousand out of a $2.5 million group settlement.
LaSalle Steel is currently participating in a group that is assessing site
conditions and further remediation options. Further liability could be asserted
against Quanex as a result of the EPA's actions. The company that sold its
assets to LaSalle Steel is one of many companies that had sent materials to this
facility. It is Quanex's understanding that such company contributed
approximately 0.2% of the total volume of materials handled at this facility.
The Company has no reason to believe that the other companies involved will not
be financially able to contribute to any possible future clean-up efforts at
this site, or that the basis for allocation of liability will substantially
change. As a result of the foregoing, Quanex does not believe that its
liability, if any, with respect to this facility, will have a material adverse
effect on its business or financial position.
The EPA also has placed on the National Priorities List the Douglassville, or
Berks Associates Disposal Site in the Commonwealth of Pennsylvania to which
LaSalle Steel may have sent used petroleum products. The EPA currently is
administering a multistage cleanup at the site. Liability has been asserted
against the Company by a group of potentially responsible parties for
contribution toward cleanup costs incurred at the facility. It is Quanex's
understanding that many companies sent wastes to this site and that LaSalle is
alleged to have contributed less than 0.005%, on a volumetric basis, of the
total materials. The group of defendants and third-party defendants include a
number of large companies and several agencies of the federal government that
the Company has no reason to believe will not be financially able to contribute
their expected share. These parties have expressed a willingness to participate
in settlement efforts. Pursuant to settlement negotiations, LaSalle Steel
currently is classified as a de minimis contributor. Based on the foregoing,
Quanex does not believe that its liability, if any, with respect to this site,
will have a material adverse effect on its business or financial position.
Amendments to the federal Clean Air Act were adopted in 1990, and the EPA
currently is developing regulations to implement the requirements of those
amendments. Depending on the nature of the regulations adopted, and upon
requirements that may be imposed by state and local regulatory authorities,
Quanex may be required to incur capital expenditures sometime in the next
several years for air pollution control equipment to maintain or obtain
operating permits and approvals and address other air emission-related issues.
Until such time as the new Clean Air Act requirements are implemented, Quanex is
unable to estimate the effect on earnings or operations or the amount and timing
of required capital expenditures. However, based upon it's preliminary analysis
to date, Quanex does not believe that its compliance with these requirements
will have a material effect on its operations or finances.
Quanex incurred approximately $4,000,000 and $3,500,000 during fiscal 1994 and
1993, respectively, in expenses and capital expenditures in order to comply with
existing or proposed environmental regulations. It is anticipated that Quanex
will spend approximately $3,500,000 at various of its facilities during fiscal
1995, and, although not currently quantifiable or expected to be material to the
Company as a whole, will continue to have expenditures in connection with
environmental matters beyond 1995. Future expenditures relating to environmental
matters will necessarily depend upon existing future regulations and their
application to Quanex and its facilities.
66
<PAGE> 9
EMPLOYEES
At October 31, 1994, the Company employed 2,652 persons. Of the total employed,
47% were covered by collective bargaining agreements. During 1995, one labor
contract will expire affecting one Quanex facility. The United Steelworkers of
America contract at Gulf States Tube covering 211 employees will expire on
October 31, 1995.
ITEM 2. PROPERTIES
The following table lists Quanex's principal plants at October 31, 1994,
together with their locations, general character and the industry segment which
uses the facility. Each of the facilities identified as being owned by the
Company is free of any material encumbrance.
<TABLE>
<S> <C> <C>
Square
Owned STEEL BARS Footage
- ------------------------ --------------------------- -------
Fort Smith, Arkansas MacSteel 415,723
Jackson, Michigan MacSteel 245,150
Owned COLD FINISHED STEEL BARS
- ------------------------ ---------------------------
Griffith, Indiana Fluid Power 37,000
Hammond, Indiana LaSalle Steel 493,000
Owned STEEL TUBES
- ------------------------ ----------------------------
Rosenberg, Texas Gulf States Tube 128,000
South Lyon, Michigan Michigan Seamless Tube 323,000
Huntington, Indiana Heat Treating 82,000
Owned ALUMINUM PRODUCTS
- ------------------------ ---------------------------
Rice Lake, Wisconsin AMSCO 290,800
Chatsworth, Illinois Homeshield Fabricated Products 212,000
Lincolnshire, Illinois Nichols Aluminum 142,000
Davenport, Iowa Nichols Aluminum 236,000
Davenport, Iowa Nichols-Aluminum Casting 245,000
Leased (expires 1999) EXECUTIVE OFFICES
- ------------------------ ---------------------------
Houston, Texas Quanex Corporation 21,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Other than the proceedings under Item 1, "Environmental Matters", incorporated
here by reference, there are no material legal proceedings to which Quanex, its
subsidiaries, or its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders through the solicitation
of proxies or otherwise during the fourth quarter of the fiscal year covered by
this report.
67
<PAGE> 10
FORM 10K INFORMATION PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quanex's common stock, $.50 par value, is traded on the New York Stock Exchange,
ticker symbol: NX. Quarterly stock price information and dividend information is
shown on page 69.
The terms of Quanex's revolving credit arrangements with certain banks and its
senior note agreement with certain institutional noteholders, limit the total
amount of common and preferred stock dividends and other distributions on such
stock. Under the most restrictive test under such credit facilities, the total
common stock dividends the Company may declare and pay is limited to
$21,000,000, plus 50% of consolidated net earnings after October 31, 1989,
adjusted for other factors as defined in their respective Loan Agreements. As of
October 31, 1994, the amount of dividends and other distributions the Company
was permitted to declare and pay under its credit facilities was $45,854,000.
Dividends on the Common Stock are also subject to the prior payment of dividends
on the Company's outstanding 6.88% Cumulative Convertible Exchangeable Preferred
Stock.
There were 3,454 record holders of Quanex common stock on October 31, 1994.
ITEM 6. SELECTED FINANCIAL DATA
Pages 34 and 35 of the 1994 Annual Report to Stockholders present selected
financial data for the past eleven fiscal years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages 37-41 of the 1994 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data for Quanex are on pages 42-57 of
the 1994 Annual Report to Stockholders.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the past two fiscal years there has been no change in the Company's
independent auditors, and there has been no disagreement on accounting practices
or financial statement disclosure required to be reported.
68
<PAGE> 11
INDEX TO FORM 10-K INFORMATION
Form 10-K Item No. Location in Annual Report
- --------------------------------------------------------------------------------
PART I
1. Business ...................................................... 8, 40, 60-67
2. Properties .............................................................. 67
3. Legal Proceedings ....................................................... 67
4. Submission of Matters to a Vote of Security Holders ..................... 67
- --------------------------------------------------------------------------------
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters ............................................................. 68, 69
6. Selected Financial Data ...................................... 33, 34-35, 68
7. Management's Discussion and Financial Analysis of Financial Condition and
Results of Operations ............................................ 37-41, 68
8. Financial Statements and Supplementary Data .............. 36, 42-57, 68, 69
9. Disagreements on Accounting and Financial Disclosure .................... 68
- --------------------------------------------------------------------------------
PART III
10. Directors and Executive Officers of the Registrant(1) .................. --
11. Executive Compensation(2) .............................................. --
12. Security Ownership of Certain Beneficial Owners and Management(3) ...... --
13. Certain Relationships and Related Transactions(1) ...................... --
- --------------------------------------------------------------------------------
PART IV
14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules ...... 36, 42-59
(b) Exhibits(4) ........................................................ --
(c) Reports on Form 8-K4 ............................................... --
- --------------------------------------------------------------------------------
1 The information under the captions "Matters to Come Before the Meeting -- (1)
Election of Three Directors" and "Further Information -- Executive Officers"
in the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held March 2, 1995, is incorporated herein by reference.
2 The information under the captions "Further Information" and "Executive
Compensation" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held March 2, 1995, is incorporated herein by reference.
3 The information regarding beneficial ownership of Common Stock by directors
and nominees (in the table of directors and nominees) and under the caption
"Further Information -- Principal Shareholders" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held March 2, 1995, is
incorporated herein by reference.
4 A copy of the Index to Exhibits, filed with Quanex's Form 10-K Report, can be
obtained free of charge by written request to Investor Relations, Quanex
Corporation, 1900 West Loop South, Suite 1500, Houston, Texas, 77027. No
Reports on Form 8-K were filed by the Company during the quarter ended October
31, 1994.
70
<PAGE> 12
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
- ----------- ---------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1987, and
incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Registrant, as amended through October 21, 1992, filed as
Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1992, and incorporated herein by reference.
4.1 Form of Registrant's Common Stock certificate, filed as Exhibit 4.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1987, and incorporated herein by reference.
4.2 Amended and Restated Rights Agreement between the Registrant and Manufacturers Hanover Trust
Company, as Rights Agent, filed as Exhibit 1 to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.3 Amended and Restated Certificate of Designation, Preferences and Rights of the Registrant's
Series A Junior Participating Preferred Stock, filed as Exhibit 1 to Amendment No. 1 to the
Registrant's Form 8-A dated April 28, 1989, and incorporated herein by reference.
4.4 Certificate of Designations of the Registrant's 6.88% Cumulative Convertible Exchangeable Preferred
Stock, liquidation preference $250 per share, filed as Exhibit 19.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1992, and incorporated herein by reference.
4.5 Form of Indenture relating to the Registrant's 6.88% Cumulative Subordinated Debentures due 2007
between the Registrant and Chemical Bank, as Trustee, filed as Exhibit 19.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1992, and incorporated herein by
reference.
4.6 Form of Certificate of 6.88% Cumulative Convertible Exchangeable Preferred Stock, liquidation
preference $250 per share, filed as Exhibit 19.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1992, and incorporated herein by reference.
4.7 Deposit Agreement, relating to Depositary Convertible Exchangeable Preferred Shares between the
Registrant and Chemical Bank, filed as Exhibit 19.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1992, and incorporated herein by reference.
4.8 Form of Depositary Receipt for Depositary Convertible Exchangeable Preferred Shares, filed as
Exhibit 19.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30,
1992, and incorporated herein by reference.
</TABLE>
<PAGE> 13
<TABLE>
<S> <C>
4.9 Note Agreement dated July 25, 1990 among the Registrant and the Purchasers listed therein,
regarding the sale of $125,000,000 of 10.77% Senior Notes due August 23, 2000, filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1990, and
incorporated herein by reference.
4.10 Revolving Credit and Letter of Credit Agreement dated as of December 4, 1990 among the Registrant
and the Banks listed therein relating to a $40,000,000 revolving credit, filed as Exhibit 4.7 to
the Registrant's Annual Report on Form 10-K for the year ended October 31, 1991, and incorporated
herein by reference.
4.11 Second Amendment to the Revolving Credit and Letter of Credit Agreement dated as of April 15, 1992,
filed as Exhibit 4.13 to the Registrant's Registration Statement on Form S-3 (Registration
No. 33-47282), and incorporated herein by reference.
4.12 Third and Fourth Amendments to the Revolving Credit and Letter of Credit Agreement dated as of
February 12, 1993 and April 1, 1993, respectively, filed as Exhibit 19 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1993, and incorporated herein by
reference.
4.13 Fifth Amendment to the Revolving Credit and Letter of Credit Agreement dated as of December 8,
1994, filed as Exhibit 4.15 to the Registrant's Form S-8 Registration No. 33-57235, and
incorporated herein by reference.
10.1 Agreement of Lease between Leland Tube Company, Inc. and Role Realty Co., dated March 5, 1970, with
attached Assignment of Tenant's Interest in Lease from Leland Tube Company to the Registrant, dated
May 31, 1979, and filed as Exhibit 10.3 of the Registrant's Form S-2, Registration No. 2-88583, and
incorporated herein by reference.
10.2 Agreement of Lease between Leland Tube Company, Inc. and Role Realty Co., dated January 24, 1973,
with attached Assignment of Tenant's Interest in Lease from Leland Tube Company to the Registrant,
dated May 31, 1979, and filed as Exhibit 10.4 of the Registrant's Form S-2, Registration No.
2-88583, and incorporated herein by reference.
10.3 Lease Agreement between the Registrant and William M. Paul and Associates, dated August 27, 1980,
filed as Exhibit 10.5 of the Registrant's Form S-2, Registration No. 2-88583, and incorporated
herein by reference.
10.4 Agreement of Lease between the Registrant and 3D Tower Limited, dated March 5, 1985, filed as
Exhibit 10.13 of the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1985, and incorporated herein by reference, as amended by the First Amendment to Lease Agreement
between the Registrant and VPM 1989-1, Ltd. effective December 8, 1989.
10.5 Quanex Corporation 1988 Stock Option Plan and form of Stock Option Agreement filed as Exhibit 10.4
to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1988, and
incorporated herein by reference.
</TABLE>
<PAGE> 14
<TABLE>
<S> <C>
10.6 Quanex Corporation Deferred Compensation Plan, as amended, filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year ended October 31, 1981, and incorporated herein by
reference.
10.7 Quanex Corporation 1978 Stock Option Plan, as amended, filed as Exhibit 10.6 to the Registrant's
Annual Report on Form 10-K for the year ended October 31, 1988, and incorporated herein by
reference.
10.8 Quanex Corporation Executive Incentive Compensation Plan, as amended, filed as Exhibit 10.8 to the
Registrant's Form 10-K for the fiscal year ended October 31, 1993, and incorporated herein by
reference.
10.9 Quanex Corporation Supplemental Benefit Plan, effective February 28, 1980 as restated November 1,
1988 and amended on June 28, 1991, filed as Exhibit 10.9 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1991, and incorporated herein by reference.
10.10 Form of Severance Compensation Agreement and Escrow Agreement, adopted on February 28, 1985,
between the Registrant and each executive officer of the Registrant, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1985, and
incorporated herein by reference.
10.11 Quanex Corporation Stock Option Loan Plan for Key Officers, filed as Exhibit 10.13 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1988, and
incorporated herein by reference.
10.12 Quanex Corporation 1987 Non-Employee Director Stock Option Plan and the related form of Stock
Option Agreement, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1988, and incorporated herein by reference.
10.13 Quanex Corporation 1989 Non-Employee Director Stock Option Plan, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128, and incorporated herein by reference.
10.14 Quanex Corporation Employee Stock Option and Restricted Stock Plan, as amended.
10.15 Retirement Agreement dated as of September 1, 1992, between the Registrant and Carl E. Pfeiffer,
filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1992, and incorporated herein by reference.
10.16 Stock Option Agreement dated as of October 1, 1992, between the Registrant and Carl E. Pfeiffer,
filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1992, and incorporated herein by reference.
10.17 Deferred Compensation Agreement dated as of July 31, 1992, between the Registrant and Carl E.
Pfeiffer, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended October 31, 1992, and incorporated herein by reference.
</TABLE>
<PAGE> 15
<TABLE>
<S> <C>
10.18 Quanex Corporation Non-Employee Director Retirement Plan.
11 Statement re computation of per share earnings.
13 Quanex Corporation Annual Report to Shareholders for fiscal year 1994 (each portion of the annual
report that is incorporated and filed as part of this report).
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule
</TABLE>
As permitted by Item 601(b)(4) of Regulation S-K, the Registrant has not filed
with this Annual Report on Form 10-K certain instruments defining the rights of
holders of long-term debt of the Registrant and its subsidiaries because the
total amount of securities authorized under any of such instruments does not
exceed 10% of the total assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant agrees to furnish a copy of any such
agreements to the Securities and Exchange Commission upon request.
<PAGE> 16
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUANEX CORPORATION
By: ROBERT C. SNYDER January 23, 1995
----------------------
Robert C. Snyder
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
CARL E. PFEIFFER January 23, 1995
--------------------------------------
Carl E. Pfeiffer
Chairman of the Board
ROBERT C. SNYDER January 23, 1995
--------------------------------------
Robert C. Snyder
President, Chief Executive Officer and
Director (Principal Executive Officer)
GERALD B. HAECKEL January 23, 1995
--------------------------------------
Gerald B. Haeckel
Director
DONALD J. MORFEE January 23, 1995
--------------------------------------
Donald J. Morfee
Director
JOHN D. O'CONNELL January 23, 1995
--------------------------------------
John D. O'Connell
Director
--------------------------------------
Fred J. Broad
Director
</TABLE>
<PAGE> 17
<TABLE>
<S> <C>
ROBERT L. WALKER January 23, 1995
--------------------------------------
Robert L. Walker
Director
MICHAEL J. SEBASTIAN January 23, 1995
--------------------------------------
Michael J. Sebastian
Director
WAYNE M. ROSE January 23, 1995
--------------------------------------
Wayne M. Rose
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
VIREN M. PARIKH January 23, 1995
--------------------------------------
Viren M. Parikh
Controller
(Chief Accounting Officer)
</TABLE>
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1987, and
incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Registrant, as amended through October 21, 1992, filed as
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1992, and incorporated herein by reference.
4.1 Form of Registrant's Common Stock certificate, filed as Exhibit 4.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1987, and incorporated herein by reference.
4.2 Amended and Restated Rights Agreement between the Registrant and Manufacturers Hanover Trust
Company, as Rights Agent, filed as Exhibit 1 to Amendment No. 1 to the Registrant's Form 8-A dated
April 28, 1989, and incorporated herein by reference.
4.3 Amended and Restated Certificate of Designation, Preferences and Rights of the Registrant's
Series A Junior Participating Preferred Stock, filed as Exhibit 1 to Amendment No. 1 to the
Registrant's Form 8-A dated April 28, 1989, and incorporated herein by reference.
4.4 Certificate of Designations of the Registrant's 6.88% Cumulative Convertible Exchangeable Preferred
Stock, liquidation preference $250 per share, filed as Exhibit 19.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1992, and incorporated herein by reference.
4.5 Form of Indenture relating to the Registrant's 6.88% Cumulative Subordinated Debentures due 2007
between the Registrant and Chemical Bank, as Trustee, filed as Exhibit 19.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1992, and incorporated herein by
reference.
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
4.6 Form of Certificate of 6.88% Cumulative Convertible Exchangeable Preferred Stock, liquidation
preference $250 per share, filed as Exhibit 19.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1992, and incorporated herein by reference.
4.7 Deposit Agreement, relating to Depositary Convertible Exchangeable Preferred Shares between the
Registrant and Chemical Bank, filed as Exhibit 19.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1992, and incorporated herein by reference.
4.8 Form of Depositary Receipt for Depositary Convertible Exchangeable Preferred Shares, filed as
Exhibit 19.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30,
1992, and incorporated herein by reference.
4.9 Note Agreement dated July 25, 1990 among the Registrant and the Purchasers listed therein,
regarding the sale of $125,000,000 of 10.77% Senior Notes due August 23, 2000, filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1990, and
incorporated herein by reference.
4.10 Revolving Credit and Letter of Credit Agreement dated as of December 4, 1990 among the Registrant
and the Banks listed therein relating to a $40,000,000 revolving credit, filed as Exhibit 4.7 to
the Registrant's Annual Report on Form 10-K for the year ended October 31, 1991, and incorporated
herein by reference.
4.11 Second Amendment to the Revolving Credit Agreement dated as of April 15, 1992, filed as
Exhibit 4.13 to the Registrant's Registration Statement on Form S-3 (Registration No. 33-47282),
and incorporated herein by reference.
4.12 Third and Fourth Amendments to the Revolving Credit and Letter of Credit Agreement dated as of
February 12, 1993 and April 1, 1993, respectively, filed as Exhibit 19 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1993, and incorporated herein by
reference.
4.13 Fifth Amendment to the Revolving Credit and Letter of Credit Agreement dated as of December 8,
1994, filed as Exhibit 4.15 to the Registrant's Form S-8 Registration No. 33-57235, and
incorporated herein by reference.
</TABLE>
<PAGE> 20
<TABLE>
<S> <C>
10.1 Agreement of Lease between Leland Tube Company, Inc. and Role Realty Co., dated March 5, 1970, with
attached Assignment of Tenant's Interest in Lease from Leland Tube Company to the Registrant, dated
May 31, 1979, and filed as Exhibit 10.3 of the Registrant's Form S-2, Registration No. 2-88583, and
incorporated herein by reference.
10.2 Agreement of Lease between Leland Tube Company, Inc. and Role Realty Co., dated January 24, 1973,
with attached Assignment of Tenant's Interest in Lease from Leland Tube Company to the Registrant,
dated May 31, 1979, and filed as Exhibit 10.4 of the Registrant's Form S-2, Registration No.
