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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 77027
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (713) 961-4600
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $.50 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
RIGHTS TO PURCHASE SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
6.88% CONVERTIBLE SUBORDINATED DEBENTURES NEW YORK STOCK EXCHANGE, INC.
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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, 1996, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $363,883,407. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.
At November 30, 1996, there were outstanding 13,603,118 shares of the
registrant's Common Stock, $.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement, to be filed
with the Commission within 120 days of October 31, 1996, for its Annual Meeting
of Stockholders to be held on February 27, 1997, are incorporated herein by
reference in Items 10, 11, 12, and 13 of Part III of this Annual Report.
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TABLE OF CONTENTS
Page
PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
General . . . . . . . . . . . . . . . . . . . . . . . . . 2-3
Markets and Product Sales by Business Segment . . . . . . 3-7
Manufacturing . . . . . . . . . . . . . . . . . . . . . . 7-8
Raw Materials and Supplies . . . . . . . . . . . . . . . . 8-9
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . 9
Competition . . . . . . . . . . . . . . . . . . . . . . . 9-10
Sales and Distribution . . . . . . . . . . . . . . . . . . 10
Seasonal Nature of Business . . . . . . . . . . . . . . . 10
Trademarks, Trade Names and Patents . . . . . . . . . . . 10
Research and Development . . . . . . . . . . . . . . . . . 11
Environmental Matters . . . . . . . . . . . . . . . . . . 11-12
Employees . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Security Holder Matters . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 15-17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation . . . . . . . . . . . . . . . . . . . . 18-26
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . 27-54
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . 55
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 56
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 56
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . 56
Item 13. Certain Relationships and Related Transactions . . . . . . . . . 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 57-67
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PART I
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 then 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
value-added metal products made from 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, aluminum sheet and
fabricated products. Quanex's products include various high quality specialized
products designed for specific markets and provide greater than average profit
margins. The Company believes that its use of state-of-the-art process
technology, low cost production and engineering to meet specific customer
applications provides the Company with competitive advantages over many of its
competitors. The Company has also sought to reduce the impact of cyclical
economic downturns on its operations through diversification of the markets
served. The markets served by the Company include 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, value-added specialized metals products company
serving a broad range of markets. The Company's future growth strategy is
focused on the continued penetration of higher margin markets for its various
products, the continued expansion of its aluminum products manufacturing
operations, rapid expansion of formed value-added products, and niche
acquisitions. The Company's August 1996 acquisition of the assets of Piper
Impact, Inc. ("Piper Impact"), a manufacturer of custom designed, impact
extruded aluminum and steel parts for the transportation industry, is
reflective of this strategy. 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.
Since 1992, the Company has invested over $82 million to enhance the steel
refining processes, rolling and finishing capacity and the manufacturing
capacity at its MacSteel operations by approximately 100,000 tons per year. The
Company is currently engaged in an additional $60 million expansion and
improvement program at MacSteel designed to increase caster productivity and
productive capacity by approximately 70,000 tons, or 12%, to 620,000 tons per
year when completed. This project is expected to be completed in fiscal 1998.
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The Company's business is managed on a decentralized basis. Each
operating group has administrative, operating and marketing functions.
Financial reporting systems measure each plant's return on investment, and the
Company seeks to reward superior performance 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 treasury 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 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" as set forth below. For financial information
regarding each of Quanex's business segments, see "Management's Discussion and
Analysis of Financial Condition and Results of Operation" herein and Note 10 to
the Consolidated Financial Statements. 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, 1996, no single customer accounted for more than 10% of the
Company's sales.
SALES BY MAJOR MARKETS
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Markets Market Description Quanex Products Sales ($ millions)
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1996 1995 1994 1993 1992
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Industrial General Industrial Mechanical and pressure $155.5 $177.8 $179.9 $180.4 $163.9
Machinery and Machinery (including tubing, pipe, specialty 17.4% 20.0% 25.7% 29.3% 28.7%
Capital Equipment mining, agriculture and forgings, extruded
construction) products, steel bars
Capital Equipment Mechanical tubing, $ 57.4 $ 48.1 $ 46.8 $ 40.0 $ 30.3
(including material steel bars 6.4% 5.4% 6.7% 6.5% 5.3%
handling, machine tools
and office/household)
Total Industrial $212.9 $225.9 $226.7 $220.4 $194.2
Machinery and Capital 23.8% 25.4% 32.4% 35.8% 34.0%
Equipment
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Transportation Aerospace Seamless contoured rolled $ -- $ .1 $ -- (1)$ 6.2(1) $ 24.2
rings, mechanical tubing -- -- -- 1.0% 4.2%
Auto/Truck Mechanical tubing, steel $262.5 $230.8 $189.2 $153.1 $114.6
bars, air bag components 29.3% 25.9% 27.1% 24.8% 20.0%
Other Transportation Mechanical tubing, $ 22.6 $ 24.0 $ 17.0 $ 17.1 $ 20.1
(including ship/railroad, steel bars 2.5% 2.7% 2.4% 2.8% 3.5%
recreational vehicles and
military transportation)
Total Transportation $285.1 $254.9 $206.2 $176.4 $158.9
31.8% 28.6% 29.5% 28.6% 27.7%
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Energy Exploration/Production Oil field production tubing $ 13.9 $ 12.6 $ 9.9 $ 13.9 $ 23.1
and casing, mechanical $ 1.5 1.4% 1.4% 2.3% 4.0%
tubing, steel bars
Processing/Conversion Pressure tubing, $ 67.0 $ 66.2 $ 55.2 $ 61.9 $ 58.5
(refining, petrochemical, process pipe 7.5% 7.4% 7.9% 10.0% 10.2%
power generation)
Total Energy $ 80.9 $ 78.8 $ 65.1 $ 75.8 $ 81.6
9.0% 8.8% 9.3% 12.3% 14.2%
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Aluminum Residential and Aluminum sheet, $313.1 $331.6 $200.9 $143.0 $137.1
Products Commercial fabricated aluminum 35.0% 37.2% 28.7% 23.2% 24.0%
Building Materials, products, aluminum coil
Other and coated aluminum coil
Other $ 3.7 $ -- $ .4 $ .5 $ .3
.4% -- .1% .1% .1%
Total Sales $895.7 $891.2 $699.3 $616.1 $572.1
100.0% 100.0% 100.0% 100.0% 100.0%
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(1) Decrease from prior years reflects the disposition of the Viking
Metallurgical Corporation subsidiary during the second quarter of 1993.