2-88583, and incorporated herein by reference.
10.3 Lease Agreement between the Registrant and William M. Paul and Associates, dated August 27, 1980,
filed as Exhibit 10.5 of the Registrant's Form S-2, Registration No. 2-88583, and incorporated
herein by reference.
10.4 Agreement of Lease between the Registrant and 3D Tower Limited, dated March 5, 1985, filed as
Exhibit 10.13 of the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1985, and incorporated herein by reference, as amended by the First Amendment to Lease Agreement
between the Registrant and VPM 1989-1, Ltd. effective December 8, 1989.
10.5 Quanex Corporation 1988 Stock Option Plan and form of Stock Option Agreement filed as Exhibit 10.4
to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1988, and
incorporated herein by reference.
10.6 Quanex Corporation Deferred Compensation Plan, as amended, filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year ended October 31, 1981, and incorporated herein by
reference.
10.7 Quanex Corporation 1978 Stock Option Plan, as amended, filed as Exhibit 10.6 to the Registrant's
Annual Report on Form 10-K for the year ended October 31, 1988, and incorporated herein by
reference.
10.8 Quanex Corporation Executive Incentive Compensation Plan, as amended, filed as Exhibit 10.8 to the
Registrant's Form 10-K for the fiscal year ended October 31, 1993, and incorporated herein by
reference.
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
10.9 Quanex Corporation Supplemental Benefit Plan, effective February 28, 1980 as restated November 1,
1988 and amended on June 28, 1991, filed as Exhibit 10.9 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1991, and incorporated herein by reference.
10.10 Form of Severance Compensation Agreement and Escrow Agreement, adopted on February 28, 1985,
between the Registrant and each executive officer of the Registrant, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1985, and
incorporated herein by reference.
10.11 Quanex Corporation Stock Option Loan Plan for Key Officers, filed as Exhibit 10.13 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1988, and
incorporated herein by reference.
10.12 Quanex Corporation 1987 Non-Employee Director Stock Option Plan and the related form of Stock
Option Agreement, filed as Exhibit 10.14 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1988, and incorporated herein by reference.
10.13 Quanex Corporation 1989 Non-Employee Director Stock Option Plan, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128, and incorporated herein by reference.
10.14 Quanex Corporation Employee Stock Option and Restricted Stock Plan, as amended.
10.15 Retirement Agreement dated as of September 1, 1992, between the Registrant and Carl E. Pfeiffer,
filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1992, and incorporated herein by reference.
10.16 Stock Option Agreement dated as of October 1, 1992, between the Registrant and Carl E. Pfeiffer,
filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1992, and incorporated herein by reference.
10.17 Deferred Compensation Agreement dated as of July 31, 1992, between the Registrant and Carl E.
Pfeiffer, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K
</TABLE>
<PAGE> 22
<TABLE>
<S> <C>
for the fiscal year ended October 31, 1992, and incorporated herein by reference.
10.18 Quanex Corporation Non-Employee Director Retirement Plan.
11 Statement re computation of per share earnings.
13 Quanex Corporation Annual Report to Shareholders for fiscal year 1994 (each portion of the annual
report that is incorporated and filed as part of this report).
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule
</TABLE>
As permitted by Item 601(b)(4) of Regulation S-K, the Registrant has not filed
with this Annual Report on Form 10-K certain instruments defining the rights of
holders of long-term debt of the Registrant and its subsidiaries because the
total amount of securities authorized under any of such instruments does not
exceed 10% of the total assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant agrees to furnish a copy of any such
agreements to the Securities and Exchange Commission upon request.
<PAGE> 1
EXHIBIT 10.14
QUANEX CORPORATION
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLAN
SECTION 1. PURPOSE
The purpose of the Quanex Corporation Employee Stock Option
and Restricted Stock Plan is to promote the interests of Quanex Corporation
(the "Company") and its shareholders by providing it with a mechanism to enable
the Company and its subsidiaries to attract, retain and motivate their key
employees with compensatory arrangements and benefits that make use of the
Company's stock so as to provide for or increase the proprietary interests of
such employees in the Company. The Quanex Corporation Employee Stock Option
and Restricted Stock Plan is an amendment and restatement of the Quanex
Corporation 1993 Employee Stock Option Plan.
SECTION 2. DEFINITIONS
(A) "AGREEMENT" shall mean a written agreement setting forth
the terms of an Award.
(B) "AWARD" shall mean an Option (which may be designated as
an Incentive Stock Option or a Non-Incentive Stock Option) or a Restricted
Stock Award granted under this Plan.
(C) "BOARD" shall mean the Board of Directors of the Company.
(D) "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(E) "COMMITTEE" shall mean the committee appointed by the
Board to administer this Plan.
(F) "COMMON STOCK" shall mean the Company's Common Stock,
$.50 par value (or such other par value as may be designated by act of the
Company's stockholders). In addition, for purposes of the Plan and the Awards,
the term Common Stock shall also be deemed to include any rights to purchase
("Rights") the Series A Junior Participating Preferred Stock of the Company
that may then be trading together with the Common Stock as provided in the
Rights Agreement between the Company and Chemical Bank relating to the Rights.
(G) "COMPANY" shall mean Quanex Corporation.
(H) "DISABILITY" shall mean a mental or physical disability
which, in the opinion of a physician selected by the Committee, shall prevent
the Employee from earning a reasonable livelihood with the Company or any
Subsidiary and which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months and
which: (a) was not contracted, suffered or incurred while the Employee was
engaged in, or did not result from having engaged in, a felonious criminal
enterprise; (b) did not result from alcoholism or addiction to narcotics; and
(c) did not result from an injury incurred while a member of the Armed Forces
of the United States for which the Employee receives a military pension.
(I) "DISINTERESTED" shall mean disinterested within the
meaning of applicable regulatory requirements, including those promulgated
under Section 16 of the Exchange Act.
(J) "EMPLOYEE" shall mean an officer or employee of the
Company or a Subsidiary.
(K) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended.
(L) "FAIR MARKET VALUE" shall mean the closing price of the
Common Stock on the date in question as reported in the New York Stock Exchange
- -- Composite Transactions listing or if, in the discretion
<PAGE> 2
of the Committee, another means of determining the fair market value of a share
of Common Stock at such date shall be necessary or advisable, the Committee may
provide for another means of determining such fair market value.
(M) "INCENTIVE STOCK OPTION" shall mean an Option that is
intended by the Committee to meet the requirements of Section 422 of the Code
or any successor provision.
(N) "NON-INCENTIVE STOCK OPTION" shall mean an Option granted
pursuant to this Plan which does not qualify as an Incentive Stock Option.
(O) "OPTION" shall mean the right to purchase Common Stock at
a price to be specified and upon terms to be designated by the Committee
pursuant to this Plan. An Option shall be designated by the Committee as an
Incentive Stock Option or a Non-Incentive Stock Option.
(P) "OPTION PRICE" shall mean the price at which shares may
be purchased pursuant to an Option.
(Q) "PLAN" shall mean this Quanex Corporation Employee Stock
Option and Restricted Stock Plan.
(R) "RESTRICTED PERIOD" shall mean the period designated by
the Committee during which Restricted Stock may not be sold, assigned,
transferred, pledged, or otherwise encumbered.
(S) "RESTRICTED STOCK" shall mean those shares of Common
Stock issued pursuant to a Restricted Stock Award which are subject to the
restrictions, terms, and conditions set forth in the related Agreement.
(T) "RESTRICTED STOCK AWARD" shall mean an award of
Restricted Stock pursuant to Section 8 hereof.
(U) "RETAINED DISTRIBUTIONS" shall mean any securities or
other property (other than regular cash dividends) distributed by the Company
in respect of Restricted Stock during any Restricted Period.
(V) "RETIRE" or "RETIREMENT" shall mean retirement in
accordance with the terms of a retirement plan that is qualified under Section
401(a) of the Code and maintained by the Company or a Subsidiary in which the
employee is a participant.
(W) "SUBSIDIARY" shall mean any present or future subsidiary
corporations, as defined in Section 424 of the Code, of the Company.
SECTION 3. STOCK SUBJECT TO THE PLAN
The total amount of the Common Stock with respect to which
Awards may be granted shall not exceed in the aggregate 750,000 shares. The
class and aggregate number of shares which may be subject to the Options
granted under this Plan shall be subject to adjustment under Section 7. The
class and aggregate number of shares which may be subject to the Restricted
Stock Awards granted under the Plan shall also be subject to adjustment under
Section 8. Shares may be treasury shares or authorized but unissued shares.
If any Award under the Plan shall expire or terminate for any reason without
having been exercised in full, or if any Award shall be forfeited, the shares
subject to the unexercised or forfeited portion of such Award shall again be
available for the purposes of the Plan.
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<PAGE> 3
SECTION 4. ADMINISTRATION
The Plan shall be administered by a Committee the members of
which shall be Disinterested persons. The Committee shall consist of not less
than two members of the Board, who are not Employees. The Board shall have the
power from time to time to add or remove members of the Committee, and to fill
vacancies arising for any reason. The Committee shall designate a chairman
from among its members, who shall preside at all of its meetings, and shall
designate a secretary, without regard to whether that person is a member of the
Committee, who shall keep the minutes of the proceedings and all records,
documents, and data pertaining to its administration of the Plan. Meetings
shall be held at any time and place as it shall choose. A majority of the
members of the Committee shall constitute a quorum for the transaction of
business. The vote of a majority of those members present at any meeting shall
decide any question brought before that meeting. In addition, the Committee
may take any action otherwise proper under the Plan by the affirmative vote,
taken without a meeting, of a majority of its members. No member of the
Committee shall be liable for any act or omission of any other member of the
Committee or for any act or omission on his own part, including but not limited
to the exercise of any power or discretion given to him under the Plan, except
those resulting from his own gross negligence or willful misconduct. All
questions of interpretation and application of the Plan, or as to Awards
granted under it shall be subject to the determination of a majority of the
Committee. The Committee in exercising any power or authority granted under
this Plan or in making any determination under this Plan shall perform or
refrain from performing those acts using its sole discretion and judgment. Any
decision made by the Committee or any refraining to act or any act taken by the
Committee in good faith shall be final and binding on all parties. The
Committee's decision shall never be subject to de novo review. When
appropriate the Plan shall be administered in order to qualify certain of the
Options granted under it as Incentive Stock Options.
SECTION 5. ELIGIBILITY
The individuals who shall be eligible to participate in the
Plan shall be those full-time key Employees, including directors if they are
Employees, as the Committee shall determine during the term of this Plan. No
individual shall be eligible to receive an Award under the Plan while that
individual is a member of the Committee.
No Employee who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the corporation
employing the Employee or of its parent or subsidiary corporation shall be
eligible to receive an Option which is an Incentive Stock Option unless at the
time that the Option is granted the option price is at least 110% of the Fair
Market Value of the Common Stock at the time the Option is granted and the
Option by its own terms is not exercisable after the expiration of five years
from the date the Option is granted.
An Employee will be considered as owning the stock owned,
directly or indirectly, by or for his brothers and sisters (whether by the
whole or half blood), spouse, ancestors, and lineal descendants. Stock owned,
directly or indirectly, by or for a corporation, partnership, estate or trust
will be considered as being owned proportionately by or for its shareholders,
partners or beneficiaries. For all purposes of this Plan, a parent corporation
is any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company if, on the date of grant of the Option in
question, each of the corporations other than the Company owns stock possessing
50% or more of the total combined voting power of all classes of stock in one
of the other corporations in that chain; and a subsidiary corporation is any
corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if, on the date of grant of the Option in question,
each of the corporations, other than the last corporation in the chain, owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in that chain.
SECTION 6. MAXIMUM NUMBER OF SHARES SUBJECT TO AN AWARD
Effective with respect to Options awarded after February 17,
1993, the maximum number of shares of Common Stock subject to Options that may
be awarded to any Employee under the Plan is 250,000. The maximum number of
shares of Common Stock that may be awarded to any Employee pursuant to
Restricted Stock Awards under the Plan is 250,000.
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<PAGE> 4
SECTION 7. STOCK OPTIONS
A. AUTHORITY TO GRANT OPTIONS. The Committee may grant
Incentive Stock Options or Non-Incentive Stock Options at any time during the
term of this Plan to any eligible Employee that it chooses.
Each Option granted shall be approved by the Committee.
Subject only to any applicable limitations set forth in this Plan, the number
of shares of Common Stock to be covered by an Option shall be as determined by
the Committee.
B. OPTION PRICE. The price at which shares may be purchased
pursuant to an Option, whether it is an Incentive Stock Option or a
Non-Incentive Stock Option, shall be not less than the Fair Market Value of the
shares of Common Stock on the date the Option is granted. The Committee in its
discretion may provide that the price at which shares may be purchased shall be
more than the minimum price required.
C. DURATION OF OPTIONS. No Option which is an Incentive
Stock Option shall be exercisable after the expiration of ten years from the
date such Option is granted. The Committee in its discretion may provide that
such Option shall be exercisable throughout the ten year period or during any
lesser period of time commencing on or after the date of grant of such Option
and ending upon or before the expiration of the ten year period. If an
Employee owns stock possessing more than 10% of the total combined voting power
of all classes of stock of the corporation employing the Employee or of its
parent or subsidiary corporation, no Option which is an Incentive Stock Option
shall be exercisable after the expiration of five years from the date such
Option is granted. No Option which is a Non-Incentive Stock Option shall be
exercisable after the expiration of ten years from the date such Option is
granted. The Committee in its discretion may provide that such Option shall be
exercisable throughout the ten year period or during any lesser period of time
commencing on or after the date of grant of such Option and ending upon or
before the expiration of the ten year period.
D. MAXIMUM VALUE OF STOCK SUBJECT TO OPTIONS WHICH ARE
INCENTIVE STOCK OPTIONS. To the extent that the aggregate Fair Market Value
(determined as of the date the Option is granted) of the stock with respect to
which Incentive Stock Options are exercisable for the first time by the
Optionee in any calendar year (under this Plan and any other incentive stock
option plan(s) of the Company and any parent and subsidiary corporation)
exceeds $100,000, the Options shall be treated as Non-Incentive Stock Options.
In making this determination, Options shall be taken into account in the order
in which they were granted.
E. AMOUNT EXERCISABLE. The usual form of agreement granting
an Option (whether Incentive or Non-incentive) shall, subject to any limitation
on exercise contained in the Agreement which is not inconsistent with this
Plan, contain the following terms of exercise:
(a) No Option granted under this Plan may be exercised
until an Optionee has completed one year of continuous employment with
the Company or any Subsidiary following the date of grant;
(b) Beginning on the day after the first anniversary of
the date of grant, an Option may be exercised up to 1/3 of the shares
subject to the Option;
(c) After the expiration of each succeeding anniversary
date of the date of grant, the Option may be exercised up to an
additional 1/3 of the shares subject to the Option, so that after the
expiration of the third anniversary of the date of grant, the Option
shall be exercisable in full; and
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<PAGE> 5
(d) To the extent not exercised, installments shall be
cumulative and may be exercised in whole or in part until the Option
expires on the tenth anniversary of the date of the grant.
However, the Committee, in its discretion, may change the terms of exercise so
that any Option may be exercised so long as it is valid and outstanding from
time to time in part or as a whole in such manner and subject to such
conditions as it may set. In addition, the Committee, in its discretion, may
accelerate the time in which any outstanding Option may be exercised. But in
no event shall any Option be exercisable after the tenth anniversary of the
date of the grant.
F. EXERCISE OF OPTIONS. An Optionee may exercise such
optionee's Option by delivering to the Company a written notice stating (i)
that such optionee wishes to exercise such Option on the date such notice is so
delivered, (ii) the number of shares of stock with respect to which the Option
is to be exercised and (iii) the address to which the certificate representing
such shares of stock should be mailed. In order to be effective, such written
notice shall be accompanied by (i) payment of the Option Price of such shares
of stock and (ii) payment of an amount of money necessary to satisfy any
withholding tax liability that may result from the exercise of such Option.
Each such payment shall be made by cashier's check drawn on a national banking
association and payable to the order of the Company in United States dollars.
If, at the time of receipt by the Company of such written
notice, (i) the Company has unrestricted surplus in an amount not less than the
Option Price of such shares of stock, (ii) all accrued cumulative preferential
dividends and other current preferential dividends on all outstanding shares of
preferred stock of the Company have been fully paid, (iii) the acquisition by
the Company of its own shares of stock for the purpose of enabling such
optionee to exercise such Option is otherwise permitted by applicable law and
without any vote or consent of any stockholder of the Company, and (iv) there
shall have been adopted, and there shall be in full force and effect, a
resolution of the Board authorizing the acquisition by the Company of its own
shares of stock for such purpose, then such optionee may deliver to the
Company, in payment of the Option Price of the shares of stock with respect to
which such Option is exercised, (x) certificates registered in the name of such
optionee that represent a number of shares of stock legally and beneficially
owned by such optionee (free of all liens, claims and encumbrances of every
kind) and having a Fair Market Value on the date of receipt by the Company of
such written notice that is not greater than the Option Price of the shares of
stock with respect to which such Option is to be exercised, such certificates
to be accompanied by stock powers duly endorsed in blank by the record holder
of the shares of stock represented by such certificates, with the signature of
such record holder guaranteed by a national banking association, and (y) if the
Option Price of the shares of stock with respect to which such Option is to be
exercised exceeds such Fair Market Value, a cashier's check drawn on a national
banking association and payable to the order of the Company in an amount, in
United States dollars, equal to the amount of such excess. Notwithstanding the
provisions of the immediately preceding sentence, the Committee, in its sole
discretion, may refuse to accept shares of stock in payment of the Option Price
of the shares of stock with respect to which such Option is to be exercised
and, in that event, any certificates representing shares of stock that were
received by the Company with such written notice shall be returned to such
optionee, together with notice by the Company to such optionee of the refusal
of the Committee to accept such shares of stock. If, at the expiration of
seven business days after the delivery to such optionee of such written notice
from the Company, such optionee shall not have delivered to the Company a
cashier's check drawn on a national banking association and payable to the
order of the Company in an amount, in United States dollars, equal to the
Option Price of the shares of stock with respect to which such Option is to be
exercised, such written notice from the optionee to the Company shall be
ineffective to exercise such Option.
As promptly as practicable after the receipt by the Company of
(i) such written notice from the optionee, (ii) payment, in the form required
by the foregoing provisions of this Section of the Option Price of the shares
of stock with respect to which such Option is to be exercised, and (iii)
payment, in the form required by the foregoing provisions of this Section, of
an amount of money necessary to satisfy any withholding tax liability that may
result from the exercise of such Option, a certificate representing the number
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<PAGE> 6
of shares of stock with respect to which such Option has been so exercised,
such certificate to be registered in the name of such optionee, provided that
such delivery shall be considered to have been made when such certificate shall
have been mailed, postage prepaid, to such optionee at the address specified
for such purpose in such written notice from the optionee to the Company.
G. TRANSFERABILITY OF OPTIONS. Options shall not be
transferable by the optionee except by will or under the laws of descent and
distribution, and shall be exercisable, during his lifetime, only by him. Any
attempted sale, assignment, transfer, pledge or encumbrance of an Option in
violation of this Agreement shall be void and the Company shall not be bound
thereby.
H. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE. Except as
may be otherwise expressly provided herein with respect to an Option that is a
Non-statutory Stock Option, all Options shall terminate on the earlier of the
date of the expiration of the Option or one day less than three months after
the date of severance, upon severance of the employment relationship between
the Company and the optionee, whether with or without cause, for any reason
other than the death, Disability or, in the case of Non-statutory Stock Options
only, Retirement of the optionee, during which period the optionee shall be
entitled to exercise the Option in respect of the number of shares that the
optionee would have been entitled to purchase had the optionee exercised the
Option on the date of such severance of employment. Whether authorized leave
of absence, or absence on military or government service, shall constitute
severance of the employment relationship between the Company and the optionee
shall be determined by the Committee at the time thereof. In the event of
severance because of the Disability of the holder of any Incentive Stock Option
while in the employ of the Company and before the date of expiration of such
Incentive Stock Option, such Incentive Stock Option shall terminate on the
earlier of such date of expiration or one year following the date of such
severance because of Disability, during which period the optionee shall be
entitled to exercise the Incentive Stock Option in respect to the number of
shares that the optionee would have been entitled to purchase had the optionee
exercised the Incentive Stock Option on the date of such severance because of
Disability. In the event of the death of the holder of any Incentive Stock
Option while in the employ of the Company and before the date of expiration of
such Incentive Stock Option, such Incentive Stock Option shall terminate on the
earlier of such date of expiration or one year following the date of death.
After the death of the optionee, his executors, administrators or any person or
person to whom his Incentive Stock Option may be transferred by will or by the
laws of descent and distribution, shall have the right, at any time prior to
the termination of an Incentive Stock Option to exercise the Incentive Stock
Option, in respect to the number of shares that the optionee would have been
entitled to exercise if he had exercised the Incentive Stock Option on the date
of his death while in employment. For purposes of Incentive Stock Options
issued under this Plan, an employment relationship between the Company and the
optionee shall be deemed to exist during any period in which the optionee is
employed by the Company, a corporation issuing or assuming an option in a
transaction to which Section 424(a) of the Code applies, or a parent or
subsidiary corporation of such corporation issuing or assuming an option. For
this purpose, the phrase "corporation issuing or assuming an option" shall be
substituted for the word "Company" in the definitions of parent and subsidiary
corporations in Section 4 and the parent-subsidiary relationship shall be
determined at the time of the corporate action described in Section 424(a) of
the Code.
In the event of the death, Disability, or Retirement of a
holder of a Non-statutory Stock Option, before the date of expiration of such
Non-statutory Stock Option, such Non-statutory Stock Option shall continue
fully in effect, including provisions providing for subsequent vesting of such
Option, and shall terminate on the date of expiration of the Non-statutory
Stock Option notwithstanding any provision to the contrary in the optionee's
Option Agreement. After the death of the optionee, his executors,
administrators or any person or person to whom his Non-statutory Stock Option
may be transferred by will or by the laws of descent and distribution, shall
have the right, at any time prior to the termination of the Non-statutory Stock
Option to exercise the Non-statutory Stock Option, in respect to the number of
shares that the optionee would have been entitled to exercise if he were still
alive. Notwithstanding the foregoing provisions of this Section, in the case
of a Non-statutory Stock Option granted on or after December 8, 1994, the
Committee may provide for a different option termination date in the Option
Agreement with respect to such Option.
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<PAGE> 7
I. NO RIGHTS AS STOCKHOLDER. No optionee shall have rights
as a stockholder with respect to shares covered by his Option until the date a
stock certificate is issued for the shares. Except as provided in the
following provisions of this Section 7, no adjustment for dividends, or other
matters shall be made if the record date is prior to the date the certificate
is issued.
J. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence
of outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or
any issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
If the Company shall effect a subdivision or consolidation of
shares or other capital adjustment of, or the payment of a dividend in capital
stock or other equity securities of the Company on, its Common Stock, or other
increase or reduction of the number of shares of the Common Stock outstanding
without receiving consideration therefor in money, services, or property, or
the reclassification of its Common Stock, in whole or in part, into other
equity securities of the Company, then (a) the number, class and per share
price of shares of stock subject to outstanding Options hereunder shall be
appropriately adjusted (or in the case of the issuance of other equity
securities as a dividend on, or in a reclassification of, the Common Stock, the
Options shall extend to such other securities) in such a manner as to entitle
an optionee to receive, upon exercise of an Option, for the same aggregate cash
compensation, the same total number and class or classes of shares (or in the
case of a dividend of, or reclassification into, other equity securities, such
other securities) he would have held after such adjustment if he had exercised
his Option in full immediately prior to the event requiring the adjustment, or,
if applicable, the record date for determining shareholders to be affected by
such adjustment; and (b) the number and class of shares then reserved for
issuance under the Plan (or in the case of a dividend of, or reclassification
into, other equity securities, such other securities) shall be adjusted by
substituting for the total number and class of shares of stock then received,
the number and class or classes of shares of stock (or in the case of a
dividend on, or reclassification into, other equity securities, such other
securities) that would have been received by the owner of an equal number of
outstanding shares of Common Stock as the result of the event requiring the
adjustment. Comparable rights shall accrue to each optionee in the event of
successive subdivisions, consolidations, capital adjustment, dividends or
reclassifications of the character described above.
If the Company shall distribute to all holders of its shares
of Common Stock (including any such distribution made to non-dissenting
shareholders in connection with a consolidation or merger in which the Company
is the surviving corporation and in which holders of shares of Common Stock
continue to hold shares of Common Stock after such merger or consolidation)
evidences of indebtedness or cash or other assets (other than cash dividends
payable out of consolidated retained earnings not in excess of, in any one year
period, the greater of (a) $1.00 per share of Common Stock or (b) two times the
aggregate amount of dividends per share paid during the preceding calendar year
and dividends or distributions payable in shares of Common Stock or other
equity securities of the Company described in the immediately preceding
paragraph), then in each case the Option Price shall be adjusted by reducing
the Option Price in effect immediately prior to the record date for the
determination of stockholders entitled to receive such distribution by an
amount equal to the Fair Market Value, as determined in good faith by the Board
(whose determination shall be described in a statement filed in the Company's
corporate records and be available for inspection by any holder of an Option)
of the portion of the evidence of indebtedness or cash or other assets so to be
distributed applicable to one share of Common Stock; provided that in no event
shall the Option Price be less than the par value of a share of Common Stock.
Such adjustment shall be made whenever any such distribution is made, and shall
become effective on the date of the distribution retroactive to the record date
for the determination of the stockholders entitled to receive such
distribution. Comparable adjustments shall be made in the event of successive
transactions of the character described above.
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<PAGE> 8
If the Company shall make a tender offer for, or grant to all
of its holders of its shares of Common Stock the right to require the Company
or any subsidiary of the Company to acquire from such stockholders shares of,
Common Stock, at a price in excess of the Current Market Price (a "Put Right")
or the Company shall grant to all of its holders for its shares of Common Stock
the right to acquire shares of Common Stock for less than the Current Market
Price (a "Purchase Right"), then, in the case of a Put Right, the Option Price
shall be adjusted by multiplying the Option Price in effect immediately prior
to the record date for the determination of stockholders entitled to receive
such Put Right by a fraction, the numerator of which shall be the number of
shares of Common Stock then outstanding minus the number of shares of Common
Stock which could be purchased at the Current Market Price for the aggregate
amount which would be paid if all Put Rights are exercised and the denominator
of which is the number of shares of Common Stock which would be outstanding if
all Put Rights are exercised; and, in the case of a Purchase Right, the Option
Price shall be adjusted by multiplying the Option Price in effect immediately
prior to the record date for the determination of the stockholders entitled to
receive such Purchase Right by a fraction, the numerator of which shall be the
number of shares of Common Stock then outstanding plus the number of shares of
Common Stock which could be purchased at the Current Market Price for the
aggregate amount which would be paid if all Purchase Rights are exercised and
the denominator of which is the number of shares of Common Stock which would be
outstanding if all Purchase Rights are exercised. In addition, the number of
shares subject to the Option shall be increased by multiplying the number of
shares then subject to the Option by a fraction which is the inverse of the
fraction used to adjust the Option Price. Notwithstanding the foregoing if any
such Put Rights or Purchase Rights shall terminate without being exercised, the
Option Price and number of shares subject to the Option shall be appropriately
readjusted to reflect the Option Price and number of shares subject to the
Option which would have been in effect if such unexercised Rights had never
existed. Comparable adjustments shall be made in the event of successive
transactions of the character described above.
After the merger of one or more corporations into the Company,
after any consolidation of the Company and one or more corporations, or after
any other corporate transaction described in Section 424(a) of the Code in
which the Company shall be the surviving corporation, each optionee, at no
additional cost, shall be entitled to receive, upon any exercise of his Option,
in lieu of the number of shares as to which the Option shall then be so
exercised, the number and class of shares of stock or other equity securities
to which the optionee would have been entitled pursuant to the terms of the
agreement of merger or consolidation if at the time of such merger or
consolidation such optionee had been a holder of a number of shares of Common
Stock equal to the number of shares as to which the Option shall then be so
exercised and, if as a result of such merger, consolidation or other
transaction, the holders of Common Stock are not entitled to receive any shares
of Common Stock pursuant to the terms thereof, each optionee, at no additional
cost shall be entitled to receive, upon exercise of his Option, such other
assets and property, including cash to which he would have been entitled if at
the time of such merger, consolidation or other transaction he had been the
holder of the number of shares of Common Stock equal to the number of shares as
to which the Option shall then be so exercised. Comparable rights shall accrue
to each optionee in the event of successive mergers or consolidations of the
character described above.
After a merger of the Company into one or more corporations,
after a consolidation of the Company and one or more corporations, or after any
other corporate transaction described in Section 424(a) of the Code in which
the Company is not the surviving corporation, each optionee shall, at no
additional cost, be entitled at the option of the surviving corporation (i) to
have his then existing Option assumed or have a new option substituted for the
existing Option by the surviving corporation to the transaction which is then
employing him, or a parent or subsidiary of such corporation, on a basis where
the excess of the aggregate fair market value of the shares subject to the
Option immediately after the substitution or assumption over the aggregate
Option Price of such option is equal to the excess of the aggregate fair market
value of all shares subject to the option immediately before such substitution
or assumption over the aggregate Option Price of such shares, provided that the
shares subject to the new option must be traded on the New York or American
Stock Exchange or quoted on the National Association of Securities Dealers
Automated Quotation System, or (ii) to receive, upon any exercise of his
Option, in lieu of the number of shares as to which the Option shall then be so
exercised, the securities, property and other assets, including cash, to which
the optionee would
-8-
<PAGE> 9
have been entitled pursuant to the terms of the agreement of merger or
consolidation or the agreement giving rise to the other corporate transaction
if at the time of such merger, consolidation or other transaction such optionee
had been the holder of the number of shares of Common Stock equal to the number
of shares as to which the Option shall then be so exercised.
If a corporate transaction described in Section 424(a) of the
Code which involves the Company is to take place and there is to be no
surviving corporation while an Option remains in whole or in part unexercised,
it shall be canceled by the Board as of the effective date of any such
corporate transaction but before that date each optionee shall be provided with
a notice of such cancellation and each optionee shall have the right to
exercise such Option in full (without regard to any vesting limitations set
forth in or imposed pursuant to preceding provisions of this Plan or the option
agreement with respect to such Option) to the extent it is then still
unexercised during a 30-day period preceding the effective date of such
corporate transaction.
For purposes of this Section, Current Market Price per share
of Common Stock shall mean the last reported price for the Common Stock in the
New York Stock Exchange -- Composite Transaction listing on the trading day
immediately preceding the first trading day on which, as a result of the
establishment of a record date or otherwise, the trading price reflects that an
acquiror of Common Stock in the public market will not participate in or
receive the payment of any applicable dividend or distribution; provided,
however, that if there is no closing price for the stock as so reported on that
date or if, in the discretion of the Committee, another means of determining
the fair value of the shares of stock at such date shall be necessary or
advisable, the Committee may provide for another means for determining the
Current Market Price of the Common Stock.
Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property, or for labor or services either
upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock then subject to outstanding Options.
K. SUBSTITUTION OPTIONS. Options may be granted under this
Plan from time to time in substitution for stock options held by employees of
other corporations who are about to become employees of the Company, or whose
employer is about to become a parent or subsidiary corporation, conditioned in
the case of an incentive stock option upon the employee becoming an employee as
the result of a merger or consolidation of the Company with another
corporation, or the acquisition by the Company of substantially all the assets
of another corporation, or the acquisition by the Company of at least 50% of
the issued and outstanding stock of another corporation as the result of which
it becomes a subsidiary of the Company. The terms and conditions of the
substitute Options granted may vary from the terms and conditions of this Plan
to the extent the Board at the time of grant may deem appropriate to conform,
in whole or in part, to the provisions of the stock options in substitution for
which they are granted. But with respect to stock options which are incentive
stock options, no variation shall be made which will affect the status of any
substitute option as an "incentive stock option" under Section 422 of the Code.
SECTION 8. RESTRICTED STOCK AWARDS
A. AWARDS. The Committee may make an Award of Restricted
Stock to selected eligible Employees. The amount of each Restricted Stock
Award and the respective terms and conditions of each Award (which terms and
conditions need not be the same in each case) shall be determined by the
Committee in its sole discretion. However, the terms and conditions of an
Award shall not be inconsistent with the terms of the Plan.
-9-
<PAGE> 10
B. TRANSFERABILITY AND RIGHTS WITH RESPECT TO RESTRICTED
STOCK. Except as provided herein, Restricted Stock may not be sold, assigned,
transferred, pledged, or otherwise encumbered during a Restricted Period. Any
attempted sale, assignment, transfer, pledge or encumbrance of Restricted Stock
in violation of this Plan shall be void and the Company shall not be bound
thereby.
During the Restricted Period, certificates representing the
Restricted Stock and any Retained Distributions shall be registered in the
recipient's name and bear a restrictive legend to the effect that ownership of
such Restricted Stock (and any such Retained Distributions), and the enjoyment
of all rights appurtenant thereto are subject to the restrictions, terms, and
conditions provided in this Plan and the applicable Agreement. Such
certificates shall be deposited by the recipient with the Company, together
with stock powers or other instruments of assignment, each endorsed in blank,
which will permit transfer to the Company of all or any portion of the
Restricted Stock and any securities constituting Retained Distributions which
shall be forfeited in accordance with this Plan and the applicable Agreement.
Restricted Stock shall constitute issued and outstanding shares of Common Stock
for all corporate purposes.
Subject to the terms of this Plan and the Agreement with
respect to the Award, the recipient shall have the right to vote the Restricted
Stock awarded to such recipient and to receive and retain all regular cash
dividends, and to exercise all other rights, powers and privileges of a holder
of Common Stock, with respect to such Restricted Stock, with the exception that
(i) the recipient shall not be entitled to delivery of the stock certificate or
certificates representing such Restricted Stock until the restrictions
applicable thereto shall have expired, (ii) the Company shall retain custody of
all Retained Distributions made or declared with respect to the Restricted
Stock (and such Retained Distributions shall be subject to the same
restrictions, terms and conditions as are applicable to the Restricted Stock)
until such time, if ever, as the Restricted Stock with respect to which such
Retained Distributions shall have been made, paid, or declared shall have
become vested, and such Retained Distributions shall not bear interest or be
segregated in separate accounts and (iii) the recipient may not sell, assign,
transfer, pledge, exchange, encumber, or dispose of the Restricted Stock or any
Retained Distributions during the Restricted Period. Nothing in this Section
shall prevent transfers by will or by the applicable laws of descent and
distribution.
C. VESTING OF RESTRICTED STOCK. Restricted Stock Awards
shall be subject to such vesting restrictions, if any, as the Committee shall
determine in its sole discretion; provided that any Restricted Stock Award that
is granted to an Employee who is then subject to the reporting and short-swing
profit provisions of Section 16 of the Exchange Act and the rules thereunder
shall vest no earlier than six months following the date on which the
Restricted Stock is deemed awarded for purposes of such provisions.
D. CONSEQUENCE OF VESTING. Subject to Section 9, when shares
of Restricted Stock become vested, the Restricted Period shall be terminated as
to those shares, and the Company shall deliver to the Restricted Stock Award
recipient (or his estate, if applicable) a Common Stock certificate
representing those shares and all Retained Distributions made or declared with
respect to those shares, reduced as necessary to satisfy the Company's tax
withholding obligation.
E. WITHHOLDING TAX. The Company shall meet its tax
withholding obligations under the Code and applicable state or local law
arising upon the vesting of Restricted Stock by delivering to the Restricted
Stock recipient (or his estate, if applicable) a reduced number of shares of
Common Stock in the manner specified herein. At the time of vesting of shares
of Restricted Stock, the Company shall (i) calculate the amount of withholding
tax due on the assumption that all such vested shares of Restricted Stock are
made available for delivery, (ii) reduce the number of such shares made
available for delivery so that the Fair Market Value of the shares withheld on
the vesting date approximates the amount of tax the Company is obliged to
withhold and (iii) in lieu of the withheld shares, remit cash to the United
States Treasury and other applicable governmental authorities, on behalf of the
participant, in the amount of the withholding tax due.
The Company shall withhold only whole shares of Common Stock
to satisfy its withholding obligation. Where the Fair Market Value of the
withheld shares does not equal Company's withholding tax
-10-
<PAGE> 11
obligation, the Company shall withhold shares with a Fair Market Value slightly
in excess of the amount of its withholding obligation and shall remit the
excess cash to the Restricted Stock Award recipient (or his estate, if
applicable) with the shares of Common Stock made available for delivery.
The withheld shares of Restricted Stock not made available for
delivery by the Company shall be retained as treasury stock or will be
cancelled and, in either case, the recipient's right, title and interest in
such Restricted Stock shall terminate.
F. CHANGES IN COMPANY'S CAPITAL STRUCTURE. In the event that
the outstanding shares of Common Stock of the Company are changed into or
exchanged for a different number or kind of shares or other securities of the
Company, or of another corporation, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, stock dividend,
or combination of shares, appropriate adjustments shall be made by the
Committee in the aggregate number and kind of shares which may be issued or
granted as Awards. If any adjustment shall result in a fractional share, the
fraction shall be disregarded.
SECTION 9. REQUIREMENTS OF LAW
The Company shall not be required to sell, issue or deliver
any shares of Common Stock under any Award if such sale, issuance or delivery
shall constitute a violation by the Award recipient or the Company of any
provisions of any law or regulation of any governmental authority. Each Award
granted under this Plan shall be subject to the requirements that, if at any
time the Board or the Committee shall determine that the listing, registration
or qualification of the shares upon any securities exchange or under any state
or federal law of the United States or of any other country or governmental
subdivision, or the consent or approval of any governmental regulatory body, or
investment or other representations, are necessary or desirable in connection
with the issue, or purchase or delivery of shares subject to an Award, that
Award shall not be exercised in whole or in part and no shares shall be
delivered pursuant to an Award unless the listing, registration, qualification,
consent, approval or representations shall have been effected or obtained free
of any conditions not acceptable to the Committee. Any determination in this
connection by the Committee shall be final. In the event the shares issuable
or deliverable on exercise or vesting of an Award are not registered under the
Securities Act of 1933, the Company may imprint on the certificate for those
shares the following legend or any other legend which counsel for the Company
considers necessary or advisable to comply with the Securities Act of 1933:
"The shares of stock represented by this certificate have not
been registered under the Securities Act of 1933 or under the
securities laws of any state and may not be sold or
transferred except upon registration or upon receipt by the
Corporation of an opinion of counsel satisfactory to the
Corporation, in form and substance satisfactory to the
Corporation, that registration is not required for a sale or
transfer."
The Company may, but shall in no event be obligated to, register any securities
covered by this Plan under the Securities Act of 1933 (as now in effect or as
later amended) and, in the event any shares are registered, the Company may
remove any legend on certificates representing those shares. The Company shall
not be obligated to take any other affirmative action in order to cause the
exercise of an Award or the issuance or delivery of shares under the Award to
comply with any law or regulation or any governmental authority.
SECTION 10. EMPLOYMENT OBLIGATION
The granting of any Award shall not impose upon the Company
any obligation to employ or continue to employ any Award recipient. The right
of the Company to terminate the employment of any officer or other Employee
shall not be diminished or affected by reason of the fact that an Award has
been granted to him.
-11-
<PAGE> 12
SECTION 11. FORFEITURE FOR CAUSE
Notwithstanding any other provision of this Plan, if the
Committee finds by a majority vote, that the Award recipient, before or after
termination of his employment with the Company (a) committed a fraud,
embezzlement, theft, felony or act of dishonesty in the course of his
employment by the Company which conduct damaged the Company or (b) disclosed
trade secrets of the Company, then any outstanding options which have not been
exercised by the individual and any Awards which have not yet vested will be
forfeited. The decision of the Committee as to the cause of an Award
recipient's discharge, the damage done to the Company and the extent of the
individual's competitive activity will be final. No decision of the Committee,
however, will affect the finality of the discharge of the individual by the
Company.
SECTION 12. AMENDMENT OR TERMINATION OF PLAN
The Board may modify, revise or terminate this Plan at any
time and from time to time. However, without the further Company stockholder
approval by a majority of the votes cast at a duly held stockholders' meeting
at which a quorum representing a majority of all outstanding voting stock (or
if the provisions of the corporate charter, bylaws or applicable state law
prescribe a greater degree of stockholder approval for this action, without the
degree of stockholder approval thus required) is, either in person or by proxy,
present and voting on the issue, the Board may not (a) increase the aggregate
number of shares that may be subject to Awards pursuant to the provisions of
this Plan; (b) materially increase the benefits accruing to participants under
this Plan or (c) materially modify the requirements as to eligibility for
participation in this Plan.