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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 precision
engineered carbon and alloy steel bars. The Company 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. The Company
typically 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 $540 per ton, and its specialty products can sell at a
considerable premium to that price.
Over time, MacSteel has focused its capital improvement programs on
production of high quality specialty steel bars. Since 1991, the Company has
invested significantly in the improvement of operations and expansion of annual
manufacturing capacity at its MacSteel operations by a total of approximately
100,000 tons. These investments have resulted in improved metallurgical,
melting and casting operations, provided ultrasonic testing facilities at both
MacSteel facilities and upgraded and modernized MacSteel's rolling and
finishing capacity and increased caster productivity. These improvements have
also allowed the Company to produce bearing grade and aircraft quality steel
bars and participate in the higher margin segments of the steel bar market. The
Company is currently engaged in an additional $60 million expansion and
improvement program to increase capacity by approximately 70,000 tons per year
by improving caster and melting utilization. Of the total $60 million MacSteel
project, $20 million is related to a significant upgrade to pollution control
systems to ensure compliance with EPA standards under the Clean Air Act.
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 steel bar in critical applications such as camshafts, crankshafts,
transmission gears, wheel spindles and hubs, bearing cages and rollers,
steering components, hydraulic mechanisms and seamless tube production. Part of
MacSteel's production may be sold to the Company's LaSalle Steel operations for
conversion into cold finished bars. The Company's steel tube business also
purchases MacSteel bars for piercing and extrusion into specialty tubular
products. Piper Impact uses MacSteel for the manufacture of safety critical
steel air bag inflators.
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, length 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.
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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. An increasing portion of these sales are precision bore,
cut to precise lengths, packaged and shipped to customers on a just-in-time
basis. 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.
In November 1996, a new $5 million continuous coil-to-bar drawing line began
operations, replacing an older single bar drawing line.
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.
Steel Tubes
The Company's steel tube business consists of its Michigan Seamless
Tube plant in South Lyon, Michigan ("MST"), its Gulf States Tube plant in
Rosenberg, Texas ("GST"), a heat treating plant in Huntington, Indiana ("Heat
Treat"), and a NitroSteel plant in Kenosha, Wisconsin ("NitroSteel"). MST
produces cold drawn seamless steel tubes and drawn-over-mandrel welded steel
tube. GST produces hot finished and cold drawn seamless steel tubes and welded
tubular products. Heat Treat provides tube and bar heat treating services.
NitroSteel provides wear and corrosion resistant finishing to steel bars and
tubes. 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. A new finishing line made
operational in October 1996 is expected to further increase manufacturing
efficiency.
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.
Heat Treat provides tube and bar heat treating services, such as
quench and temper, stress relieving, normalizing and "cut-to-length".
Metallurgical testing services are also provided. This plant serves customers
in the energy, automotive, ordnance, mining and fluid power markets.
NitroSteel was acquired in January 1995, and began commercial
operations in November 1995. This facility provides wear and corrosion
resistant finishing to steel bars and tubes. NitroSteel's products are sold
into fluid power markets.
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Aluminum Products
The Company manufactures finished aluminum sheet and fabricates
aluminum and steel products for the home improvement, new construction, light
commercial construction and automotive markets. The principal products sold by
the Company include aluminum window screens, patio door screens, window frames,
window and screen components, rain carrying systems, exterior trim, mill finish
sheet, air bag components and ordnance. Aluminum sheet is produced by the
Company's mini-mill ("N-H Casting"). The aluminum sheet is cold rolled,
finished and marketed from the Davenport, Iowa and Lincolnshire, Illinois
finishing facilities (collectively, "Nichols-Aluminum"). The Company's
fabricated products are manufactured at the AMSCO plant in Rice Lake, Wisconsin
("AMSCO"), its two Homeshield Fabricated Products plants in Chatsworth,
Illinois ("HFP"), and at its two Piper Impact plants in New Albany, Mississippi
and Park City, Utah. A third Piper Impact plant is currently under construction
in New Albany and is scheduled to be completed and operational by April of
1997. The Company's aluminum products businesses are described below.
N-H Casting operates an aluminum mini-mill in Davenport, Iowa. The
mini-mill has a capacity in excess of 300 million pounds annually of hot rolled
coiled aluminum sheet for building products, transportation and service center
markets, including the Company's fabricated products businesses and other
markets. The N-H Casting mini-mill operates a state-of-the-art 52-inch wide
Hazelett thin slab continuous caster, a three stand hot rolling mill and scrap
processing and melting equipment. The three-stand hot rolling mill is able to
reduce the cast aluminum slab from a thickness of approximately .75 inches to
coiled aluminum sheet with a thickness of .045 inches. This hot rolling mill
process substantially reduces subsequent cold rolling requirements. The Company
believes the advent of aluminum mini-mills, like the more developed steel
mini-mills, offers competitive advantages over large integrated producers,
including labor and energy savings and reduced capital and raw material costs.
Nichols Aluminum finishes the aluminum sheet produced at N-H Casting
and markets both coated and mill finished aluminum sheet. This division
includes the Nichols Aluminum Davenport ("NAD") plant and the Nichols Aluminum
Lincolnshire ("NAL") plant. Operations include cold rolling to specific gauge,
slitting to width, annealing, leveling and custom coating. The Company
currently has cold rolling capacity of approximately 300 million pounds
annually depending upon product mix.
The HFP plants manufacture 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. Most of the
production from this facility is sold to Andersen Corporation, a major
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.
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Piper Impact, which was acquired in August 1996, manufactures custom
designed, impact-extruded aluminum and steel parts for the transportation,
electronics and defense markets. The majority of Piper Impact's sales are to
the transportation market in the form of air bag components. Within the
transportation market, one customer, Morton International, represents more than
one-half of the sales of Piper Impact.
MANUFACTURING
Quanex operates sixteen manufacturing facilities in nine 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. The Company is generally able to maintain
minimal levels of finished goods inventories at most locations because it
typically manufactures products to customer specifications upon order.
Hot Rolled Steel Bars. The Company's MacSteel facilities produce
various grades of 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. Precision engineered products are
produced through a continuous in-line process by which scrap steel is converted
into hot rolled steel bars without interruption.