SECTION 13. WRITTEN AGREEMENT
Each Award granted under this Plan shall be embodied in a
written Agreement, which shall be subject to the terms and conditions
prescribed above, and shall be signed by the recipient and by the appropriate
officer of the Company for and in the name and on behalf of the Company. Each
Agreement shall contain any other provisions consistent with this Plan that the
Committee in its discretion shall deem advisable.
SECTION 14. INDEMNIFICATION OF THE COMMITTEE
The Company shall indemnify each present and future member of
the Committee against, and each member of the Committee shall be entitled
without further act on his part to indemnity from the Company for, all expenses
(including the amount of judgments and the amount of approved settlements made
with a view to the curtailment of costs of litigation, other than amounts paid
to the Company itself) reasonably incurred by him in connection with or arising
out of any action, suit or proceeding in which he may be involved by reason of
his being or having been a member of the Committee, whether or not he continues
to be such member of the Committee at the time of incurring such expenses;
provided, however, that such indemnity shall not include any expenses incurred
by any such member of the Committee (a) in respect of matters as to which he
shall be finally adjudged in any such action, suit or proceeding to have been
guilty of gross negligence or willful misconduct in the performance of his duty
as such member of the Committee, or (b) in respect of any matter in which any
settlement is effected, to an amount in excess of the amount approved by the
Company on the advice of its legal counsel; and provided further, that no right
of indemnification under the provisions set forth herein shall be available to
or enforceable by any such member of the Committee unless, within sixty (60)
days after institution of any such action, suit or proceeding, he shall have
offered the Company, in writing, the opportunity to handle and defend the same
at its own expense. The foregoing right of indemnification shall inure to the
benefit of the heirs, executors or administrators of each such member of the
Committee and shall be in addition to all other rights to which such member of
the Committee may be entitled to as a matter of law, contract or otherwise.
Nothing in this Section shall be construed to limit or otherwise affect any
right to indemnification or payment of expense, or any provisions limiting the
liability of any officer or director of the Company or any member of the
Committee, provided by law, the Certificate of Incorporation of the Company or
otherwise.
-12-
<PAGE> 13
SECTION 15. SECTION 83(B) ELECTIONS.
No Employee shall exercise the election permitted under
Section 83(b) of the Code with respect to an Award without written approval of
the Committee. If the Committee permits such an election with respect to any
Award, the Company shall require the Award recipient to pay the Company an
amount necessary to satisfy the Company's tax withholding obligation.
SECTION 16. AWARD GRANT TERMINATION.
No Awards shall be granted pursuant to this Plan after
December 1, 2002.
-13-
<PAGE> 14
FIRST AMENDMENT TO
THE QUANEX CORPORATION EMPLOYEE STOCK
OPTION AND RESTRICTED STOCK PLAN
THIS AGREEMENT by Quanex Corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company previously
adopted the plan agreement known as the "Quanex Corporation Employee Stock
Option and Restricted Stock Plan" (the "Plan"); and
WHEREAS, the Board of Directors of the Company retained the
right in Section 12 of the Plan to amend the Plan from time to time; and
WHEREAS, the Board of Directors of the Company has approved
the following amendment to the Plan;
NOW, THEREFORE, the Board of Directors of the Company agrees
that Paragraph H of Section 7 of the Plan is hereby amended, effective with
respect to both Non-Incentive Options outstanding on the date of the adoption
of this Amendment and all Non-Incentive Options issued in the future under this
Plan, as follows:
H. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE. Except as
may be otherwise expressly provided herein with respect to an Option
that is a Non-Incentive Stock Option, all Options shall terminate on
the earlier of the date of the expiration of the Option or one day
less than three months after the date of severance, upon severance of
the employment relationship between the Company and the optionee,
whether with or without cause, for any reason other than the death,
Disability or, in the case of Non-Incentive Stock Options only,
Retirement of the optionee, during which period the optionee shall be
entitled to exercise the Option in respect of the number of shares
that the optionee would have been entitled to purchase had the
optionee exercised the Option on the date of such severance of
employment. Whether authorized leave of absence, or absence on
military or government service, shall constitute severance of the
employment relationship between the Company and the optionee shall be
determined by the Committee at the time thereof. In the event of
severance because of the Disability of the holder of any Incentive
Stock Option while in the employ of the Company and before the date of
expiration of such Incentive Stock Option, such Incentive Stock Option
shall terminate on the earlier of such date of expiration or one year
following the date of such severance because of Disability, during
which period the optionee shall be entitled to exercise the Incentive
Stock Option in respect to the number of shares that the optionee
would have been entitled to purchase had the optionee exercised the
Incentive Stock Option on the date of such severance because of
Disability. In the event of the death of the holder of any Incentive
Stock Option while in the employ of the Company and before the date of
expiration of such Incentive Stock Option, such Incentive Stock Option
shall terminate on the earlier of such date of expiration or one year
following the date of death. After the death of the optionee, his
executors, administrators or any person or person to whom his
Incentive Stock Option may be transferred by will or by the laws of
descent and
-14-
<PAGE> 15
distribution, shall have the right, at any time prior to the
termination of an Incentive Stock Option to exercise the Incentive
Stock Option, in respect to the number of shares that the optionee
would have been entitled to exercise if he had exercised the Incentive
Stock Option on the date of his death while in employment. For
purposes of Incentive Stock Options issued under this Plan, an
employment relationship between the Company and the optionee shall be
deemed to exist during any period in which the optionee is employed by
the Company, a corporation issuing or assuming an option in a
transaction to which Section 424(a) of the Code applies, or a parent
or subsidiary corporation of such corporation issuing or assuming an
option. For this purpose, the phrase "corporation issuing or assuming
an option" shall be substituted for the word "Company" in the
definitions of parent and subsidiary corporations in Section 4 and the
parent-subsidiary relationship shall be determined at the time of the
corporate action described in Section 424(a) of the Code.
In the event of the death, Disability, or Retirement of a
holder of a Non-Incentive Stock Option, before the date of expiration
of such Non-Incentive Stock Option, such Non-Incentive Stock Option
shall continue fully in effect, including provisions providing for
subsequent vesting of such Option, and shall terminate on the date of
expiration of the Non-Incentive Stock Option notwithstanding any
provision to the contrary in the optionee's Option Agreement. After
the death of the optionee, his executors, administrators or any person
or person to whom his Non-Incentive Stock Option may be transferred by
will or by the laws of descent and distribution, shall have the right,
at any time prior to the termination of the Non-Incentive Stock Option
to exercise the Non-Incentive Stock Option, in respect to the number
of shares that the optionee would have been entitled to exercise if he
were still alive. Notwithstanding the foregoing provisions of this
Section, in the case of a Non-Incentive Stock Option granted on or
after December 8, 1994, the Committee may provide for a different
option termination date in the Option Agreement with respect to such
Option.
Dated: October 20, 1994
-15-
<PAGE> 1
EXHIBIT 10.18
QUANEX CORPORATION
NON-EMPLOYEE DIRECTOR RETIREMENT PLAN
To promote the interest of Quanex Corporation (the "Company") and to
assist the Company in obtaining and retaining qualified persons to act as
directors of the Company, the Company has adopted the following Non-Employee
Directors Retirement Plan (the "Plan").
1. Eligibility. Each person, other than full-time employees of
the Company, serving, on or after the Effective Date of this Plan, as a
director subject to reelection by the holders of Common Stock of the Company
and each person serving as an advisory director at the request of the Board of
Directors, shall be entitled to participate in this Plan.
2. Retirement Benefit. Any director or advisory director who is
eligible to participate in this Plan and has served on the Board of Directors
of the Company for at least an aggregate of ten full years shall be entitled to
a retirement payment as provided herein. Subject to Sections 3 and 4 below,
the Company shall pay to the director or advisory director annually a sum (the
"Retirement Amount") equal to the base annual director retainer fee paid at the
time the person is no longer either a director or advisory director of the
Company. The base annual director retainer fee shall not include fees paid for
attendance at meetings or other purposes. The Retirement Amount shall be paid
annually on the anniversary date of the retirement of the person as a director
or advisory director or at such earlier time as the Company may select. In
addition, the Company may elect to pay the Retirement Amount in installments
provided the Retirement Amount shall be paid in full by each anniversary date.
3. Termination of Payment. The Company shall pay the Retirement
Amount annually for a period equal to the aggregate length of time the director
or advisory director served on the Board of Directors, such period to be
rounded up to the next full year; provided that the Company's obligation shall
earlier terminate (i) upon the death of the director or advisory director, (ii)
upon the termination of this Plan as to all then current and retired directors,
in which case payment shall be made to all eligible retired directors and
advisory directors for the year in which the termination of this Plan occurs
and two additional years, and (iii) upon a determination by the Board of
Directors that the retired director or advisory director is serving as a
director, officer or employee of a competitor of the Company and the
continuation of such relationship after 15 days written notice of such
determination to the retired director.
4. Consultation. At any time payments are being made to a person
pursuant to this Plan, such person agrees to be available to consult with and
advise the Board of Directors of the Company from time to time upon reasonable
notice; provided that the Company shall pay all out of pocket expenses of such
person, such person shall not be obligated to travel and such consultations
shall not require more of such person's time than that required when serving as
a director or advisory director.
5. Effective Date. This Plan shall be effective on February 20,
1992, and shall remain in effect until termination by a resolution of the Board
of Directors of the Company. Except as provided in Section 3, upon termination
of this Plan, no person shall be entitled to any further benefits hereunder.
<PAGE> 2
Approved by the Board of Directors - 2/20/92
-2-
<PAGE> 1
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Years Ended October 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Income before cumulative effect of accounting change................ $ 18,852 $ 8,428 $ 6,195
Cumulative effect of accounting change.............................. - - (25,108)
--------- --------- ---------
Net income (loss)................................................... 18,852 8,428 (18,913)
Preferred dividend requirements..................................... (5,934) (5,934) (2,654)
--------- --------- ---------
Net income attributable to
common stockholders............................................... $ 12,918 $ 2,494 $ (21,567)
========= ========= =========
Weighted average shares
outstanding-primary............................................... 13,496 13,551 12,696
========= ========= =========
Earnings(loss) per common share:
Primary:
Income before cumulative effect of accounting change............ $ 0.96 $ 0.18 $ 0.28
Cumulative effect of accounting change.......................... - - (1.98)
--------- --------- ---------
Net earnings (loss)............................................. $ 0.96 $ 0.18 $ (1.70)
========= ========= =========
Income before cumulative effect of accounting change................ $ 18,852 $ 8,428 $ 6,195
Cumulative effect of accounting change.............................. - - (25,108)
--------- --------- ---------
Net income (loss)................................................... 18,852 8,428 (18,913)
Interest on 9-1/8% convertible subordinated
debentures and amortization of related issuance
costs, net applicable of income taxes............................. - - 1,783
--------- --------- ---------
Adjusted net income................................................. $ 18,852 $ 8,428 $ (17,130)
========= ========= =========
Weighted average shares
outstanding-primary............................................... 13,496 13,551 12,696
Effect of common stock equivalents
arising from stock options........................................ 72 45 133
Preferred stock assumed converted
to common stock................................................... 2,738 2,738 1,225
Subordinated debentures assumed
converted to common stock......................................... - - 1,993
--------- --------- ---------
Weighted average shares
outstanding-fully diluted......................................... 16,306 16,334 16,047
========= ========= =========
Earnings(loss) per common share:
Assuming full dilution:
Income before cumulative effect of accounting change............ $ 1.16 $ 0.52 $ 0.50
Cumulative effect of accounting change.......................... - - (1.56)
--------- --------- ---------
Net earnings (loss)............................................. $ 1.16 $ 0.52 $ (1.06)
========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 13
SALES BY MAJOR MARKETS
<TABLE>
<CAPTION>
Markets Market Description Quanex Products Sales ($ millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INDUSTRIAL General Industrial Mechanical and pressure $179.9 $180.4 $163.9 $146.4 $171.4
MACHINERY AND Machinery (including tubing, pipe, specialty 25.7% 29.3% 28.7% 24.8% 26.4%
CAPITAL EQUIPMENT mining, agriculture and forgings, extruded
construction) products, steel bars
Capital Equipment Mechanical tubing, steel $ 46.8 $ 40.0 $ 30.3 $ 32.3 $ 44.6
(including material bars 6.7% 6.5% 5.3% 5.5% 6.9%
handling, machine tools
and office/household)
TOTAL INDUSTRIAL $226.7 $220.4 $194.2 $178.7 $216.0
MACHINERY AND CAPITAL 32.4% 35.8% 34.0% 30.3% 33.3%
EQUIPMENT
- ------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION Aerospace Seamless contoured rolled $ - (1) $ 6.2 (1) $ 24.2 $ 26.8 $ 30.8
rings, mechanical tubing - 1.0% 4.2% 4.6% 4.7%
Auto/Truck Mechanical tubing, steel $189.2 $153.1 $114.6 $ 93.6 $115.7
bars 27.1% 24.8% 20.0% 15.9% 17.8%
Other Transportation Mechanical tubing, steel $ 17.0 $ 17.1 $ 20.1 $ 26.7 $ 23.5
(including ship/railroad, bars 2.4% 2.8% 3.5% 4.5% 3.6%
recreational vehicles and
military transportation)
TOTAL TRANSPORTATION $206.2 $176.4 $158.9 $147.1 $170.0
29.5% 28.6% 27.7% 25.0% 26.1%
- ------------------------------------------------------------------------------------------------------------------------------------
ENERGY Exploration/Production Oil field production tubing $ 9.9 $ 13.9 $ 23.1 $ 42.7 $ 12.0
and casing, mechanical 1.4% 2.3% 4.0% 7.3% 1.9%
tubing, steel bars
Processing/Conversion Pressure tubing, process $ 55.2 $ 61.9 $ 58.5 $ 61.8 $ 71.7
(refining, petrochemical, pipe 7.9% 10.0% 10.2% 10.5% 11.0%
power generation)
TOTAL ENERGY $ 65.1 $ 75.8 $ 81.6 $104.5 $ 83.7
9.3% 12.3% 14.2% 17.8% 12.9%
- ------------------------------------------------------------------------------------------------------------------------------------
ALUMINUM Residential and Aluminum sheet, $200.9 $143.0 $137.1 $133.7 $153.7
PRODUCTS Commercial fabricated aluminum 28.7% 23.2% 24.0% 22.7% 23.6%
Building Materials, products, aluminum coil
Other and coated aluminum coil
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER $ .4 $ .5 $ .3 $ 24.9 $ 26.9
.1% .1% .1% 4.2% 4.1%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SALES $699.3 $616.1 $572.1 $588.9 $650.3
100.0% 100.0% 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Decrease from prior years reflects the disposition of the Viking
Metallurgical Corporation subsidiary during the second quarter of 1993
8
<PAGE> 2
INDEX TO FINANCIAL SECTION
<TABLE>
<S> <C>
Years Ended October 31, 1994, 1993 and 1992
- -----------------------------------------------------------------------------------------
FINANCIAL SUMMARY 1984-1994 34-35
- -----------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION 37-41
- -----------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------
Independent auditors' report ................................................... 36
Balance sheets ................................................................. 42
Statements of income ........................................................... 43
Statements of stockholders' equity ............................................. 44
Statements of cash flow ........................................................ 45
Notes to consolidated financial statements ..................................... 46-56
- -----------------------------------------------------------------------------------------
SUPPLEMENTARY FINANCIAL DATA
- -----------------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (unaudited) 57
- -----------------------------------------------------------------------------------------
SCHEDULES
- -----------------------------------------------------------------------------------------
V -- Property, plant and equipment........................................... 58
VI -- Accumulated depreciation and amortization of property, plant and
equipment............................................................... 59
VIII -- Valuation and qualifying accounts and reserves.......................... 59
</TABLE>
Schedules not listed or discussed above have been omitted as they
are either inapplicable or the required information has been given
in the consolidated financial statements or the notes thereto.
GLOSSARY OF TERMS
The exact definitions of commonly used financial terms and ratios vary somewhat
among different companies and investment analysts. The following list gives the
definition of certain financial terms that are used in this report:
Capital expenditures: Additions to property, plant and equipment.
Book value per common share: Stockholders' equity less the stated value of
preferred stock divided by the number of common shares outstanding.
Asset turnover: Net sales divided by average total assets.
Current ratio: Current assets divided by current liabilities.
Fixed charge coverage: The sum of income before income taxes plus interest
expense, plus the estimated interest component of rentals, less capitalized
interest, plus amortization of previously capitalized interest, plus
amortization of deferred debt issuance costs; divided by interest expense,
plus the estimated interest component of rentals, plus amortization of deferred
debt issuance costs.
Return on investment: The sum of net income and the after-tax effect of interest
expense less capitalized interest divided by the sum of the averages for
long-term debt and stockholders' equity.
Return on common stockholders' equity: Net income attributable to common
stockholders' divided by average common stockholders' equity.
33
<PAGE> 3
FINANCIAL SUMMARY 1984-1994
($ THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(FOR DEFINITION OF ITEMS, SEE PAGE 33)
FISCAL YEARS ENDED OCTOBER 31, 1994 1993 1992 1991 1990 1989(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND EARNINGS
Net sales $ 699,314 616,145 572,090 588,888 650,316 501,991
Cost of sales $ 613,553 550,969 506,778 514,894 551,929 418,580
Gross profit $ 85,761 65,176 65,312 73,994 98,387 83,411
Selling, general and administrative expenses $ 44,359 41,907 46,390 (4) 38,914 41,207 30,136
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 41,402 23,269 18,922 35,080 57,180 53,275
Percent of net sales 5.9 3.8 3.3 6.0 8.8 10.6
Other income (expense)-net $ 1,279 3,224 2,255 673 (2,106) 703
Interest expense-net of capitalized interest $ 10,178 11,962 10,495 14,306 9,880 6,837
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes,
extraordinary items, and cumulative
effect of accounting change $ 32,503 14,531 10,682 21,447 45,194 47,141
Income taxes (credit) $ 13,651 6,103 4,487 9,007 17,174 17,891
Extraordinary items(2) - - (25,108)(2) - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 18,852 8,428 (18,913) 12,440 28,020 29,250
Percent of net sales 2.7 1.4 (3.3) 2.1 4.3 5.8
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Earnings (loss) per primary common
share before extraordinary items and
cumulative effect of accounting change $ .96 .18 .28 1.02 2.03 2.11
Net earnings (loss) per primary common shares $ .96 .18 (1.70) 1.02 2.03 2.11
Cash dividends declared $ .56 .56 .52 .48 .40 .30
Book value $ 10.91 10.48 11.10 12.99 12.33 10.83
Average shares outstanding (000) 13,496 13,551 12,696 11,679 12,224 12,380
Market closing price range
High $ 27 20 3\4 31 1\2 23 18 1\2 19
Low $ 16 1\4 14 1\4 15 1\2 10 1\8 9 1\8 12 3\4
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION - YEAR END
Working capital $ 124,645 148,338 154,455 69,142 74,187 76,257
Property, plant and equipment - net $ 262,261 242,346 239,538 220,038 187,712 194,638
Other assets $ 42,351 43,111 44,801 45,431 44,683 35,580
Noncurrent deferred income taxes $ 23,014 18,061 16,675 32,428 31,400 37,132
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 128,400 128,695 128,894 162,792 131,498 94,214
Stockholders' equity $ 232,249 225,776 237,592 152,488 181,430 167,630
Total capitalization $ 360,649 354,471 366,486 315,280 312,928 261,844
Long-term debt percent of capitalization 35.6 36.3 35.2 51.6 42.0 36.0
- ---------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Asset turnover 1.3 1.2 1.2 1.3 1.5 1.4
Current ratio 1.9 TO 1 2.6 to 1 2.6 to 1 1.7 to 1 1.8 to 1 1.8 to 1
Fixed charge coverage 3.08 1.98 1.52 2.12 5.12 7.47
- ---------------------------------------------------------------------------------------------------------------------------
Return on average investment - percent 6.9 4.3 (3.8) 6.6 11.9 15.0
Return on average common equity - percent 9.0 1.7 (14.2) 8.0 17.8 21.3
- ---------------------------------------------------------------------------------------------------------------------------
Working capital provided (used) by operations(5) $ 51,243 40,061 44,932 37,971 49,848 56,883
Depreciation and amortization $ 28,535 29,352 26,777 25,741 22,920 17,442
Capital expenditures $ 44,557 36,961 52,516 47,945 31,939 13,781
Backlog for shipment in next 12 months $ 182,707 142,771 119,254 91,396 114,534 116,641
- ---------------------------------------------------------------------------------------------------------------------------
Number of stockholders 3,454 3,540 3,596 3,894 4,262 4,578
Average number of employees 2,603 2,622 2,725 2,886 3,001 2,135
Sales/employee $ 269 235 210 204 217 235
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On August 22, 1989, Quanex Corporation acquired Nichols-Homeshield,
Inc. 1989 results include two months of Nichols-Homeshield operations.