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 precision
engineered 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
maintained at low levels 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 5.0 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, length and straightness tolerances. Heat treating further
enhances the strength, machinability, wear and toughness of LaSalle Steel's
cold finished bar products. The Company's Griffith, Indiana facility uses
advanced techniques of surface preparation, induction hardening and chrome
plating to produce chrome plated bars and induction hardened chrome plated bars
with improved corrosion and wear resistance.
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 to the desired dimension (diameter) 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.
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Aluminum Products. Manufacturing at the Company's various facilities
ranges from the production of coiled aluminum sheet to the production and
fabrication of finished metal products, such as window screens, window frames
and air bag components.
The Company's aluminum casting operations are conducted at N-H
Casting's mini-mill in Davenport, Iowa. The single in-line manufacturing
process at the facility has 300 million pounds of annual hot rolled aluminum
capacity. The mini-mill converts scrap to aluminum sheet through melting,
continuous casting and in-line hot rolling. N-H Casting also has the ability to
shred scrap to broaden the diversity and sources of its scrap raw material.
Delacquering equipment improves the quality of the raw material before it
reaches the melting furnaces by burning off impurities within the scrap. The
scrap is blended using computer programs to achieve the desired alloy
composition and best economics. 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 .045 inches. The combination of capacity increases and
technological enhancements directed at producing quality hot rolled aluminum
sheet with cost savings derived from optimized scrap utilization, reduced
energy cost per pound, reduced cold rolling requirements and decreased labor
costs results in a significant manufacturing advantage.
Further processing of the coiled aluminum sheet hot rolled from the
mini-mill occurs at Nichols Aluminum. At Nichols Aluminum's Davenport, Iowa,
and Lincolnshire, Illinois, plants, the specific product requirements of
customers can be met through cold rolling to various gauges, annealing for
additional product formability, tension levelling and slitting to specific
widths. Products at Davenport can also be custom coated, an important feature
for the building products applications of certain customers.
Manufacturing of value-added 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), at AMSCO (including aluminum windows and patio door screens) and
at Piper Impact (including air bag components, ordnance and electronic
components). These facilities fabricate aluminum and steel into various
components, some of which are then assembled into final products.
RAW MATERIALS AND SUPPLIES
The Company's precision engineered steel bar plants purchase steel
scrap and hot briquetted iron, their principal raw materials, on the open
market. 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 bar 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. Piper Impact's raw
material consists of aluminum bars which it purchases on the open market and
steel bars which it purchases from MacSteel.
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Nichols-Homeshield's principal raw material is aluminum scrap. N-H
Casting's 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 contracts on the London Metals Exchange in amounts equal to N-H's
requirements for fixed price sales commitments for aluminum products and then
sells these contracts coincident with delivery of product, thereby protecting
against increases in the price of the aluminum used to manufacture the related
products.
BACKLOG
At October 31, 1996, Quanex's backlog of orders to be shipped in the
next twelve months was $206.5 million. This compares to $164.0 million at
October 31, 1995. The increase is mostly due to the Piper Impact acquisition.
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 products,
cold finished bar products and steel bars produced by the Company represent a
small percentage of annual domestic production.
The hot rolled precision engineered steel bar plants compete with two
large integrated steel producers, two large non-integrated 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 ten 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.
Certain competitors of GST are currently subject to countervailing duties
ranging from 3% to 124% due to a determination by the International Trade
Commission that such competitors had engaged in dumping or benefited from
subsidized sales.
9
<PAGE> 11
The Company's aluminum products businesses compete with many small and
large aluminum sheet manufacturers and metal fabricators. 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.
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 businesses are organized by major product group. Residential products
are sold primarily through distributors; engineered and fabricated 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
With the exception of Piper Impact, the business of which is not
seasonal, the Company's aluminum and fabricated products businesses are
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.
The businesses conducted by the Company generally 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.
10
<PAGE> 12
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 specialized 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 wastes or hazardous
substances at the locations Quanex at any time has owned or operated. This
responsibility includes remediation and corrective action at the plant
currently operated by the Company's Piper Impact subsidiary in New Albany,
Mississippi that is subject to historic soil and groundwater contamination.
Having undertaken preliminary technical studies of the contamination, Quanex
estimates that $20 million will be required to complete necessary cleanup. The
timing and final extent of remedial work currently are not determined. The
final cost could be more or less; however, Quanex has reserved $20 million
towards the cleanup and is attempting to negotiate mutually acceptable
remediation plans with the State of Mississippi.
Quanex also may be liable pursuant to state and federal environmental
laws such as CERCLA for all or part of the costs incurred to clean up
third-party sites where it arranged for disposal of hazardous substances. The
Company's most significant involvement to date at third-party Superfund sites
is described below.
During fiscal 1987, Quanex's LaSalle Steel Company subsidiary paid
approximately $200,000, of which approximately $130,000 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. The extent of any further cleanup assessments against the
company 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.
11
<PAGE> 13
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 0.041% 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
cleanup 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 is alleged to 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 a tiny portion of the
total volume. 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 of cleanup costs. 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.
The Company's Board of Directors has approved capital expenditures totaling
approximately $20 million to be spent in 1996, 1997, and 1998 to meet these
requirements. Based upon its analysis to date, Quanex does not believe that
its compliance with these requirements will have a material effect on its
operations or financial condition.
Quanex incurred approximately $3,900,000 and $3,300,000 during fiscal
1996 and 1995, respectively, in expenses and capital expenditures in order to
comply with existing or proposed environmental regulations. It is anticipated
that Quanex will spend approximately $14,000,000 at various of its facilities
during fiscal 1997. The 1997 amount includes spending toward a significant
upgrade to pollution control systems at MacSteel to ensure compliance with EPA
standards under the Clean Air Act. Although not currently quantifiable or
expected to be material to the Company as a whole, Quanex will continue to have
expenditures in connection with environmental matters beyond 1997. Future
expenditures relating to environmental matters will necessarily depend upon
existing future regulations and their application to Quanex and its facilities.
12
<PAGE> 14
EMPLOYEES
At October 31, 1996, the Company employed 4,016 persons. Of the total
employed, 32% were covered by collective bargaining agreements. During calendar
year 1997, two labor contracts will expire affecting three Quanex facilities.
The Progressive Steelworkers of Hammond contract at LaSalle Steel covering 299
employees will expire on May 11, 1997. The International Brotherhood of
Teamsters contract with two facilities of Nichols Aluminum covering 247
employees will expire November 11, 1997.
ITEM 2. PROPERTIES
The following table lists Quanex's principal plants at October 31,
1996, 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>
<CAPTION>
Square
Owned Hot Rolled Steel Bars Footage
- ----- --------------------- -------
<S> <C> <C>
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
Leased (expires 2009)
- ---------------------
Kenosha, Wisconsin NitroSteel 35,000
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
New Albany, Mississippi Piper Impact 475,000
Park City, Utah Piper Impact 130,000
Leased (expires 1999) Executive Offices
- --------------------- -----------------
Houston, Texas Quanex Corporation 21,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Other than the proceedings described under Item 1, "Environmental
Matters", there are no material legal proceedings to which Quanex, its
subsidiaries, or their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
13
<PAGE> 15
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 annual
dividend information for the common stock is as follows:
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK DIVIDENDS 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January...................................... .15 .14 .14 .14 .13
April........................................ .15 .15 .14 .14 .13
July......................................... .15 .15 .14 .14 .13
October...................................... .15 .15 .14 .14 .13
- -------------------------------------------------------------------------------------------------------------------
Total....................................... .60 .59 .56 .56 .52
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK SALES PRICE (High & Low) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January...................................... 21 1/8 24 5/8 21 1/4 27 27
18 20 16 1/8 17 5/8 16 1/8
April........................................ 22 3/8 23 7/8 22 3/8 20 7/8 29 7/8
19 5/8 21 19 1/8 14 1/4 24 3/4
July......................................... 23 7/8 26 5/8 23 17 3/4 31 3/4
19 3/8 22 1/8 18 1/8 14 21 1/2
October...................................... 28 3/4 26 27 1/4 20 3/4 24 3/4
19 5/8 18 5/8 20 3/4 16 1/2 15 1/2
</TABLE>
The terms of Quanex's revolving credit arrangements with certain
banks, 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, 1996, the amount of dividends and other
distributions the Company was permitted to declare and pay under its credit
facilities was $35,571,000.
There were 3,425 record holders of Quanex common stock on October 31,
1996.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
GLOSSARY OF TERMS
The exact definitions of commonly used financial terms and ratios vary somewhat
among different companies and investment analysts. The following list gives the
definition of certain financial terms that are used in this report:
Capital expenditures: Additions to property, plant and equipment.
Book value per common share: Stockholders' equity less the stated value of
preferred stock divided by the number of common shares outstanding.
Asset turnover: Net sales divided by average total assets.
Current ratio: Current assets divided by current liabilities.
Fixed charge coverage: The sum of income before income taxes plus interest
expense, plus the estimated interest component of rentals, less capitalized
interest, plus amortization of previously capitalized interest, plus
amortization of deferred debt issuance costs; divided by interest expense, plus
the estimated interest component of rentals, plus amortization of deferred debt
issuance costs.
Return on investment: The sum of net income and the after-tax effect of
interest expense less capitalized interest divided by the sum of the averages
for long-term debt and stockholders' equity.
Return on common stockholders' equity: Net income attributable to common
stockholders divided by average common stockholders' equity.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FINANCIAL SUMMARY 1986 - 1996 ($ THOUSANDS, EXCEPT PER SHARE DATA)
(For definition of items, see page ) Fiscal years ended October 31, 1996(1) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES AND EARNINGS
Net sales $ 895,710 891,195 699,314 616,145
Cost of sales $ 772,371 778,067 613,553 550,969
Gross profit $ 123,339 113,128 85,761 65,176
Selling, general and administrative expenses(3) $ 56,798 46,647 44,898 42,243
- ------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 66,541 66,481 40,863 22,933
Percent of net sales 7.4 7.5 5.8 3.7
Other income (expense)-net $ 1,526 769 1,818 3,560
Interest expense-net of capitalized interest $ 11,360 8,870 10,178 11,962
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary items,
and cumulative effect of accounting change $ 56,707 58,380 32,503 14,531
Income taxes (credit) $ 23,817 24,520 13,651 6,103
Extraordinary items and cumulative effect of accounting changes,
net of taxes(2) $ (2,522)(2) (2,021)(2) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 30,368 31,839 18,852 8,428
Percent of net sales 3.4 3.6 2.7 1.4
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Earnings (loss) per primary common share before extraordinary
items and cumulative effect of accounting change $ 2.41 2.20 0.96 0.18
Net earnings (loss) per primary common share $ 2.22 2.05 0.96 0.18
Cash dividends declared $ 0.60 0.59 0.56 0.56
Book value $ 14.32 12.65 10.91 10.48
Average shares outstanding (000) 13,658 13,580 13,496 13,551
Market closing price range
High $ 28 5/8 26 $ 27 20 3/4
Low $ 18 3/8 18 3/8 $ 16 1/4 14 1/4
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION - YEAR END(1)
Working capital $ 110,272 77,167 124,645 148,338
Property, plant and equipment - net $ 351,546 258,564 262,261 242,346
Other assets $ 103,322 45,808 42,351 43,111
Total assets $ 718,206 546,747 564,008 528,867
Noncurrent deferred income taxes $ 24,033 29,278 23,014 18,061
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 253,513 132,862 128,400 128,695
Stockholders' equity $ 194,673 170,526 232,249 225,776
Total capitalization $ 448,186 303,388 360,649 354,471
Long-term debt percent of capitalization 56.6 43.8 35.6 36.3
- ------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Asset turnover 1.4 1.6 1.3 1.2
Current ratio 1.7 TO 1 1.5 to 1 1.9 to 1 2.6 to 1
Fixed charge coverage 5.48 6.04 3.08 1.98
- ------------------------------------------------------------------------------------------------------------------------------
Return on average investment - percent 9.8 11.1 6.9 4.3
Return on average common equity - percent 16.6 17.6 9.0 1.7
- ------------------------------------------------------------------------------------------------------------------------------
Working capital provided (used) by operations(4) $ 73,110 72,552 51,243 40,061
Depreciation and amortization $ 38,416 32,433 28,535 29,352
Capital expenditures $ 45,843 26,654 44,557 36,961
Backlog for shipment in next 12 months $ 206,455 164,035 182,707 142,771
- ------------------------------------------------------------------------------------------------------------------------------
Number of stockholders 3,425 3,659 3,454 3,540
Average number of employees 3,011 2,719 2,603 2,622
Sales/employee $ 297 328 269 235
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On August 9, 1996, Quanex Corporation acquired Piper Impact, Inc. 1996
results include three months of Piper Impact's operations. On August 22,
1989, Quanex Corporation acquired Nichols-Homeshield, Inc. 1989 results
include two months of Nichols-Homeshield operations.