(2) 1992-Cumulative effect of accounting change for postretirement welfare
benefits; 1988-primarily loss on early extinguishment of debt;
1987-reduction of income taxes arising from carryforward of prior year
operating losses; 1985-loss on early extinguishment of debt.
(3) Includes $16.7 million loss on disposition of Oil Country Tubular
Division.
(4) Includes $7.2 million facilities realignment charge.
(5) Working capital provided by operations, is a supplemental financial
measurement used in the evaluation of the company's business and
should not be construed as an alternative to operating income or cash
provided by operating activities since it excludes the effects of
changes in working capital.
34
<PAGE> 4
FINANCIAL SUMMARY 1984-1994
($ THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(FOR DEFINITION OF ITEMS, SEE PAGE 33)
FISCAL YEARS ENDED OCTOBER 31, 1988 1987 1986 1985 1984
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES AND EARNINGS
Net sales 462,916 345,409 324,835 296,974 398,314
Cost of sales 383,399 305,725 304,330 263,746 340,765
Gross profit 79,517 39,684 20,505 33,228 57,549
Selling, general and administrative expenses 29,495 23,415 26,476 26,452 33,272
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) 50,022 16,269 (5,971) 6,776 24,277
Percent of net sales 10.8 4.7 (1.8) 2.3 6.1
Other income (expense)-net 1,596 6,758 83 9,405 (15,076)(3)
Interest expense-net of capitalized interest 15,081 17,019 17,255 10,861 9,922
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes,
extraordinary items, and cumulative
effect of accounting change 36,537 6,008 (23,143) 5,320 (721)
Income taxes (credit) 13,600 2,958 (3,200) (5,801) (2,700)
Extraordinary items(2) (4,464)(2) 2,158(2) - (1,000)(2) -
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) 18,473 5,208 (19,943) 10,121 1,979
Percent of net sales 4.0 1.5 (6.1) 3.4 0.5
- ---------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Earnings (loss) per primary common
share before extraordinary items and
cumulative effect of accounting change 1.85 .25 (1.63) .98 .19
Net earnings (loss) per primary common shares 1.48 .42 (1.63) .89 .19
Cash dividends declared .08 - - - -
Book value 9.13 7.83 7.41 9.03 8.20
Average shares outstanding (000) 12,270 12,257 12,256 11,369 10,658
Market closing price range
High 14 1\2 9 8 10 1\4 12 1\2
Low 4 1\4 3 3 5\8 5 1\8 6 3\8
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION - YEAR END
Working capital 64,820 43,772 24,513 35,201 36,847
Property, plant and equipment - net 141,640 155,766 169,782 187,299 176,903
Other assets 3,688 7,662 13,132 14,276 9,551
Noncurrent deferred income taxes 14,890 4,623 3,545 10,765 16,257
- ---------------------------------------------------------------------------------------------------------------
Long-term debt 38,953 96,847 113,055 113,467 128,050
Stockholders' equity 146,654 95,988 90,764 110,707 87,389
Total capitalization 185,607 192,835 203,819 224,174 215,439
Long-term debt percent of capitalization 21.0 50.2 55.5 50.6 59.4
- ---------------------------------------------------------------------------------------------------------------
OTHER DATA
Asset turnover 1.6 1.3 1.2 1.0 1.3
Current ratio 1.7 to 1 1.7 to 1 1.5 to 1 1.6 to 1 1.7 to 1
Fixed charge coverage 2.84 1.42 (.16) .97 .56
- ---------------------------------------------------------------------------------------------------------------
Return on average investment - percent 14.8 10.1 (2.4) 7.2 3.3
Return on average common equity - percent 17.5 5.6 (19.8) 10.2 2.3
- ---------------------------------------------------------------------------------------------------------------
Working capital provided (used) by operations(5) 52,784 25,762 (2,918) 21,254 20,931
Depreciation and amortization 18,355 18,091 20,597 15,625 12,593
Capital expenditures 5,348 2,210 5,045 25,302 32,443
Backlog for shipment in next 12 months 110,955 101,679 69,941 54,911 52,382
- ---------------------------------------------------------------------------------------------------------------
Number of stockholders 5,318 5,483 5,808 6,515 7,182
Average number of employees 2,013 1,843 1,925 2,030 2,661
Sales/employee 230 187 169 146 150
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On August 22, 1989, Quanex Corporation acquired Nichols-Homeshield,
Inc. 1989 results include two months of Nichols-Homeshield operations.
(2) 1992-Cumulative effect of accounting change for postretirement welfare
benefits; 1988-primarily loss on early extinguishment of debt;
1987-reduction of income taxes arising from carryforward of prior year
operating losses; 1985-loss on early extinguishment of debt.
(3) Includes $16.7 million loss on disposition of oil country tubular
division.
(4) Includes $7.2 million facilities realignment charge.
(5) Working capital provided by operations, is a supplemental financial
measurement used in the evaluation of the company's business and
should not be construed as an alternative to operating income or cash
provided by operating activities since it excludes the effects of
changes in working capital.
35
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Quanex Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Quanex
Corporation and subsidiaries as of October 31, 1994 and 1993, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1994. Our audits also
included the financial statement schedules listed in the index on page 33. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Quanex Corporation and subsidiaries
as of October 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Notes 1 and 9 of "Notes to Consolidated Financial Statements,"
The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," as of
November 1, 1991.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
November 23, 1994
(December 29, 1994 as to Note 17)
RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Quanex Corporation and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
Quanex's system of internal controls is designed to provide reasonable
assurance, at justifiable cost, as to the reliability of financial records and
reporting and the protection of assets. The system of controls provides for
appropriate division of responsibility and the application of policies and
procedures that are consistent with high standards of accounting and
administration. Internal controls are monitored through recurring internal audit
programs and are updated as our businesses and business conditions change.
The Audit Committee, composed solely of outside directors, determines that
management is fulfilling its financial responsibilities by meeting periodically
with management, Deloitte & Touche LLP, and Quanex's internal auditors, to
review internal accounting control and financial reporting matters. The internal
and independent auditors have free and complete access to the Audit Committee.
We believe Quanex's system of internal controls, combined with the activities
of the internal and independent auditors and the Audit Committee, provides
reasonable assurance of the integrity of our financial reporting.
/s/ ROBERT C. SNYDER
Robert C. Snyder
President and
Chief Executive Officer
/s/ WAYNE M. ROSE
Wayne M. Rose
Vice President and
Chief Financial Officer
36
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company classifies its operations into four business segments: hot rolled
steel bars, cold finished steel bars, steel tubes and aluminum products. The
Company's products are marketed to the industrial machinery and capital
equipment industries, the transportation industry, the energy processing
industry and the home building and remodeling industries.
All of the Company's businesses, with the exception of the steel tube
business, reflected substantial improvement in fiscal 1994 over fiscal 1993 in
both revenues and income. The improvement was due primarily to more favorable
market conditions in these business segments relating to a stronger domestic
economy, improved margins resulting from favorable pricing trends, greater
market penetration for certain of the Company's manufactured products and the
cost reduction programs initiated in earlier years and continuing to the
present. The improved results also reflect the benefits realized from the
Company's capital improvement programs, which have allowed the Company to
increase capacity, improve quality and manage manufacturing costs. The Company's
steel tube business was adversely affected in fiscal 1994 by downward pricing
pressure from imports on certain products, the absence of operating income from
the Company's Bellville Tube Division, which was sold in fiscal 1993, and a
general weakness in this segment's primary markets, which include power
generation and the petrochemical and refining industries.
Net sales, operating income and income before the cumulative effect of an
accounting change all increased on a Company-wide basis for fiscal 1994 compared
to fiscal 1993 and 1992. Results for 1993 and 1992 were affected by less
favorable economic conditions. Results for fiscal 1993 were also materially
affected by the existence of excess supplies of aluminum ingot, which resulted
in lower selling prices and lower profit margins in the Company's aluminum
products business. Results for fiscal 1992 included a $7.2 million charge to
write down certain manufacturing facilities and to reflect cost reduction
actions to be taken to improve profitability and growth.
The impact of recent increases in interest rates and global competition in the
Company's markets can also be expected to impact the Company's future business.
In this regard, increased interest rates can be expected to impact the demand
for products in many of the Company's markets, including the automotive and
light truck market and the residential building market. The Company currently
expects that business conditions will remain strong in early fiscal 1995,
although typically the first fiscal quarter is seasonally the weakest quarter.
Continued improved financial results, however, will be dependent upon, among
other things, whether the strong economic conditions experienced in fiscal 1994
can be sustained.
1994 COMPARED TO 1993
Net Sales -- Net sales for fiscal 1994 were $699.3 million, an increase of $83.2
million, or 13%, as compared to fiscal 1993 sales of $616.1 million.
Net sales from the Company's hot rolled steel bar business increased by $31.1
million, or 15%. The increase was attributable to a 5% increase in tonnage
shipped due to improved demand, particularly in the automotive and light truck
markets, combined with an increase in average net selling prices of 9%.
Net sales from the Company's cold finished steel bar business increased by
$15.6 million, or 11%. This increase was primarily attributable to improved
demand related to better market conditions. The improved demand resulted in a 4%
increase in tons shipped. Average net selling prices for the Company's cold
finished steel bar products also increased by 7%.
Net sales from the Company's steel tube business decreased by $15.0 million,
or 12%. However, net sales for 1993 included revenues from Bellville Tube
Division that was sold in April of 1993. Excluding the net sales of Bellville
Tube Division from the 1993 data, net sales increased by $4.6 million, or 5%.
The steel tube business was adversely affected during the year by increased
foreign competition and lower prices for certain products. The increased
pressure from imports on certain products was partially offset by improved
demand and prices in automotive related business. Weakness in this segment's
primary markets, which include power generation and the petrochemical and
refining industries, continued to depress revenues.
Net sales from the Company's aluminum products business increased by $57.9
million, or 41%. The increase was primarily attributable to a larger customer
base which resulted in a higher market share and improved demand related to the
economy. Overall average selling prices declined 6% due to product mix changes.
Operating Income -- Consolidated operating income for fiscal 1994 was $41.4
million, an increase of $18.1 million, or 78%, as compared to fiscal 1993
operating income of $23.3 million. This increase was principally due to higher
net sales and lower costs per unit resulting from operating at higher levels of
volume and continuing cost reduction programs. Included in 1993 results is $3.2
million of operating income from the Company's Bellville Tube Division and
Viking Metallurgical Subsidiary, which were sold during fiscal 1993.
37
<PAGE> 7
Operating income from the Company's hot rolled steel bar business was $31.2
million in fiscal 1994 compared to $21.9 million in fiscal 1993, an increase of
43%. This increase was due to higher net sales as well as lower variable
production costs per ton.
Operating income from the cold finished steel bar business was $8.6 million,
an increase of $2.1 million, or 33%, as compared to fiscal 1993 operating income
of $6.5 million. The improvement resulted from increased volume as well as
better margins related to higher selling prices. The cold finished steel bar
business segment operated near capacity during 1994.
Operating income from the steel tube business was $6.5 million, a decrease of
$2.9 million, or 31% as compared to fiscal 1993 operating income of $9.4
million. This decrease reflects primarily the absence of operating income from
Bellville Tube Division. After excluding the impact of the Bellville Tube
Division, operating income for fiscal 1994 was essentially flat as compared to
fiscal 1993 notwithstanding increased sales. Operating income in the steel tube
business reflected reduced margins due to continued pricing pressures from
imports. This trend is continuing.
Operating income from the aluminum products business was $9.6 million,
compared to an operating loss in fiscal 1993 of $437 thousand. The improved
results are due to significantly higher sales combined with lower variable
conversion costs per pound. The lower costs per pound resulted from both cost
reductions as well as from economies related to operating at higher levels of
volume. Also contributing to improved operating income in 1994 was the partial
elimination of outside service costs as the additional finishing equipment
became operational at the Company's Lincolnshire facility. Pricing pressures
declined in fiscal 1994 due to a reduction in the excess supply of aluminum
ingot, which allowed for improved profit margins.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased $2.5 million, or 6%, in fiscal 1994 as
compared to fiscal 1993 primarily due to increased levels of business activity.
However, as a percentage of net sales, selling, general and administrative
expenses decreased slightly in fiscal 1994 from fiscal 1993.
Interest Expense and Capitalized Interest -- Interest expense was flat at
$13.9 million for both fiscal years 1994 and 1993. Capitalized interest
increased by $1.9 million due to continued construction at the Company's
MacSteel facilities which will be completed in 1995.
Net Income -- Net income attributable to common stockholders for fiscal 1994
was $12.9 million as compared to $2.5 million in fiscal 1993, after deducting
preferred dividends of $5.9 million from both periods.
Interest income, included in "Other, net", was $3.0 million in fiscal 1994 as
compared to $5.0 million in fiscal 1993. The decrease reflects lower yields on
short-term investments and lower average cash balances available for investment
as a result of the Company's investment of cash in its businesses.
Included in net income for fiscal 1994 and 1993 are certain items classified
as "Other, net" on the income statement. In fiscal 1994, $1.0 million of income
relating to partial reimbursement of a business interruption loss for the fire
that occurred at the Company's Lincolnshire facility in August 1993 was
received. In addition, included in fiscal 1994 and 1993 are a $1.7 million
pre-tax charge and a $1.4 million pre-tax gain, respectively, realized from
certain financing contracts.
1993 COMPARED TO 1992
Net Sales -- Net sales for fiscal 1993 were $616.1 million, an increase of $44.0
million, or 8%, as compared to fiscal 1992 sales of $572.1 million.
Net sales from the Company's hot rolled steel bar business increased by $22.9
million, or 12%. The increase was attributable to a 13% increase in tonnage
shipped due to moderately improved demand for the Company's hot rolled steel bar
products, particularly in the automotive and light truck market segments.
Although the Company was able to increase prices for certain products to reflect
increases in scrap prices, most sales of hot rolled steel bar products were
under one year fixed price contracts, which resulted in average net sales
transaction prices for the Company's hot rolled steel bar products being
essentially unchanged in 1993 as compared to 1992.
Net sales from the Company's cold finished steel bar business increased by
$25.2 million, or 21%. This increase was primarily attributable to improved
demand related to strength in the automotive and truck market segment as well as
continuation of the change in marketing strategy that was made in fiscal 1992.
This change in strategy was to achieve higher plant capacity utilization by
aggressively pursuing sales of products in commodity markets while maintaining
its share in the value added specialties. The improved demand combined with the
change in marketing strategy resulted in a 23% increase in tons shipped. Average
net selling prices for the Company's cold finished steel bar products were at
approximately the same level in 1993 as compared to 1992. Price increases late
in fiscal 1993 were partly offset by raw material cost increases.
Net sales from the Company's steel tube business increased by $9.2 million, or
8%. This increase resulted from improved demand in the industrial machinery and
capital equipment market segment and the transportation market segment,
particularly at the Michigan Seamless Tube Division. Net sales for fiscal 1993
and fiscal 1992 from the Bellville Tube Division, which was sold in April, 1993,
were $19.6 million and $18.8 million, respectively.
38
<PAGE> 8
Excluding Bellville Tube Division's sales, the steel tube business experienced a
decrease in average unit selling prices of 4%, which was primarily due to
downward pricing pressures.
Net sales from the Company's aluminum products business increased by $5.9
million, or 4%. The increase in sales was attributable in part to increased
capacity following the commencement of commercial operations of the Company's
new mini-mill in 1992. Although pounds shipped increased by 16%, selling prices
decreased approximately 10% due to both product mix and excess world supplies of
aluminum ingot. Sales in the aluminum products business during the fourth
quarter of fiscal 1993 were also affected by a fire at one of the Company's
production facilities.
Operating Income -- Operating income for fiscal 1993 was $23.3 million, an
increase of $4.3 million, or 23%, as compared to fiscal 1992 operating income of
$18.9 million. However, included in fiscal 1992 results was the $7.2 million
pre-tax facilities realignment charge described below. Excluding the facilities
realignment charge, operating income decreased in fiscal 1993 compared to fiscal
1992 by $2.8 million, or 11%.
Operating income from the Company's hot rolled steel bar business was $21.9
million in fiscal 1993 compared to $21.4 million in fiscal 1992, an increase of
2%. The percentage increase in operating income from this business was less than
the percentage increase in sales primarily because of rising scrap prices and
the inability of the Company to fully pass on these cost increases to customers
due to one year fixed price contracts in effect during the year.
Operating income from the cold finished steel bar business was $6.5 million,
an increase of $2.8 million, or 75%, as compared to fiscal 1992 operating income
of $3.7 million. This increase was due to higher net sales combined with lower
costs primarily related to productivity improvements and other cost reduction
programs.
Operating income from the steel tube business was $9.4 million in fiscal 1993
compared to fiscal 1992 operating income of $2.0 million. This increase
reflected both improved net sales as well as significant improvements in
productivity and product yield.
Operating income from the aluminum products business declined by $8.5 million
in fiscal 1993 compared to fiscal 1992, to an operating loss of $437 thousand.
Although shipments improved by 16% when compared to 1992, profits declined due
to increased costs associated with the start-up of the plants in Davenport, Iowa
and Lincolnshire, Illinois together with a reduction in margins. Excess supplies
of aluminum ingot also adversely affected fiscal 1993 operating income. Profit
margins for aluminum products declined significantly due to lower selling prices
relative to the cost of aluminum scrap which is the principal component of cost
of goods sold for these products. Partially offsetting these factors was
increased operating income at the Company's fabricated products plant in
Chatsworth, Illinois resulting from an improved product mix.
Facilities Realignment -- During the fourth quarter of 1992, the Company
completed a strategic evaluation of its businesses as part of its plan for
profitable growth. As a result of this evaluation and of management's assessment
of then current and forecasted industry conditions, a $7.2 million pre-tax
charge was recognized to write down certain manufacturing facilities and to
reflect the anticipated costs of various cost saving actions, such as
relocation, downsizings, subleases, rationalizations of equipment and similar
matters. The facilities realignment was completed during fiscal 1993 and 1994.
Of the $7.2 million, $4.7 million related to the aluminum products segment, $600
thousand related to the steel tube segment and the remainder related to various
assets classified in "Corporate and Other."
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased $2.7 million, or 7%, in 1993 as compared to
fiscal 1992 primarily due to increased levels of business activity. However, as
a percentage of net sales, selling, general and administrative expenses were
essentially unchanged from fiscal 1993 to 1992.
Interest Expense and Capitalized Interest -- Interest expense was $13.9
million for fiscal 1993 as compared to $14.6 million in fiscal 1992. This
decrease reflects the conversion of $28.6 million principal amount of the
Company's convertible subordinated debentures into common stock during 1992.
Capitalized interest decreased by $2.2 million due to the completion in 1992 of
the aluminum mini-mill in Davenport, Iowa.
Net Income -- Net income attributable to common stockholders for fiscal 1993
was $2.5 million as compared to a net loss attributable to common stockholders
of $21.6 million in fiscal 1992, after deducting preferred dividends of $5.9
million and $2.7 million, respectively. The results for fiscal 1992 include a
one-time cumulative net of tax charge of $25.1 million for postretirement
welfare benefits related to the adoption of SFAS 106.
Interest income, included in "Other, net", was $5.0 million in fiscal 1993 as
compared to $3.3 million in fiscal 1992. The increase reflects higher average
cash balances carried by the Company during fiscal 1993 and investments in
short-term instruments with maturities longer than three months.