(2) 1996 and 1995-early extinguishment of debt; 1992-cumulative effect of
accounting change from postretirement welfare benefits; 1988-primarily loss
on early extinguishment of debt; 1987-reduction of income taxes arising
from carryforward of prior year operating losses.
16
<PAGE> 18
<TABLE>
<CAPTION>
1992 1991 1990 1989(1) 1988 1987 1986
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
572,090 588,888 650,316 501,991 462,916 345,409 324,835
506,778 514,894 551,929 418,580 383,399 305,725 304,330
65,312 73,994 98,387 83,411 79,517 39,684 20,505
46,534(3) 38,914 41,207 30,136 29,495 23,415 26,476
- --------------------------------------------------------------------------------------------
18,778 35,080 57,180 53,275 50,022 16,269 (5,971)
3.3 6.0 8.8 10.6 10.8 4.7 (1.8)
2,399 673 (2,106) 703 1,596 6,758 83
10,495 14,306 9,880 6,837 15,081 17,019 17,255
- --------------------------------------------------------------------------------------------
10,682 21,447 45,194 47,141 36,537 6,008 (23,143)
4,487 9,007 17,174 17,891 13,600 2,958 (3,200)
(25,108)(2) -- -- -- (4,464)(2) 2,158(2) --
- --------------------------------------------------------------------------------------------
(18,913) 12,440 28,020 29,250 18,473 5,208 (19,943)
(3.3) 2.1 4.3 5.8 4.0 1.5 (6.1)
- --------------------------------------------------------------------------------------------
0.28 1.02 2.03 2.11 1.85 0.25 (1.63)
(1.70) 1.02 2.03 2.11 1.48 0.42 (1.63)
0.52 0.48 0.40 0.30 0.08 -- --
11.10 12.99 12.33 10.83 9.13 7.83 7.41
12,696 11,679 12,224 12,380 12,270 12,257 12,256
31 1/2 23 18 1/2 19 14 1/2 9 8
15 1/2 10 1/8 9 1/8 12 3/4 4 1/4 3 3 5/8
- --------------------------------------------------------------------------------------------
154,455 69,142 74,187 76,257 64,820 43,772 24,513
239,538 220,038 187,712 194,638 141,640 155,766 169,782
44,801 45,431 44,683 35,580 3,688 7,662 13,132
534,749 446,459 451,381 400,076 301,465 277,612 265,595
16,675 32,428 31,400 37,132 14,890 4,623 3,545
- --------------------------------------------------------------------------------------------
128,894 162,792 131,498 94,214 38,953 96,847 113,055
237,592 152,488 181,430 167,630 146,654 95,988 90,764
366,486 315,280 312,928 261,844 185,607 192,835 203,819
35.2 51.6 42.0 36.0 21.0 50.2 55.5
- --------------------------------------------------------------------------------------------
1.2 1.3 1.5 1.4 1.6 1.3 1.2
2.6 to 1 1.7 to 1 1.8 to 1 1.8 to 1 1.7 to 1 1.7 to 1 1.5 to 1
1.52 2.12 5.12 7.47 2.84 1.42 (0.16)
- --------------------------------------------------------------------------------------------
(3.8) 6.6 11.9 15.0 14.8 10.1 (2.4)
(14.2) 8.0 17.8 21.3 17.5 5.6 (19.8)
- --------------------------------------------------------------------------------------------
44,932 37,971 49,848 56,883 52,784 25,762 (2,918)
26,777 25,741 22,920 17,442 18,355 18,091 20,597
52,516 47,945 31,939 13,781 5,348 2,210 5,045
119,254 91,396 114,534 116,641 110,955 101,679 69,941
- --------------------------------------------------------------------------------------------
3,596 3,894 4,262 4,578 5,318 5,483 5,808
2,725 2,886 3,001 2,135 2,013 1,843 1,925
210 204 217 235 230 187 169
- --------------------------------------------------------------------------------------------
</TABLE>
(3) Includes $7.2 million facilities realignment charge.
(4) 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.
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
The Company's results for 1996 continued the trend of record revenues
and earnings for the Company. The Company, however, did recognize a decline in
its margins due to, among other things, lower average selling prices, increased
raw material costs and increased depreciation charges. These declines were
substantially offset by increased sales and operating income in the Company's
aluminum and fabrication products segment, principally due to the fourth
quarter acquisition by the Company of Piper Impact. Overall demand for the
Company's products was strong, with all of the Company's operations operating
at high utilization levels.
The Company's hot rolled steel bar business experienced lower
operating income for 1996 compared to 1995 even though sales unit volume was
higher. The results for 1995 reflected the benefits of unusually high
surcharges for molybdenum, chrome and scrap, which did not occur in 1996.
Operating income was also negatively impacted in 1996 by increased depreciation
related to the completion of Phase II of the Company's MacSteel expansion
project and by higher accruals to the allowance for doubtful accounts. Lower
operating income in the Company's cold finished steel bar business in 1996
compared to 1995 resulted principally from lower average selling prices and
lower sales unit volume as the Company experienced a softening in demand for
this segment's products. The Company's steel tube business results for 1996
were adversely affected by higher conversion costs as compared to 1995. The
Company's aluminum products business was affected in 1996 by improved demand
and lower conversion costs, partly offset by higher accruals to the allowance
for doubtful accounts. The Company's aluminum products business also benefited
by the acquisition of Piper Impact and margins between selling prices and raw
material costs, particularly in the first half of fiscal 1996. These margins,
referred to herein as "price spreads", are a key financial performance
indicator in the aluminum products business.
During the first quarter of fiscal 1996, the Company acquired its
remaining 10.77% Senior Notes for a purchase price equal to 107.5% of the
principal amount plus accrued interest. The purchase resulted in an
extraordinary charge of $2.5 million ($4.3 million before taxes).
The Company currently expects that overall business levels for fiscal
1997 should be similar to those experienced during 1996. However, domestic and
global market factors will impact the Company and any slowdown in the U.S.
economy could affect demand and pricing for many of the Company's products. The
acquisition of Piper Impact will affect 1997 and is expected to result in
higher sales and assuming no material declines in the markets in which it
serves, be accretive to earnings. Improved financial results will be dependent
upon, among other things, whether the continued strength of the economy can be
sustained, improvements in the markets which the Company serves and improvement
in the price spreads of aluminum products.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following table sets forth selected operating data for the Company's four
business segments:
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------
1996 1995 1994(1)
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Hot Rolled Steel Bars:
Units shipped (Tons) ............................... 526.8 503.0 476.1
Net sales .......................................... $287,290 $282,100 $245,219
Operating income ................................... 38,181 41,552 31,209
Depreciation and amortization ...................... 17,815 15,284 12,862
Identifiable assets ................................ $167,029 $172,544 $167,583
Cold Finished Steel Bars:
Units shipped (Tons) ............................... 176.5 182.9 182.9
Net sales .......................................... $158,549 $170,675 $160,010
Operating income ................................... 10,359 11,461 8,618
Depreciation and amortization ...................... 1,453 1,310 1,268
Identifiable assets ................................ $ 54,740 $ 54,985 $ 51,405
Steel Tubes:
Units shipped (Tons) ............................... 94.2 94.2 81.4
Net sales .......................................... $120,282 $119,915 $106,136
Operating income ................................... 7,640 8,724 6,492
Depreciation and amortization ...................... 2,285 1,966 1,992
Identifiable assets ................................ $ 47,755 $ 43,777 $ 38,939
Aluminum Products(2):
Units shipped (Pounds) ............................. 254,559 230,039 154,503
Net sales .......................................... $344,867 $331,565 $200,932
Operating income ................................... 25,088 22,080 9,606
Depreciation and amortization ...................... 16,184 13,135 12,077
Identifiable assets ................................ $412,048 $230,586 $221,332
</TABLE>
================================================================================
(1) Excludes the effects of charges to a $7.2 million general write-down
reserve recorded against manufacturing facilities in 1992 that could not be
allocated against specific facilities or between businesses and was therefore
reflected as a charge against "Corporate and Other" operations and the
identifiable assets included within "Corporate and Other" operations. 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 Note 10 to consolidated financial
statements).
(2) 1996 Results include three months of Piper Impact's operations.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
1996 COMPARED TO 1995
NET SALES - Net sales for fiscal 1996 were $895.7 million,
representing an increase of $4.5 million when compared to fiscal 1995. This
increase resulted principally from higher volumes in the hot rolled steel bar
and aluminum products businesses, offset by lower selling prices in both of
these businesses.
Net sales for fiscal 1996 from the Company's hot rolled steel bar
business were $287.3 million, representing an increase of $5.2 million, or 2%,
when compared to fiscal 1995. This increase was primarily attributable to a 5%
increase in volume and was offset by a 3% decrease in average selling prices.
Decreases in average selling prices resulted from unusually high surcharges for
molybdenum, chrome and scrap during 1995. The increased volume resulted from
improved market share and the additional capacity added during fiscal 1995.
Net sales for fiscal 1996 from the Company's cold finished steel bar
business were $158.5 million, representing a decrease of $12.1 million, or 7%,
when compared to the record levels in fiscal 1995. The decrease was
attributable to a decrease in volume of 3% and a decrease in average selling
price of 4%. The decrease in shipments was less than the decrease in total cold
finished steel industry shipments due to continued improved market share.
Net sales from the Company's steel tube business for fiscal 1996 were
$120.3 million compared to $119.9 million in 1995. Tons shipped and average
selling prices were comparable in both periods.
Net sales from the Company's aluminum products business for fiscal
1996 were $344.9 million, representing an increase of $13.3 million, or 4%,
when compared to fiscal 1995. This increase was partly attributable to the
acquisition of Piper Impact. Excluding Piper Impact, pounds shipped increased
9% in 1996 compared to 1995. Average selling prices, however, decreased 13%
during the same period. The increase in pounds shipped was primarily the result
of improved market share.
OPERATING INCOME - Consolidated operating income for fiscal 1996 was
$66.5 million, which is level with fiscal 1995.
Operating income from the Company's hot rolled steel bar business for
fiscal 1996 was $38.2 million, representing a decrease of $3.4 million, or 8%,
when compared to fiscal 1995. This decrease was principally due to increased
selling, general and administrative expenses related to higher accruals to the
allowance for doubtful accounts.
Operating income from the Company's cold finished steel bar business
for fiscal 1996 was $10.4 million, representing a decrease of $1.1 million, or
10%, when compared to fiscal 1995. This decrease in operating income was
principally due to the lower sales.
Operating income from the Company's steel tube business for fiscal
1996 was $7.6 million, representing a decrease of $1.1 million, or 12%, when
compared to fiscal 1995. This decrease was principally due to higher conversion
costs and operating losses at the Company's NitroSteel division, a small
division that was acquired by the Company in early fiscal 1995.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Operating income from the Company's aluminum products business for
fiscal 1996 was $25.1 million, representing an increase of $3.0 million, or
14%, when compared to fiscal 1995. This increase was principally due to the
acquisition of Piper Impact in August 1996. Results for 1996 were also affected
by higher volumes and lower conversion costs. These positive factors were
mostly offset by lower price spreads and higher accruals to the allowance for
doubtful accounts in 1996 compared to 1995. Recently, an aluminum products
customer discontinued purchases of a particular product line. Although the
Company expects to be able to replace most of this lost business, the impact on
operating income is expected to be approximately $2 million to $3 million, if
none of the lost sales volume can be replaced.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased in fiscal 1996 by $10.2 million, or 22%, as
compared to fiscal 1995. This increase is principally due to higher accruals to
the allowance for doubtful accounts in the hot rolled steel bar and the
aluminum products businesses.