39
<PAGE> 9
The following table sets forth selected operating data for the Company's four
businesses:
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------------
1994(1) 1993(1) 1992(1)
----------------------------------
(In thousands)
<S> <C> <C> <C>
Hot Rolled Steel Bars:
Units shipped (Tons)............................................... 476.1 451.6 400.6
Net sales.......................................................... $245,219 $214,139 $191,277
Operating income................................................... 31,209 21,875 21,382
Depreciation and amortization...................................... 12,862 12,724 12,826
Identifiable assets................................................ $167,583 $157,078 $136,501
Cold Finished Steel Bars:
Units shipped (Tons)............................................... 182.9 175.9 143.0
Net sales.......................................................... $160,010 $144,445 $119,206
Operating income................................................... 8,618 6,464 3,693
Depreciation and amortization...................................... 1,268 1,195 992
Identifiable assets................................................ $ 51,405 $ 49,400 $ 43,999
Steel Tubes:
Units shipped (Tons)............................................... 81.4 113.2 103.1
Net sales.......................................................... $106,136 $121,126 $111,938
Operating income................................................... 6,492 9,436 1,962
Depreciation and amortization...................................... 1,992 2,811 4,364
Identifiable assets................................................ $ 38,939 $ 37,821 $ 47,024
Aluminum Products:
Units shipped (Pounds)............................................. 154,503 103,149 88,888
Net sales.......................................................... $200,932 $142,990 $137,060
Operating income................................................... 9,606 (437) 8,063
Depreciation and amortization...................................... 12,077 11,700 7,540
Identifiable assets................................................ $221,332 $193,183 $200,977
</TABLE>
- ---------------
(1) Excludes the effect of a $7.2 million general write-down taken in the fourth
quarter of 1992 against manufacturing facilities that could not be allocated
against specific facilities or between businesses and has therefore been
reflected as a charge against "Corporate and Other" operations and the
identifiable assets included within "Corporate and Other" operations. In
1993, $2.9 million was charged against the reserve, which included $2.2
million relating to the aluminum products business and $700 thousand
relating to the sale of Viking Metallurgical Corporation and Bellville Tube
Division. In 1994, $4.3 million was charged against the reserve, which
included $2.5 million relating to the aluminum products business, $900
thousand relating to the steel tubes business and $900 thousand relating to
write-downs of assets classified in "Corporate and Other" (See Notes 2 and
10 to consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow from
operations, and, if needed, borrowings under a $48 million unsecured revolving
credit facility with a group of banks (the "Bank Agreement"). All borrowings
under the Bank Agreement bear interest, at the option of the Company, at either
floating prime or a reserve adjusted Eurodollar rate. The Bank Agreement
contains customary affirmative and negative covenants and requirements to
maintain a minimum consolidated tangible net worth, as defined. The Bank
Agreement limits the payment of dividends and certain restricted investments. At
October 31, 1994, there were no outstanding borrowings under the Bank Agreement
and $92,800 of outstanding letters of credit. The Bank Agreement was amended in
December 1994 to extend the maturity date to March 31, 1999. As of October 31,
1994, the Company was in compliance with all Bank Agreement covenants.
At October 31, 1994, the Company had outstanding $125 million in Senior Notes
("Senior Notes "). The Senior Notes are unsecured and bear interest at the rate
of 10.77% per annum, payable semi-annually. The Senior Notes will mature on
August 23, 2000, and require annual repayments of principal beginning on August
23, 1995. On December 29, 1994, the Company acquired $59.5 million principal
amount of the Senior Notes for a purchase price equal to 105% of the principal
amount plus accrued interest. Total annual principal payments on the remaining
$65.5 million in Senior Notes will not change as a result of the purchase. The
purchase will result in a one-time, after-tax extraordinary charge of
approximately $2.0 million in the first quarter of 1995. The Senior Notes
contain customary affirmative and negative covenants, as well as requirements to
maintain a minimum capital base, as defined. As of October 31, 1994, the Company
was in compliance with all Senior Notes covenants. In addition, the terms of the
Senior Notes limit the payment of dividends and certain restricted investments.
The Company currently has outstanding 3,450,000 Depositary Convertible
Exchangeable Preferred Shares, each representing 1/10th of a share of the
Company's 6.88% Cumulative Convertible Exchangeable Preferred Stock
40
<PAGE> 10
("Preferred Stock"). The Preferred Stock may be exchanged, at the option of the
Company, beginning on June 30, 1995, for a new issue of the Company's 6.88%
Convertible Subordinated Debentures due June 30, 2007 having a principal amount
equal to $250 per share of Preferred Stock exchanged.
At October 31, 1994, the Company had commitments of $10 million for the
purchase or construction of capital assets, primarily at its Nichols-Homeshield
and MacSteel divisions. The Company's $52 million (not including approximately
$9 million in capitalized interest) Phase II MacSteel Ultra Clean Steel Program,
which commenced in June 1992, is expected to be completed in early fiscal 1995.
Capital expenditures remaining for this program are approximately $7 million.
In management's opinion, the Company currently has sufficient funds and
adequate financial sources available to meet its anticipated liquidity needs
including required payments on the Senior Notes. Management believes that cash
flow from operations, cash balances, short-term investments and available
borrowings will be sufficient for the foreseeable future to finance anticipated
capital expenditures, debt service requirements and dividends.
Operating Activities
Cash provided by operating activities during fiscal 1994 was $46.0 million. This
represents an increase of $16.1 million, or 53.8%, as compared to fiscal 1993.
The principal cause of this increase was higher operating income in 1994.
Investment Activities
Net cash used by investment activities in fiscal 1994 was $41.3 million as
compared to $66.1 million in fiscal 1993. Fiscal 1994 included an increase in
short-term investments of $6.4 million as compared to $47.7 million in fiscal
1993. In fiscal 1993, the Company invested a portion of its cash and equivalents
in investments with maturities longer than three months. In addition, $6.4
million in proceeds from the sale of the Company's Viking Metallurgical
Corporation subsidiary was received in fiscal 1994 as compared to $15.5 million
in proceeds from the sale of Bellville Tube Division and Viking Metallurgical
Corporation received in fiscal 1993. The Company has made substantial capital
expenditures over the past three years. For fiscal 1994, 1993, and 1992, capital
expenditures (net of retirements) were $42.5 million, $35.9 million and $52.2
million, respectively. These capital expenditures have been primarily directed
toward the Company's Nichols-Homeshield and MacSteel divisions, with the goal of
increasing the manufacturing capacity and improving quality and operating costs.
Capital expenditures for fiscal 1994 included approximately $23 million related
to its Phase II MacSteel Ultra Clean Steel Program which is expected to be
completed in early 1995. The Company estimates that fiscal 1995 capital
expenditures will approximate $30 to $40 million.
Financing Activities
Cash used by financing activities for fiscal 1994 was $12.9 million, principally
consisting of $7.5 million in common dividends and $5.9 million in preferred
dividends.
CHANGE IN ACCOUNTING
The Company elected, effective November 1, 1991, for fiscal 1992, to adopt
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" on the immediate recognition basis.
Under this accounting method, the Company records the cost of these benefits
during an employee's years of service versus on a pay-as-you-go basis upon
retirement. The after-tax cumulative effect on prior years as of November 1,
1991, for this change in accounting for retiree medical and life insurance plans
reduced fiscal 1992 earnings by $25.1 million ($1.98 per share primary).
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 109, "Accounting for Income Taxes",
("FAS 109") which modifies and replaces FAS No. 96, "Accounting for Income
Taxes". The Company adopted FAS 109 effective November 1, 1993. It was not
necessary for the Company to record any adjustments for the cumulative effect of
adopting FAS 109.
EFFECTS OF INFLATION
Inflation has not had a significant effect on earnings and other financial
statement items.
41
<PAGE> 11
Quanex Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1994 1993
- -------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.......................................................... $ 34,041 $ 42,247
Short-term investments........................................................ 54,070 47,655
Accounts and notes receivable, less allowance for doubtful accounts of
$3,593,000 in 1994 and $2,025,000 in 1993.................................. 83,082 72,266
Inventories (Note 4).......................................................... 81,800 76,899
Deferred income taxes (Note 3)................................................ 6,114 3,875
Prepaid expenses.............................................................. 289 468
-------- --------
Total current assets.................................................. 259,396 243,410
Property, plant and equipment, net (Note 5)..................................... 262,261 242,346
Goodwill, net (Note 1).......................................................... 33,017 33,964
Other assets.................................................................... 9,334 9,147
-------- --------
$564,008 $528,867
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 75,515 $ 62,349
Accrued expenses (Note 6)..................................................... 37,118 32,504
Current maturities of long-term debt (Note 7)................................. 20,958 219
Income taxes payable (Note 3)................................................. 1,160 --
-------- --------
Total current liabilities............................................. 134,751 95,072
Long-term debt (Note 7)......................................................... 107,442 128,476
Deferred pension credits (Note 8)............................................... 15,810 13,923
Deferred postretirement welfare benefits (Note 9)............................... 50,742 47,559
Deferred income taxes (Note 3).................................................. 23,014 18,061
-------- --------
Total liabilities..................................................... 331,759 303,091
Stockholders' equity (Notes 11, 12, and 13):
Preferred stock, no par value, 1,000,000 shares authorized; 345,000 issued and
outstanding................................................................ 86,250 86,250
Common stock, $.50 par value, 25,000,000 shares authorized; 13,377,724 shares
in 1994 and 13,314,837 shares in 1993 issued and outstanding............... 6,688 6,657
Additional paid-in capital.................................................... 86,323 85,218
Retained earnings............................................................. 55,081 49,635
Unearned compensation......................................................... (370) --
Adjustment for minimum pension liability (Note 8)............................. (1,723) (1,984)
-------- --------
Total stockholders' equity............................................ 232,249 225,776
-------- --------
$564,008 $528,867
======== ========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 12
Quanex Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended October 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net sales............................................................ $699,314 $616,145 $572,090
Costs and expenses:
Cost of sales...................................................... 613,553 550,969 506,778
Selling, general and administrative................................ 44,359 41,907 39,190
Facilities realignment charge (Note 2)............................. -- -- 7,200
-------- -------- --------
Operating income..................................................... 41,402 23,269 18,922
Other income (expense):
Interest expense................................................... (13,944) (13,871) (14,557)
Capitalized interest............................................... 3,766 1,909 4,062
Other, net......................................................... 1,279 3,224 2,255
-------- -------- --------
Income before income taxes and cumulative effect of accounting
change............................................................. 32,503 14,531 10,682
Income tax expense (Note 3).......................................... (13,651) (6,103) (4,487)
-------- -------- --------
Income before cumulative effect of accounting change................. 18,852 8,428 6,195
Cumulative effect of accounting change for postretirement welfare
benefits, net of related income tax benefit of $18,181 in 1992..... -- -- (25,108)
-------- -------- --------
Net income (loss).................................................... 18,852 8,428 (18,913)
Preferred dividends.................................................. (5,934) (5,934) (2,654)
-------- -------- --------
Net income (loss) attributable to common stockholders................ $ 12,918 $ 2,494 $(21,567)
======== ======== ========
Earnings (loss) per common share:
Income before cumulative effect of accounting change............... $ .96 $ .18 $ 0.28
Cumulative effect of accounting change............................. -- -- (1.98)
-------- -------- --------
Net earnings (loss)........................................ $ .96 $ .18 $ (1.70)
======== ======== ========
Weighted average number of shares outstanding........................ 13,496 13,551 12,696
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 13
Quanex Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Adjustment
for
Minimum
Pension Total
Years Ended October 31, Preferred Stock Common Stock Additional Liability/ Stock-
1994, 1993, and 1992 ------------------ ------------------- Paid-in Retained Unearned holders'
Shares Amount Shares Amount Capital Earnings Compensation Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31,
1991 .................. -- -- 11,735,166 $5,868 $59,885 $ 86,735 -- $152,488
Net loss .............. -- -- -- -- -- (18,913) -- (18,913)
Issuance of preferred
stock through public
offering ........... 345,000 $86,250 -- -- (3,350) -- -- 82,900
Conversion of
subordinated
debentures to
common stock ....... -- -- 1,691,439 846 26,418 -- -- 27,264
Common dividends--
($.52 per share) ... -- -- -- -- -- (6,657) -- (6,657)
Preferred dividends ... -- -- -- -- -- (2,159) -- (2,159)
Exercise of stock
options ............ -- -- 211,400 105 4,307 (1,743) -- 2,669
------- ------- --------- ------ ------- -------- ------- --------
Balance at October 31,
1992 .................. 345,000 86,250 13,638,005 6,819 87,260 57,263 -- 237,592
Net Income ............ -- -- -- -- -- 8,428 -- 8,428
Stock purchases ....... -- -- (340,100) (170) (2,252) (2,574) -- (4,996)
Common dividends--
($.56 per share) ... -- -- -- -- -- (7,548) -- (7,548)
Preferred dividends ... -- -- -- -- -- (5,934) -- (5,934)
Adjustment for minimum
pension
liability .......... -- -- -- -- -- -- $(1,984) (1,984)
Exercise of stock
options ............ -- -- 16,932 8 210 -- -- 218
------- ------- --------- ------ ------- -------- ------- --------
Balance at October 31,
1993 .................. 345,000 86,250 13,314,837 6,657 85,218 49,635 (1,984) 225,776
Net Income............. -- -- -- -- -- 18,852 -- 18,852
Common dividends--
($.56 per share) ... -- -- -- -- -- (7,472) -- (7,472)
Preferred dividends ... -- -- -- -- -- (5,934) -- (5,934)
Adjustment for minimum
pension
liability .......... -- -- -- -- -- -- 261 261
Unearned
Compensation ....... -- -- -- -- -- -- (370) (370)
Exercise of stock
options and
restricted stock
awards ............. -- -- 62,887 31 1,105 -- -- 1,136
------- ------- --------- ------ ------- -------- ------- --------
Balance at October 31,
1994 .................. 345,000 $86,250 13,377,724 $6,688 $86,323 $ 55,081 $(2,093) $232,249
======= ======= ========== ====== ======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 14
Quanex Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended October 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income before cumulative effect of accounting change............... $ 18,852 $ 8,428 $ 6,195
Adjustments to reconcile income before cumulative effect of
accounting change to cash provided by operating activities:
Depreciation and amortization................................. 28,535 29,352 26,777
Facilities realignment charge (See Note 1).................... (4,264) (2,936) 7,200
Deferred income taxes......................................... 4,786 4,593 2,428
Deferred pension costs........................................ 151 (1,400) (328)
Deferred postretirement welfare benefits...................... 3,183 2,024 45,949
Cumulative effect of accounting change........................ -- -- (43,289)
-------- -------- --------
51,243 40,061 44,932
Changes in assets and liabilities net of effects from acquisitions
and dispositions:
Increase in accounts and notes receivable..................... (17,206) (3,008) (11,757)
Increase in inventory......................................... (4,901) (6,763) (7,708)
Increase (decrease) in accounts payable....................... 13,166 (3,076) 11,105
Increase (decrease) in accrued expenses....................... 4,614 2,723 (3,889)
Other, net.................................................... (900) (9) (1,213)
-------- -------- --------
Cash provided by operating activities...................... 46,016 29,928 31,470
INVESTMENT ACTIVITIES:
Capital expenditures, net of retirements........................... (42,457) (35,866) (52,162)
Increase in short-term investments................................. (6,415) (47,655) --
Designated cash and equivalents used for plant expansion........... -- -- 17,000
Proceeds from the sale of Bellville Tube Division and Viking
Metallurgical Subsidiary........................................ 6,390 15,500 --
Other, net......................................................... 1,195 1,941 (2,006)
-------- -------- --------
Cash used by investment activities......................... (41,287) (66,080) (37,168)
-------- -------- --------
Cash provided (used) by operating and investment
activities............................................... 4,729 (36,152) (5,698)
FINANCING ACTIVITIES:
Net proceeds from preferred stock offering......................... -- -- 82,900
Repayments of long-term debt....................................... (295) (199) (5,313)
Common dividends paid.............................................. (7,472) (7,548) (6,657)
Preferred dividends paid........................................... (5,934) (5,934) (2,159)
Purchases of Quanex common stock................................... -- (4,996) --
Other, net......................................................... 766 218 2,669
-------- -------- --------
Cash provided (used) by financing activities............... (12,935) (18,459) 71,440
-------- -------- --------
Increase (decrease) in cash and equivalents.......................... (8,206) (54,611) 65,742
Cash and equivalents at beginning of period.......................... 42,247 96,858 31,116
-------- -------- --------
Cash and equivalents at end of period................................ $ 34,041 $ 42,247 $ 96,858
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
45
<PAGE> 15
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Quanex Corporation
and its subsidiaries (the "Company"), all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
SCOPE OF OPERATIONS
The Company operates primarily in four industry segments: the manufacturing of
hot rolled steel bars, cold finished steel bars, steel tubes, and aluminum
products. The Company's operations are conducted principally in one geographic
area, the United States. For the years ended October 31, 1994, 1993 and 1992, no
single customer accounted for more than 10% of the Company's revenue. (See Note
10.)
STATEMENTS OF CASH FLOWS
The Company generally considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Similar
investments with original maturities beyond three months are considered
short-term investments and are carried at cost, which approximates market value.
For fiscal years 1994, 1993 and 1992 cash paid for income taxes was $10,144,000,
$4,037,000 and $3,413,000, respectively. These amounts are before refunds of
$294,000, $1,412,000 and $2,406,000, respectively. Cash paid for interest for
fiscal 1994, 1993 and 1992 was $13,990,000, $13,941,000 and $15,202,000,
respectively. Cash payments related to the facilities realignment charge
recorded in fiscal 1992 were $625,000 and $1,712,000, respectively, for fiscal
1994 and 1993 (none in 1992). In fiscal 1992, non-cash investing and financing
activities included the conversion of $28,588,000 principal amount of the
Company's 9 1/8% Convertible Subordinated Debentures to common stock.
INVENTORIES
Inventories are valued at the lower of cost or market. Costs related to
substantially all manufacturing inventories are determined by the last-in,
first-out ("LIFO") method (See Note 4).
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
acquired companies and is being amortized on a straight line basis over forty
years. At October 31, 1994 and 1993, accumulated amortization was $4,854,000 and
$3,907,000, respectively.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of certain categories are as follows:
<TABLE>
<CAPTION>
Years
---------
<S> <C>
Land improvements................................................................... 10 to 25
Buildings........................................................................... 10 to 40
Machinery and equipment............................................................. 3 to 18
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective November 1, 1991, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("FAS 106") on the immediate recognition basis. Under this
accounting method, the Company records the cost of these benefits during an
employee's years of service versus on a pay-as-you-go basis upon retirement. The
after-tax cumulative effect on prior years as of November 1, 1991 for this
change in accounting for retiree medical and life insurance plans reduced fiscal
1992 first quarter earnings by $25,108,000 (See Note 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective October 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments" ("FAS 107")(See Note 14).
46
<PAGE> 16
- --------------------------------------------------------------------------------
HEDGING
The Company uses futures and option contracts to hedge a portion of its exposure
to price fluctuations of aluminum. Hedging gains and losses are recognized
concurrently with the related sales transactions (See Note 16).
INCOME TAXES
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This statement
requires the use of the asset and liability approach for financial accounting
and reporting for income taxes. Adoption of this statement did not have a
material effect on the Company's financial position or results of operations
(See Note 3).
EARNINGS PER SHARE DATA
Primary earnings per share is computed by deducting preferred dividends from net
income in order to determine net income attributable to common stockholders.
This amount is then divided by the weighted average number of common shares
outstanding and common stock equivalents.
RECLASSIFICATION
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to 1994 presentations.
2. ACQUISITIONS, DISPOSITIONS AND FACILITIES REALIGNMENT
During the second quarter of fiscal 1993, the Company sold the stock of its
Viking Metallurgical Corporation subsidiary and the assets of its Bellville Tube
Division for $15.5 million in cash and a $6.4 million note. The aggregate
consideration approximated the book value. These sales did not have a
significant effect on the Company's financial results.
In the fourth quarter of fiscal 1992, the Company completed a strategic
evaluation of its businesses as part of its plan for profitable growth. As a
result of this evaluation and of management's assessment of current and
forecasted industry conditions, a $7.2 million pre-tax charge was recognized to
write down certain manufacturing facilities. During 1994 and 1993, $4.3 million
and $2.9 million, respectively, were charged against the reserve (See Note 10).
3. INCOME TAXES
Effective November 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." This statement requires the use of the asset and
liability approach for financial accounting and reporting for income taxes.