INTEREST EXPENSE AND CAPITALIZED INTEREST - Interest expense increased
by $1.2 million as compared to fiscal 1995 primarily due to increased long-term
debt related to the Piper Impact acquisition in the fourth quarter of fiscal
1996. Through the first three quarters of fiscal 1996, interest expense was
comparable to the same periods of 1995. Increased interest related to the
Company's $84.9 million of 6.88% Convertible Subordinated Debentures that were
issued in June 1995 in exchange for the Company's outstanding preferred stock
was offset by the early extinguishment of a portion of the Company's senior
debt in the first quarter of fiscal 1995 and the early extinguishment of the
remaining senior debt in the first fiscal quarter of 1996. Capitalized interest
decreased by $1.3 million in 1996 compared to 1995 primarily resulting from the
completion in March 1995 of Phase II of the Company's MacSteel Ultra Clean
Steel Program. Capitalized interest is expected to increase in fiscal 1997 as
capital spending on Phase III of the MacSteel expansion project continues.
OTHER - Included in "Other, net" for fiscal 1996, was a $2.3 million
pretax gain which represents the final recovery of a business interruption
claim related to a fire at the Company's Lincolnshire, Illinois facility that
occurred in 1993. Also included in "Other, net" in 1996 was a $1.5 million loss
resulting from abandonment of idle assets. Included in "Other, net" for fiscal
1995 was a $1.1 million pretax gain related to a life insurance policy on a
deceased former officer. In addition, "Other, net" included investment income
of $1.6 million for fiscal 1996 as compared to $783 thousand for fiscal 1995.
In fiscal 1997, the amortization of the goodwill related to the Piper Impact
acquisition will increase by approximately $1.6 million.
EXTRAORDINARY CHARGE - Included in fiscal 1996 was an extraordinary
charge of $2.5 million compared to $2.0 million in 1995 relating to early
extinguishment of debt.
NET INCOME - Net income attributable to common shareholders for fiscal
1996 was $30.4 million, compared to $27.9 million for fiscal 1995. Preferred
dividends reduced net income attributable to common shareholders by $4.0
million for fiscal 1995. There were no preferred dividends in 1996.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
1995 COMPARED TO 1994
NET SALES - Net sales for fiscal 1995 were $891.2 million,
representing an increase of $191.9 million, or 27%, when compared to fiscal
1994. This increase was due to significantly higher volume in the aluminum
products business, additional volume from increased production capacity as
compared to last year, improvements in the economy, increases in demand and
higher average selling prices.
Net sales for fiscal 1995 from the Company's hot rolled steel bar
business were $282.1 million, representing an increase of $36.9 million, or
15%, when compared to fiscal 1994. This increase was primarily attributable to
increased volume and a 9% increase in average selling prices. Volume increases
reflected the additional capacity provided from the capital expenditures
completed in March 1995. The hot rolled steel bar business also benefited from
strength in the durable goods markets.
Net sales for fiscal 1995 from the Company's cold finished steel bar
business were $170.7 million, representing an increase of $10.7 million, or 7%,
when compared to fiscal 1994. The increase was primarily attributable to an
increase in average selling price of 7%. Even though volume for the last half
of the fiscal year was down 9% as compared to the last half of fiscal 1994, the
strength experienced during the first half of the year, combined with the
increase in average selling prices, resulted in the year-to-year net sales
improvement.
Net sales from the Company's steel tube business for fiscal 1995 were
$119.9 million, representing an increase of $13.8 million, or 13%, when
compared to fiscal 1994. This increase in sales resulted principally from a 16%
increase in volume. The Company's steel tube business was adversely affected in
fiscal 1994, and to a lesser degree in fiscal 1995, by downward pricing
pressure from imports on certain products and a general weakness in this
segment's primary markets, which include power generation and the petrochemical
and refining industries. In June 1994, the Company 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. In August 1994, the
International Trade Commission (the "ITC") made an affirmative preliminary
determination that imports of small-diameter pipe from these countries were
causing injury to the U.S. industry and in January 1995, dumping bonds were
imposed on imports of these products by these countries. In July 1995, the ITC
made a final determination that imports of small diameter seamless carbon and
alloy standard, line and pressure pipe from four countries had caused injury to
the U.S. industry. This final ruling results in the ongoing enforcement of
countervailing duties imposed by the U.S. Department of Commerce. The Company
believes that the volume improvement in fiscal 1995 over fiscal 1994 was due,
in part, to the favorable ruling.
Net sales from the Company's aluminum products business for fiscal
1995 were $331.6 million, representing an increase of $130.6 million, or 65%,
when compared to fiscal 1994. This increase was attributable to an increase in
volume of 49% due to improved demand and market share and an increase in
average selling price of 11%. First and second quarter results for fiscal 1994
were adversely affected by the fire at the Company's Lincolnshire plant.
Results for fiscal 1995 were affected by aluminum price increases, which
generally increased by more than the Company's average selling price because of
a change in product mix.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
OPERATING INCOME - Consolidated operating income for fiscal 1995 was
$66.5 million, representing an increase of $25.6 million, or 63%, when compared
to fiscal 1994. This increase was principally due to higher net sales.
Operating income from the Company's hot rolled steel bar business for
fiscal 1995 was $41.6 million, representing an increase of $10.3 million, or
33%, when compared to fiscal 1994. This increase was principally due to higher
volume, higher net sales and improved margins.
Operating income from the Company's cold finished steel bar business
for fiscal 1995 was $11.5 million, representing an increase of $2.8 million, or
33%, when compared to fiscal 1994. This increase was principally due to higher
net sales and improved margins.
Operating income from the Company's steel tube business for fiscal
1995 was $8.7 million, representing an increase of $2.2 million, or 34%, when
compared to fiscal 1994. This increase was principally due to higher volume and
net sales.
Operating income from the Company's aluminum products business for
fiscal 1995 was $22.1 million, representing an increase of $12.5 million, or
130%, when compared to fiscal 1994. This increase was principally due to
substantially higher volume and net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased in fiscal 1995 by $1.7 million, or 4%, as
compared to fiscal 1994. As a percentage of net sales, however, selling,
general and administrative expenses were 5.2% in fiscal 1995 as compared to
6.4% in fiscal 1994.
INTEREST EXPENSE AND CAPITALIZED INTEREST - Interest expense decreased
by $3.2 million as compared to fiscal 1994 primarily as a result of the early
extinguishment of a portion of the Company's senior debt late in the first
fiscal quarter of 1995. Interest expense is expected to increase in fiscal 1996
following the Company's exchange of its 6.88% Cumulative Convertible
Exchangeable Preferred Stock for $84.9 million principal amount of its 6.88%
Convertible Subordinated Debentures due June 30, 2007 on June 30, 1995.