Adoption of this statement did not have a material effect on the Company's
financial position or results of operations. Prior year financial statements
have not been restated.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------------
1994 1993 1992
-------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal.............................................................. $ 9,738 $4,226 $ 1,562
State................................................................ 1,359 802 485
------- ------ --------
11,097 5,028 2,047
Deferred............................................................... 2,554 1,075 2,440
------- ------ --------
13,651 6,103 4,487
Cumulative effect of accounting change for postretirement welfare
benefits-deferred.................................................... -- -- (18,181)
------- ------ --------
$13,651 $6,103 $(13,694)
======= ====== ========
</TABLE>
47
<PAGE> 17
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At October 31, 1994 and
1993, $6,114,000 and $3,875,000, respectively, of deferred tax assets were
classified as current assets. Significant components of the Company's net
deferred tax liability are as follows:
<TABLE>
<CAPTION>
October 31,
-------------------
1994 1993
-------------------
(In thousands)
<S> <C> <C>
Deferred tax liability:
Property, plant and equipment................................................... $38,406 $38,690
Inventory....................................................................... 3,885 1,951
Other........................................................................... 8,547 4,917
------- -------
50,838 45,558
------- -------
Deferred tax assets:
Postretirement benefit obligation............................................... 19,786 18,546
Other employee benefit obligations.............................................. 8,647 8,149
Other accrued liabilities....................................................... 5,505 4,677
------- -------
33,938 31,372
------- -------
Net deferred tax liability........................................................ $16,900 $14,186
======= =======
</TABLE>
Income tax expense before cumulative effect of accounting change differs from
the amount computed by applying the statutory federal income tax rate to
earnings before income taxes for the following reasons:
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------------
1994 1993 1992
-------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory tax rate............................... $11,376 $5,039 $3,632
Increase in taxes resulting from:
State income taxes, net of federal effect............................ 1,720 694 193
Goodwill............................................................. 331 332 322
Other items, net..................................................... 224 38 340
------- ------ ------
$13,651 $6,103 $4,487
======= ====== ======
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
-------------------
1994 1993
-------------------
(In thousands)
<S> <C> <C>
Inventories valued at lower of cost (principally LIFO method) or market:
Raw materials................................................................... $25,946 $25,474
Finished goods and work in process.............................................. 47,684 42,610
------- -------
73,630 68,084
Other........................................................................... 8,170 8,815
------- -------
Total................................................................... $81,800 $76,899
======= =======
</TABLE>
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $15,000,000 and $10,000,000 at October
31, 1994 and 1993, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
October 31,
----------------------
1994 1993
----------------------
(In thousands)
<S> <C> <C>
Land and land improvements .................................................... $ 17,365 $ 17,208
Leasehold improvements ........................................................ 94 99
Buildings ..................................................................... 70,795 70,318
Machinery and equipment ....................................................... 353,927 335,454
Construction in progress ...................................................... 57,617 36,075
-------- --------
499,798 459,154
Less accumulated depreciation and amortization................................. 237,537 216,808
-------- --------
$262,261 $242,346
======== ========
</TABLE>
48
<PAGE> 18
- --------------------------------------------------------------------------------
Maintenance and repair expense was $21,488,000, $19,572,000, and $19,173,000 in
1994, 1993 and 1992, respectively. The Company had commitments for the purchase
or construction of capital assets amounting to approximately $10,000,000 at
October 31, 1994.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
October, 31,
-------------------
1994 1993
-------------------
(In thousands)
<S> <C> <C>
Accrued contribution to pension funds............................................. $ 1,435 $ 1,633
Interest.......................................................................... 2,661 2,708
Payroll, payroll taxes and employee benefits...................................... 20,392 15,231
State and local taxes............................................................. 3,271 3,098
Other............................................................................. 9,359 9,834
------- -------
$37,118 $32,504
======= =======
</TABLE>
7. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October, 31,
---------------------
1994 1993
---------------------
(In thousands)
<S> <C> <C>
Senior notes.................................................................... $125,000 $125,000
Industrial Revenue and Economic Development Bonds, unsecured, payable in annual
installments through the year 2005, bearing interest ranging from 7.40% to
8.375%........................................................................ 3,400 3,515
Other........................................................................... -- 180
-------- --------
$128,400 $128,695
Less maturities due within one year included in current liabilities............. 20,958 219
-------- --------
$107,442 $128,476
======== ========
</TABLE>
At October 31, 1994 and 1993, the Company had $125,000,000 outstanding under its
unsecured Long-Term Note Agreement ("Senior Notes Agreement"). The debt bears
interest at the rate of 10.77% per annum, payable semi-annually. The Senior
Notes Agreement will mature on August 23, 2000, and requires annual repayments
of principal beginning on August 23, 1995. The Senior Notes Agreement contains
customary affirmative and negative covenants, as well as requirements to
maintain a minimum capital base as defined. As of October 31, 1994, the Company
was in compliance with all Senior Notes Agreement covenants. In addition, the
Senior Notes Agreement limits the payment of dividends and certain restricted
investments. On December 29, 1994, the Company repurchased $59.5 million
principal amount of its Senior Notes (See Note 17).
The Company has an unsecured $48,000,000 Revolving Credit and Letter of Credit
Agreement ("Bank Agreement") with a group of banks. The Bank Agreement consists
of a revolving line of credit ("Revolver"), and up to $20,000,000 for standby
letters of credit, limited to the undrawn amount available under the Revolver.
The Bank Agreement is renewable annually and was amended in December 1994 to
extend the maturity to March 31, 1999. All borrowings under the Revolver bear
interest, at the option of the Company, at either floating prime or a reserve
adjusted Eurodollar rate. The Bank Agreement contains customary affirmative and
negative covenants and requirements to maintain a minimum consolidated tangible
net worth, as defined. The Bank Agreement limits the payment of dividends and
certain restricted investments. At October 31, 1994 and 1993, no amounts were
outstanding under the Revolver and $92,800 and $104,000, respectively, were
issued under Letters of Credit. As of October 31, 1994, the Company was in
compliance with all Bank Agreement covenants.
Under the Company's most restrictive loan covenants, retained earnings of
$45,854,000 at October 31, 1994, were available for dividends.
49
<PAGE> 19
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt at October 31, 1994, are as follows (in
thousands):
<TABLE>
<S> <C>
1995................ $ 20,958
1996................ 20,968
1997................ 20,978
1998................ 20,988
1999................ 20,998
Thereafter.......... 23,510
--------
$128,400
========
</TABLE>
The above aggregate maturities will decrease in years 1998, 1999 and 2000 by
approximately $17.9 million, $20.8 million and $20.8 million, respectively, as a
result of the repurchase of $59.5 million of the Senior Notes in December 1994
(See Note 17).
The Company has entered into financing arrangements in order to manage a
portion of its exposure to interest rate fluctuations. These arrangements
effectively converted a portion of the Company's debt from fixed-rate to
variable rate. In 1994, the Company accrued its maximum potential pretax loss on
open agreements of $1.7 million. These agreements expire in 1995. In 1993, the
Company recognized a $1.4 million gain on the close out of certain financing
contracts.
8. PENSION PLANS AND RETIREMENT BENEFITS
The Company has retirement plans covering substantially all employees. The plans
provide for defined benefits. The plans pay benefits to employees at retirement
using formulas based upon years of service and compensation rates near
retirement. The Company's funding policy is generally to make the minimum annual
contributions required by applicable regulations.
The plans' funded status was as follows:
<TABLE>
<CAPTION>
Assets exceed Accumulated benefit
accumulated obligation
benefit obligation exceeds assets
------------------- -------------------
October 31,
-------------------------------------------
1994 1993 1994 1993
-------------------------------------------
<S> <C> <C> <C> <C>
Assets available for benefits ............................... $22,564 $20,732 $10,363 $10,198
------- ------- ------- -------
Projected benefit obligation
Vested .................................................... (20,457) (20,015) (16,329) (13,999)
Nonvested ................................................. (340) (636) (3,217) (3,190)
------- ------- ------- -------
Accumulated benefit obligation ......................... (20,797) (20,651) (19,546) (17,189)
Effect of future salary increases ......................... (8,725) (9,257) (278) (228)
------- ------- ------- -------
Total projected benefit obligation .......................... (29,522) (29,908) (19,824) (17,417)
------- ------- ------- -------
Assets less than projected benefit obligation ............... $(6,958) $(9,176) $(9,461) $(7,219)
======= ======= ======= =======
Consisting of:
Amounts to be offset against future pension costs:
Assets in excess of obligation at adoption ............. $ 1,083 $ 1,187 $ 321 $ 381
Obligation (increase) decrease due to plan
amendments ........................................... 405 517 (4,343) (2,178)
Actuarial gains and losses ............................. (383) (2,317) (3,425) (3,861)
Minimum liability adjustment ........................... -- -- 7,168 5,432
Amounts recognized in consolidated balance sheets:
Deferred pension credit ................................ (7,497) (7,466) (8,313) (6,457)
Accrued contribution to pension funds .................. (566) (1,097) (869) (536)
------- ------- ------- -------
$(6,958) $(9,176) $(9,461) $(7,219)
======= ======= ======= =======
</TABLE>
In accordance with the provisions of Statement of Financial Accounting Standards
No. 87, the Company recorded additional minimum pension liabilities as of
October 31, 1994 and 1993, representing the excess of the accumulated benefit
obligations over the fair value of plan assets and accrued pension liabilities.
The Company recorded additional pension liabilities of $7,168,000 and
$5,432,000; intangible assets of $4,343,000 and $2,179,000; and stockholders'
equity reductions, net of income taxes, of $1,723,000 and $1,984,000, as of
October 31, 1994 and 1993, respectively.
50
<PAGE> 20
- --------------------------------------------------------------------------------
The projected unit credit method was used to determine the actuarial present
value of the accumulated benefit obligation and the projected benefit
obligation. For 1994, 1993 and 1992 the discount rates were 8%, 7% and 8%,
respectively. The expected long term rate of return on assets was 10% for the
three year period ending October 31, 1994. The assumed rate of increase in
future compensation levels was 5% in 1994, 4% in 1993 and 5% in 1992. The plans
invest primarily in marketable equity and debt securities.
Net pension costs for defined benefit plans were as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------
1994 1993 1992
----------------------------
(In thousands)
<S> <C> <C> <C>
Benefits earned during the year............................................ $3,040 $2,631 $2,538
Interest cost on projected benefit obligation.............................. 3,388 3,231 2,906
Actual return on plan assets............................................... (275) (3,715) (1,474)
Net amortization and deferral.............................................. (2,727) 1,153 (626)
------ ------ ------
$3,426 $3,300 $3,344
====== ====== ======
</TABLE>
The Company has various defined contribution plans in effect for certain
eligible employees. The Company makes contributions to the plans subject to
certain limitations outlined in the plans. Contributions to these plans were
approximately $2,478,000, $2,277,000, and $2,219,000 during fiscal 1994, 1993,
and 1992, respectively.
The Company has a Supplemental Benefit Plan covering certain key officers of
the Company. Earned vested benefits under the Supplemental Benefit Plan were
approximately $2,982,000, $2,543,000, and $5,231,000 at October 31, 1994, 1993
and 1992, respectively. These benefits are funded with life insurance policies
on the officers purchased by the Company.
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for
eligible retired employees. Employees may become eligible for those benefits if
they reach normal retirement age while working for the Company. The Company
continues to fund benefit costs on a pay-as-you-go basis; and, for fiscal year
1994, the Company made benefit payments totaling $1,892,000, compared to
$2,460,000 and $1,665,000 in fiscal 1993 and 1992, respectively.
The following table sets forth the funded status of the Company's projected
postretirement benefits other than pensions, reconciled with amounts recognized
in the Company's consolidated balance sheets at:
<TABLE>
<CAPTION>
October 31,
----------------------
1994 1993
----------------------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................................... $(29,995) $(28,927)
Fully eligible active plan participants...................................... (5,764) (7,275)
Other active plan participants............................................... (14,209) (16,750)
-------- --------
(49,968) (52,952)
Plan assets at fair value...................................................... -- --
-------- --------
Accumulated postretirement benefit obligation in excess of plan assets......... (49,968) (52,952)
Unrecognized prior service cost................................................ (3,232) --
Unrecognized net loss from past experience different from that assumed and from
changes in assumption........................................................ 2,458 5,393
-------- --------
Accrued postretirement benefit cost............................................ $(50,742) $(47,559)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31,
------------------------------
1994 1993 1992
------------------------------
(In thousands)
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost -- benefits attributed to service during the period....... $ 945 $ 824 $ 859
Interest cost on accumulated postretirement benefit obligation......... 3,839 3,634 3,466
Net amortization and deferral.......................................... 291 26 --
------ ------ ------
Net periodic postretirement benefit cost............................... $5,075 $4,484 $4,325
====== ====== ======
</TABLE>
51
<PAGE> 21
- --------------------------------------------------------------------------------
The assumed health care cost trend rate was 10.7% in 1994, decreasing uniformly
to 6.0% in the year 2002 and remaining level thereafter. The assumed discount
rate used to measure the accumulated postretirement benefit obligation was 8% at
October 31, 1994, and 7% at October 31, 1993.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of October 31, 1994 would be
increased by 7.7%. The effect of this change on the sum of the service cost and
interest cost would be an increase of 14.2%.
10. INDUSTRY SEGMENT INFORMATION
Quanex is principally a specialty metals producer. The Company's operations
primarily consist of four segments: Hot rolled steel bars, cold finished steel
bars, steel tubes and aluminum products.
<TABLE>
<CAPTION>
Hot Cold
Rolled Finished Corporate
Year ended Steel Steel Steel Aluminum and
October 31, 1994 Bars Bars Tubes Products Other(1) Consolidated
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated companies.. 452.4 Tons 182.9 Tons 81.4 Tons 154,503 Lbs.
Intersegment .............. 23.7 -- -- --
-------- -------- -------- --------
Total........................ 476.1 Tons 182.9 Tons 81.4 Tons 154,503 Lbs.
Net sales:
To unaffiliated companies.. $232,236 $160,010 $106,136 $200,932 -- $699,314
Intersegment(2)............ 12,983 -- -- -- $(12,983) --
-------- -------- -------- -------- -------- --------
Total........................ $245,219 $160,010 $106,136 $200,932 $(12,983) $699,314
======== ======== ======== ======== ======== ========
Operating income (loss)...... $ 31,209 $ 8,618 $ 6,492 $ 9,606 $(14,523) $ 41,402
Depreciation and
amortization:
Operating.................. $ 12,862 $ 1,268 $ 1,992 $ 11,130 $ 97 $ 27,349
Other...................... -- -- -- 947 239 1,186
-------- -------- -------- -------- -------- --------
Total........................ $ 12,862 $ 1,268 $ 1,992 $ 12,077 $ 336 $ 28,535
Capital expenditures......... $ 23,931 $ 893 $ 1,907 $ 17,741 $ 85 $ 44,557
Identifiable assets.......... $167,583 $ 51,405 $ 38,939 $221,332 $ 84,749 $564,008
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
<TABLE>
<CAPTION>
Hot Cold
Rolled Finished Corporate
Year ended Steel Steel Steel Aluminum and
October 31, 1993 Bars Bars Tubes Products Other(1) Consolidated
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliate companies... 427.3 Tons 175.9 Tons 113.2 Tons 103,149 Lbs.
Intersegment .............. 24.3 -- -- --
--------- -------- -------- --------
Total........................ 451.6 Tons 175.9 Tons 113.2 Tons 103,149 Lbs.
Net sales:
To unaffiliated
companies............... $201,419 $144,445 $121,126 $142,990 $ 6,165 $616,145
Intersegment(2)............ 12,720 -- -- -- (12,720) --
-------- -------- -------- -------- -------- --------
Total........................ $214,139 $144,445 $121,126 $142,990 $ (6,555) $616,145
======== ======== ======== ======== ======== ========
Operating income (loss)...... $ 21,875 $ 6,464 $ 9,436 $ (437) $(14,069) $ 23,269
Depreciation and
amortization:
Operating.................. $ 12,724 $ 1,195 $ 2,811 $ 10,752 $ 296 $ 27,778
Other...................... -- -- -- 948 626 1,574
-------- -------- -------- -------- -------- --------
Total........................ $ 12,724 $ 1,195 $ 2,811 $ 11,700 $ 922 $ 29,352
Capital expenditures......... $ 26,734 $ 1,457 $ 1,388 $ 7,078 $ 304 $ 36,961
Identifiable assets.......... $157,078 $ 49,400 $ 37,821 $193,183 $ 91,385 $528,867
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations, Viking
Metallurgical Corporation and corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
52
<PAGE> 22
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Hot Cold
Rolled Finished Corporate
Year ended Steel Steel Steel Aluminum and
October 31, 1992 Bars Bars Tubes Products Other(1) Consolidated
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated companies.. 368.1 Tons 143.0 Tons 103.1 Tons 88,888 Lbs.
Intersegment............... 32.5 -- -- --
-------- -------- -------- --------
Total........................ 400.6 Tons 143.0 Tons 103.1 Tons 88,888 Lbs.
Net sales:
To unaffiliated companies.. $175,246 $119,206 $111,888 $137,060 $ 28,690 $572,090
Intersegment(2)............ 16,031 -- 50 -- (16,081) --
-------- -------- -------- -------- -------- --------
Total........................ $191,277 $119,206 $111,938 $137,060 $ 12,609 $572,090
======== ======== ======== ======== ======== ========
Operating income (loss)...... $ 21,382 $ 3,693 $ 1,962 $ 8,063 $(16,178) $ 18,922
Depreciation and
amortization:
Operating.................. $ 12,826 $ 992 $ 4,364 $ 6,592 $ 7,901(3) $ 32,675
Other...................... -- -- -- 948 354 1,302
-------- -------- -------- -------- -------- --------
Total........................ $ 12,826 $ 992 $ 4,364 $ 7,540 $ 8,255 $ 33,977
Capital expenditures......... $ 8,796 $ 2,532 $ 1,856 $ 38,797 $ 535 $ 52,516
Identifiable assets.......... $136,501 $ 43,999 $ 47,024 $200,977 $106,248(3) $534,749
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations, Viking
Metallurgical Corporation and corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
(3) Includes a general facilities realignment charge of $7.2 million. This
charge was recorded in "Other" because no specific allocation of the charge
could be made between various facilities and segments. In 1993, $2.9 million
was charged against the reserve, which included $2.2 million relating to the
Aluminum Products segment and $700 thousand relating to the sale of Viking
Metallurgical Corporation and Bellville Tube Division. In 1994, $4.3 million
was charged against the reserve, which included $2.5 million relating to the
Aluminum Products segment, $900 thousand relating to the Steel Tubes segment
and $900 thousand relating to write-downs of assets classified in "Corporate
and Other".
11. PREFERRED STOCK PURCHASE RIGHTS
The Company declared a dividend in 1986 of one Preferred Stock Purchase Right (a
"Right") on each outstanding share of its common stock. This action was intended
to assure that all shareholders would receive fair treatment in the event of a
proposed takeover of the Company. On April 26, 1989, the Company amended the
Rights to provide for additional protection to shareholders and to provide the
Board of Directors of the Company with needed flexibility in responding to
abusive takeover tactics. Each Right, when exercisable, entitles the holder to
purchase 1/100th of a share of the Company's Series A Junior Participating
Preferred Stock at an exercise price of $60. Each 1/100th of a share of Series A
Junior Participating Preferred Stock will be entitled to a dividend equal to the
greater of $.01 and the dividend declared on each share of common stock, and
will be entitled to 1/100th of a vote, voting together with the shares of common
stock. The Rights will be exercisable only if, without the Company's prior
consent, a person or group of persons acquires or announces the intention to
acquire 20% or more of the Company's common stock. If the Company is acquired
through a merger or other business combination transaction, each Right will
entitle the holder to purchase $120 worth of the surviving company's common
stock for $60. Additionally, if someone acquires 20% or more of the Company's
common stock, each Right not owned by the 20% or greater shareholder would
permit the holder to purchase $120 worth of the Company's common stock for $60.
The Rights are redeemable, at the option of the Company, at $.02 per Right at
any time until ten days after someone acquires 20% or more of the common stock.
The Rights expire in 1999.
As a result of the Rights distribution, 150,000 of the 1,000,000 shares of
authorized Preferred Stock were reserved for issuance as Series A Junior
Participating Preferred Stock.
12. PREFERRED STOCK -- DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES
During May 1992, the Company issued 3,450,000 Depositary Convertible
Exchangeable Preferred Shares ("Depositary Shares"), each representing 1/10th of
a share of the Company's 6.88% Cumulative Convertible Exchangeable Preferred
Stock ("Preferred Stock"). The net proceeds from the issuance was $82.9 million.
The dividend per annum and liquidation preference for each share of Preferred
Stock are $17.20 and $250, respectively, and for each Depositary Share are $1.72
and $25, respectively. Dividends on the Preferred Stock and Depositary Shares
are cumulative and payable quarterly, commencing September 30, 1992. The Company
is prohibited from paying any dividends on Common Stock (other than in Common
Stock or junior stock) unless all required preferred dividends have been paid.
53
<PAGE> 23
- --------------------------------------------------------------------------------
The Preferred Stock is convertible at the option of the holder into shares of
the Company's Common Stock at a conversion price of $31.50 per share, subject to
adjustment in certain events. As a result, 2,738,095 shares of Common Stock are
reserved for conversion.
The Preferred Stock is exchangeable at the option of the Company, in whole but
not in part, on any dividend payment date commencing June 30, 1995 for the
Company's 6.88% Convertible Subordinated Debentures due June 30, 2007 ("6.88%
Debentures") at the rate of $250 principal amount of 6.88% Debentures for each
share of Preferred Stock and $25 principal amount of 6.88% Debentures for each
Depositary Share. The 6.88% Debentures, if issued, will bear interest payable
semiannually on June 30 and December 31 of each year.
The Preferred Stock may be redeemed at any time on or after June 30, 1995 at
the option of the Company, in whole or in part, at specified redemption prices,
together with accrued and unpaid dividends, except that no such redemption may
be made prior to June 30, 1996 unless the last reported sale price of the
Company's Common Stock is at least 150% of the conversion price then in effect
for any 20 trading days within a period of 30 consecutive trading days ending
not more than five days prior to the date of the notice of redemption.
13. RESTRICTED STOCK AND STOCK OPTION PLANS
The Company has restricted stock and stock option plans which provide for the
granting of common shares or stock options to key employees. Under the Company's
restricted stock plan, common stock may be awarded to key employees. The
recipient is entitled to all of the rights of a shareholder, except that during
the forfeiture period the shares are nontransferable. The award vests during an
eight year period based on the price of the Company's stock. Upon issuance of
stock under the plan, unearned compensation equal to the market value at the
date of grant is charged to stockholders' equity and subsequently amortized to
expense over the restricted period. Restricted shares granted were 22,400 in
1994 and none in 1993 or 1992. The amount charged to compensation expense was
$92,000 in 1994 and none in 1993 or 1992.
Options are granted at prices determined by the Board of Directors which may
not be less than the fair market value of the shares at the time the options are
granted. Unless otherwise provided by the Board at the time of grant, options
become exercisable in 33 1/3% increments maturing cumulatively on each of the
first through third anniversaries of the date of grant and must be exercised no
later than ten years from the date of grant. No options may be granted under the
plans after December 1, 2002. There were 435,151, 652,951, and 69,513 shares
available for granting of options at October 31, 1994, 1993 and 1992,
respectively. Stock option transactions for the three years ended October 31,
1994, were as follows:
<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
------------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1991....................................... 352,870 623,529 $13
========
Granted......................................................... 185,400 18
Exercised....................................................... (264,925) 11
Cancelled....................................................... (62,133) 16
--------
Balance at October 31, 1992....................................... 190,885 481,871 16
========
Granted......................................................... 198,700 20
Exercised....................................................... (13,932) 10
Cancelled....................................................... (32,838) 17
--------
Balance at October 31, 1993....................................... 287,412 633,801 17
========
Granted......................................................... 198,800 26
Exercised....................................................... (34,400) 15
Cancelled....................................................... (3,400) 19
--------
Balance at October 31, 1994....................................... 405,299 794,801 $19
======== ========
</TABLE>
The Company also has a stock option plan which provides for the granting of
stock options to non-employee Directors to purchase up to an aggregate amount of
100,000 shares of common stock. The plan provides that each non-employee
Director and each future non-employee Director as of the first anniversary of
the date of his election as a Director of the Company will be granted an option
to purchase 10,000 shares of common stock at a price per share of common stock
equal to the fair market value of the common stock as of the date of the grant.
Options become exercisable in 33 1/3% increments maturing cumulatively on each
of the first through third anniversaries of the date of the grant and must be
exercised no later than 10 years from the date of grant. No options may be
granted under the plan after June 22, 1997. There were 40,000, 40,000 and 50,000
shares available
54
<PAGE> 24
- --------------------------------------------------------------------------------
for granting of options at October 31, 1994, 1993 and 1992, respectively. Stock
option transactions for the three years ended October 31, 1994, were as follows:
<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
-----------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1991........................................ 20,000 20,000 $10
========
Granted.......................................................... -- --
Exercised........................................................ (10,000) 6
Cancelled........................................................ -- --
-------
Balance at October 31, 1992........................................ 10,000 10,000 14
========
Granted.......................................................... 10,000 21
Exercised........................................................ -- --
Cancelled........................................................ -- --
-------
Balance at October 31, 1993........................................ 10,000 20,000 17
========
Granted.......................................................... -- --
Exercised........................................................ -- --
Cancelled........................................................ -- --
-------
Balance at October 31, 1994........................................ 13,333 20,000 $17
======== =======
</TABLE>
In addition, the Company has a stock option plan which provides for the granting
of stock options to non-employee Directors to purchase up to an aggregate of
210,000 shares of common stock. The plan provides that each non-employee
Director as of December 6, 1989, was granted an option to purchase 3,000 shares
of common stock at a price per share of common stock equal to the fair market
value of the common stock as of the date of grant. Also, each non-employee
Director who is a director of the Company on any subsequent October 31, while
the plan is in effect and shares are available for the granting of options
hereunder, shall be granted on such October 31, an option to purchase 3,000
shares of common stock at a price equal to the fair market value of the common
stock as of such October 31. Options become exercisable at any time commencing
six months after the grant and must be exercised no later than 10 years from the
date of grant. No option may be granted under the plan after December 5, 1999.
There were 93,000, 114,000, and 135,000 shares available for granting of options
at October 31, 1994, 1993 and 1992, respectively. Stock option transactions for
the three years ended October 31, 1994, were as follows:
<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
----------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1991......................................... 27,000 45,000 $17
========
Granted........................................................... 21,000 19
Exercised......................................................... (9,000) 16
Cancelled......................................................... -- --
------
Balance at October 31, 1992......................................... 36,000 57,000 18
========
Granted........................................................... 21,000 20
Exercised......................................................... (3,000) 11
Cancelled......................................................... -- --
------
Balance at October 31, 1993......................................... 54,000 75,000 19
========
Granted........................................................... 21,000 25
Exercised......................................................... (9,000) 15
Cancelled......................................................... -- --
------
Balance at October 31, 1994......................................... 66,000 87,000 $20
======== ======
</TABLE>
On October 1, 1992, Carl E. Pfeiffer retired as the Chief Executive Officer of
the Company. In connection with such retirement, the Company replaced options to
purchase 60,000 shares of Common Stock at a weighted average exercise price of
$15.85 held by Mr. Pfeiffer, under the Company's employee stock option plans
with new options having the same exercise prices and expiration dates. Such
options are substantially similar to the options previously held by him with the
exception that vesting is not contingent upon his continued employment with the
Company and the options expire on various dates between October 25, 1999, and
October 13, 2001, instead of one year after retirement. There were 60,000,
50,000 and 30,000 shares exercisable at October 31, 1994, 1993, and 1992,
respectively. There were no transactions related to these stock options during
the years ended October 31, 1994 and 1993.
55
<PAGE> 25
- --------------------------------------------------------------------------------
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 107 requires disclosure of fair value of certain financial instruments, as
well as the methods and assumptions to estimate fair value.
The financial assets and liabilities included in the Company's balance sheet
and their estimated fair values at October 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
October 31,
---------------------------------------------
1994 1993
---------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents........................................ $ 34,041 $ 34,041 $ 42,247 $ 42,247
Short-term investments...................................... 54,070 53,688 47,655 48,030
Financial liabilities and equities:
Long-term debt (including current portion).................. $128,400 $133,792 $128,695 $133,372
Preferred stock............................................. 86,250 83,663 86,250 87,113
</TABLE>
The fair values of cash and equivalents approximate amounts included in the
balance sheet due to the short-term maturity of the instruments. The fair value
of short-term investments was arrived at using quoted market prices. The fair
value of long-term debt was based on recent transactions or based on rates
available to the Company for instruments with similar terms and maturities. The
fair value of preferred stock was calculated using the quoted market price.
At October 31, 1994 and 1993, the Company had open futures and option
contracts at fair values of $8.5 million and $14.4 million, respectively, and
open financing contracts in a net payable position as of October 31, 1994 of
$1.4 million (none in 1993). The fair values of futures and option contacts are
based on quoted market prices. The fair values of open financing contracts are
the net cash amounts payable in 1995.
15. CONTINGENCIES
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which are constantly changing, govern the discharge
of materials in the environment and may require the Company to make
environmental expenditures on an on-going basis. Environmental expenditures are
expensed or capitalized depending on their future economic benefit. The Company
has been identified as potentially responsible for cleanup of several
contaminated sites under the Federal Superfund law or similar statutes. Although
in some circumstances, Superfund might be deemed to impose joint and several
liability upon each responsible party at a site, the extent of the Company's
allocated financial contribution to the cleanup of these sites is expected to be
limited based on the number of companies participating, the volumes of waste
involved, and/or the nature of the Company's alleged connection. Although the
level of reasonably possible future expenditures, if any, beyond amounts already
accrued for environmental purposes, including cleanup obligations, is impossible
to determine with any degree of probability, it is management's opinion that,
based on current knowledge and the extent of such expenditures to date, the
ultimate aggregate cost of environmental remediation will not have a material
adverse effect on the Company's financial condition.
16. HEDGING
The Company uses futures and option contracts to hedge a portion of its exposure
to price fluctuations of aluminum. The exposure is related to the Company's
backlog of aluminum sales orders with committed prices as well as future
aluminum sales for which a sales price increase would lag a raw material cost
increase. Firm price commitments do not extend beyond December 1995. As of
October 31, 1994, the Company had $7.0 million of open contracts, all of which
mature before December 1995. The amount of deferred gains related to contracts
closed prior to the occurrence of the hedged sales is $1.2 million as of October
31, 1994. Hedging gains and losses are included in "Cost of sales" in the income
statement concurrently with the hedged sales. Unrealized gains and losses
related to open contracts are not reflected in the financial statements.
17. SUBSEQUENT EVENT
On December 29, 1994, the Company acquired $59.5 million principal amount of its
10.77% Senior Notes, due August 23, 2000, for a purchase price equal to 105% of
the principal amount plus accrued interest. The purchase will result in a
one-time, after-tax extraordinary charge of approximately $2.0 million in the
first quarter of 1995.
56
<PAGE> 26
Quanex Corporation
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly information for the years ended October 31, 1994 and 1993 is
as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1994:
Net sales................................................ $149,522 $172,235 $181,088 $196,469
Gross profit............................................. 14,330 20,383 23,534 27,514
Net income............................................... 1,768 3,777 5,777 7,530
Earnings per share....................................... $ .02 $ .17 $ .32 $ .45
1993:
Net sales................................................ $141,430 $161,370 $153,500 $159,845
Gross profit............................................. 11,635 16,374 16,916 20,251
Net income............................................... 486 1,902 2,678 3,362
Earnings (loss) per share................................ $ (.07) $ .03 $ .09 $ .13
</TABLE>
57
<PAGE> 27
Quanex Corporation
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Balance Balance
at Retirements at end
beginning and of
Description of year Additions sales Other year
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1994:
Land.......................................... $ 7,717 $ -- $ 1 $ -- $ 7,716
Land improvements............................. 9,491 158 -- -- 9,649
Leasehold improvements........................ 99 -- 5 -- 94
Buildings..................................... 70,318 477 -- -- 70,795
Machinery and equipment....................... 335,454 22,380 3,907 -- 353,927
Construction in progress...................... 36,075 21,542 -- -- 57,617
-------- -------- ------ -------- --------
$459,154 $ 44,557 $3,913 $ $499,798
======== ======== ====== ======== ========
YEAR ENDED OCTOBER 31, 1993:
Land.......................................... $ 8,208 $ -- $ -- $ (491) $ 7,717
Land improvements............................. 11,627 42 33 (2,145) 9,491
Leasehold improvements........................ 99 -- -- -- 99
Buildings..................................... 72,980 974 48 (3,588) 70,318
Machinery and equipment....................... 348,830 14,803 4,704 (23,475) 335,454
Construction in progress...................... 15,159 21,142 -- (226) 36,075
-------- -------- ------ -------- --------
$456,903 $ 36,961 $4,785 $(29,925)(1) $459,154
======== ======== ====== ======== ========
YEAR ENDED OCTOBER 31, 1992:
Land.......................................... $ 7,158 $ 1,202 $ 152 $ -- $ 8,208
Land improvements............................. 9,036 2,591 -- -- 11,627
Leasehold improvements........................ 99 -- -- -- 99
Buildings..................................... 58,555 14,458 33 -- 72,980
Machinery and equipment....................... 284,658 65,035 863 -- 348,830
Construction in progress...................... 45,929 (30,770) -- -- 15,159
-------- -------- ------ -------- --------
$405,435 $ 52,516 $1,048 $ -- $456,903
======== ======== ====== ======== ========
</TABLE>
(1) Relates to sale of Viking Metallurgical Corporation and Bellville Tube
Division (See Note 2).
58
<PAGE> 28
Quanex Corporation
SCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND
EQUIPMENT
<TABLE>
<CAPTION>
Additions
charged
Balance to Balance
at costs Retirements at end
beginning and and of
Description of year expenses sales Other year
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1994:
Land improvements...................... $ 3,725 $ 403 $ -- $ -- $ 4,128
Leasehold improvements................. 71 9 3 -- 77
Buildings.............................. 22,556 2,453 -- -- 25,009
Machinery and equipment................ 190,456 23,941 1,810 (4,264) 208,323
-------- ------- ------ -------- --------
$216,808 $26,806 $1,813 $ (4,264)(1) $237,537
======== ======= ====== ======== ========
YEAR ENDED OCTOBER 31, 1993:
Land improvements...................... $ 4,246 $ 463 $ 33 $ (951) $ 3,725
Leasehold improvements................. 60 11 -- -- 71
Buildings.............................. 21,950 2,498 47 (1,845) 22,556
Machinery and equipment................ 191,109 23,747 3,610 (20,790) 190,456
-------- ------- ------ -------- --------
$217,365 $26,719 $3,690 $(23,586)(2) $216,808
======== ======= ====== ======== ========
YEAR ENDED OCTOBER 31, 1992:
Land improvements...................... $ 3,813 $ 433 $ -- $ -- $ 4,246
Leasehold improvements................. 49 11 -- -- 60
Buildings.............................. 19,634 2,333 17 -- 21,950
Machinery and equipment................ 161,901 22,685 677 7,200 191,109
-------- ------- ------ -------- --------
$185,397 $25,462 $ 694 $ 7,200(1) $217,365
======== ======= ====== ======== ========
</TABLE>
(1) Relates to Facilities Realignment (See Note 2).
(2) $(20,650) relates to sale of Viking Metallurgical Corporation and sale of
Bellville Tube Division; $(2,936) relates to Facilities Realignment (See
Note 2).
Quanex Corporation
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE> Balance Charged
<CAPTION> at to Balance
beginning costs at
of and end of
Description year expenses Write-offs Other year
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 31, 1994...................... $2,025 $1,805 $(237) $ -- $3,593
Year ended October 31, 1993...................... $2,610 $ 13 $ (8) $(590)(1) $2,025
Year ended October 31, 1992...................... $2,711 $ 750 $(851) $ -- $2,610
</TABLE>
(1) Relates to sale of Viking Metallurgical Corporation and Bellville Tube
Division (See Note 2).
59
<PAGE> 29
QUARTERLY FINANCIAL RESULTS
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET SALES (millions)
January ......................... 149.52 141.43 124.88 142.51 145.03
April ........................... 172.23 161.37 148.41 142.64 165.53
July ............................ 181.09 153.50 141.90 152.28 169.27
October ......................... 196.47 159.85 156.90 151.46 170.49
- ------------------------------------------------------------------------------------------------------------
Total .................... 699.31 616.15 572.09 588.89 650.32
GROSS PROFIT (millions)
January ......................... 14.33 11.64 12.04 16.30 20.11
April ........................... 20.38 16.37 18.38 16.81 24.86
July ............................ 23.54 16.92 15.20 20.68 24.61
October ......................... 27.51 20.25 19.69 20.20 28.81
- ------------------------------------------------------------------------------------------------------------
Total .................... 85.76 65.18 65.31 73.99 98.39
NET INCOME (LOSS) (millions)
January ......................... 1.77 .49 (24.55) 2.45 3.85
April ........................... 3.78 1.90 3.15 2.10 7.27
July ............................ 5.77 2.68 2.23 3.49 7.78
October ......................... 7.53 3.36 .26 4.40 9.12
- ------------------------------------------------------------------------------------------------------------
Total .................... 18.85 8.43 (18.91) 12.44 28.02
NET EARNINGS (LOSS) PER PRIMARY
COMMON SHARE
January ......................... .02 (.07) (2.05) .16 .25
April ........................... .17 .03 .25 .19 .53
July ............................ .32 .09 .08 .29 .57
October ......................... .45 .13 (.09) .38 .68
- ------------------------------------------------------------------------------------------------------------
Total .................... .96 .18 (1.70) 1.02 2.03
QUARTERLY COMMON STOCK DIVIDENDS
January ......................... .14 .14 .13 .12 .10
April ........................... .14 .14 .13 .12 .10
July ............................ .14 .14 .13 .12 .10
October ......................... .14 .14 .13 .12 .10
- ------------------------------------------------------------------------------------------------------------
Total .................... .56 .56 .52 .48 .40
COMMON STOCK SALES PRICE
(High and Low)
January ......................... 21 1/4-16 1/8 21-17 5/8 27-16 1/8 13 3/4-10 1/4 15 1/2-11 1/2
April ........................... 22 3/8-19 1/8 20 7/8-14 1/4 29 7/8-24 3/4 18 5/8-13 1/2 16 5/8-11 7/8
July ............................ 23-18 1/8 17 3/4-14 31 3/4-21 1/2 17 3/4-14 1/8 18 5/8-15 1/4
October ......................... 27 1/4-20 3/4 20 3/4-16 1/2 24 3/4-15 1/2 23-15 1/4 17- 9 1/8
- ------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 1
E X H I B I T 21
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Subsidiaries of
Jurisdiction of
QUANEX CORPORATION Incorporation
- ------------------------------------------ ---------------------------------
<S> <C>
LaSalle Steel Company Delaware
Michigan Seamless Tube Company Delaware
Quanex Foreign Sales Corporation U.S. Virgin Islands
Quanex Metals, Inc. Delaware
Quanex Wire, Inc. Delaware
Verdi Springs Water Co., Inc. Nevada
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-23474, No. 33-29585, No. 33-22550, No. 33-35128, No. 33-38702, No. 33-46824,
No. 33-57235, No. 33-54081, No. 33-54085 and No. 33-54087 on Form S-8 of our
report dated November 23, 1994 (December 29, 1994 as to Note 17) appearing in
the Annual Report on Form 10-K of Quanex Corporation for the year ended October
31, 1994.
DELOITTE & TOUCHE LLP
Houston, Texas
January 23, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of October 31, 1994 and the income statement for the twelve months
ended October 31, 1994 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-START> NOV-01-1993
<PERIOD-END> OCT-31-1994
<CASH> 34,041
<SECURITIES> 54,070
<RECEIVABLES> 83,082
<ALLOWANCES> 3,593
<INVENTORY> 81,800
<CURRENT-ASSETS> 259,396
<PP&E> 499,798
<DEPRECIATION> 237,537
<TOTAL-ASSETS> 564,008
<CURRENT-LIABILITIES> 134,751
<BONDS> 107,442
<COMMON> 6,688
0
86,250
<OTHER-SE> 139,311
<TOTAL-LIABILITY-AND-EQUITY> 564,008
<SALES> 699,314
<TOTAL-REVENUES> 699,314
<CGS> 613,553
<TOTAL-COSTS> 613,553
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,805
<INTEREST-EXPENSE> 13,944
<INCOME-PRETAX> 32,503
<INCOME-TAX> 13,651
<INCOME-CONTINUING> 18,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,852
<EPS-PRIMARY> .96
<EPS-DILUTED> 1.16
</TABLE>