Capitalized interest decreased by $1.9 million as compared to fiscal 1994 due
to the completion in early fiscal 1995 of the construction at the Company's hot
rolled steel bar business facilities.
OTHER - Included in "Other, net" for fiscal 1995, was a $1.1 million
pretax gain related to a life insurance policy on a deceased former officer.
Included in "Other, net" for fiscal 1994 was a $1.7 million pretax charge
related to certain financing contracts, partially offset by $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.
In addition, "Other, net" included investment income of $783 thousand for
fiscal 1995, compared to $3.0 million for fiscal 1994. The decrease in
investment income was due to a decline in cash and short-term investments as
such funds were used to reduce debt, and losses on sales of short-term
investments.
EXTRAORDINARY CHARGE - Included in fiscal 1995 was an extraordinary
charge of $2.0 million relating to early extinguishment of debt.
NET INCOME - Net income attributable to common shareholders for fiscal
1995 was $27.9 million, compared to $12.9 million for fiscal 1994. Preferred
dividends reduced net income attributable to common shareholders by $4.0
million for fiscal 1995, as compared to $5.9 million for fiscal 1994. The
improvement in net income attributable to common shareholders was primarily
attributable to improved operating income.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow
from operations, and borrowings under an unsecured $250 million Revolving
Credit and Term Loan Agreement ("Bank Agreement"). The Bank Agreement replaced
the Company's former $75 million Revolving Credit and Letter of Credit
Agreement (the "Old Bank Agreement"), effective July 23, 1996. The Bank
Agreement consists of a revolving line of credit ("Revolver") and up to two
term loans not to exceed $100 million in the aggregate and repayable at a date
selected by the Company to be no later than July 23, 2004. Any term loan
elections reduce the amount available under the Revolver. The Bank Agreement
expires July 23, 2001, and provides for up to $25 million for standby letters
of credit, limited to the undrawn amount available under the Revolver. All
borrowings under the Revolver bear interest, at the option of the Company, at
either (i) the prime rate or the federal funds rate plus one percent, whichever
is higher, or (ii) a Eurodollar based rate. In the fourth quarter of fiscal
1996, the Company entered into interest rate swap agreements, which effectively
converted $100 million of its variable rate debt under the Bank Agreement, to
fixed rate. Under these agreements, payments are made based on a fixed rate
($50 million at 7.025%, and $50 million at 6.755%) and received on a LIBOR
based variable rate (5.53125% at October 31, 1996). Differentials to be paid or
received under the agreements are recognized as interest expense. The
agreements mature in 2003. 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, 1996, retained
earnings of $35,571,000 were available for dividends. Under the Bank Agreement,
at October 31, 1996, there were $160.0 million of outstanding Revolver
borrowings. Additional borrowings under the Bank Agreement were used to fund
the acquisition of Piper Impact.
In December 1995, the Company acquired all of its outstanding 10.77%
Senior Notes for a purchase price equal to 107.5% of the principal amount plus
accrued interest. The acquisition and related expenses resulted in an after-tax
extraordinary charge of approximately $2.5 million in the first quarter of
1996. The acquisition was funded with cash and additional borrowings under the
Old Bank Agreement.
On June 30, 1995, the Company exercised its right under the terms of
its Cumulative Convertible Exchangeable Preferred Stock to exchange such stock
for an aggregate of $84,920,000 of its 6.88% Convertible Subordinated
Debentures due June 30, 2007 ("Debentures"). Interest is payable semi-annually
on June 30 and December 31 of each year. The Debentures are subject to
mandatory annual sinking fund payments sufficient to redeem 25% of the
Debentures issued on each of June 30, 2005 and June 30, 2006, to retire a total
of 50% of the Debentures before maturity. The Debentures are subordinate to all
senior indebtedness of the Company and are convertible, at the option of the
holder, into shares of the Company's common stock at a conversion price of
$31.50 per share.
On August 9, 1996, the Company completed the acquisition of
substantially all of the assets of Piper Impact. Piper Impact's assets, net of
various liabilities, were acquired for approximately $130 million in cash, cash
equivalents, and notes. This acquisition was financed with existing cash and
bank borrowings. Subsequent to the acquisition, the Company's Board of
Directors approved additional capital expenditures at Piper Impact totaling
approximately $55 million. These expenditures are expected to provide the
capacity needed to supply major new customer programs phasing in over the next
two years.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
At October 31, 1996, the Company had commitments of $34 million for
the purchase or construction of capital assets, primarily relating to the
Company's continued expansion at MacSteel and the expansion at Piper Impact.
The capital project at MacSteel also includes significant upgrades to pollution
control systems to ensure compliance with new EPA standards under the Clean Air
Act. The MacSteel expansion is expected to cost approximately $60 million and
is expected to be completed during fiscal year 1998. The Company plans to fund
this capital investment through cash flow from operations and, if necessary,
additional borrowings.
The Company believes that it has sufficient funds and adequate
financial sources available to meet its anticipated liquidity needs. The
Company also believes that cash flow from operations, cash balances and
available borrowings will be sufficient for the foreseeable future to finance
anticipated working capital requirements, capital expenditures, debt service
requirements, environmental expenditures and dividends.
Operating Activities
Cash provided by operating activities during fiscal 1996 was $64.1 million.
This represents a decrease of $3.0 million, or 4%, as compared to fiscal 1995.
Increased working capital requirements related to inventories and accounts
payable were mostly offset by decreased accounts receivable.
Investment Activities
Net cash used by investment activities in fiscal 1996 was $172.6 million as
compared to net cash provided of $25.6 million in fiscal 1995. The decrease in
cash provided by investment activities was principally due to the acquisition
of the assets of Piper Impact, higher capital spending, and decreases in
short-term investments in 1995. The Company estimates that fiscal 1997 capital
expenditures will approximate $70 to $80 million.
Financing Activities
Net cash provided by financing activities for fiscal 1996 was $99.3 million,
principally consisting of $160 million in bank borrowings offset by $44.7
million related to the early extinguishment of the Senior Notes, $10.0 million
in repayments of notes payable and $8.1 million in common dividends.
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, 1996.
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 consolidated statements of
income.
EFFECTS OF INFLATION
Inflation has not had a significant effect on earnings and other financial
statement items.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
PRIVATE SECURITIES LITIGATION REFORM ACT
Certain forward looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in the forward
looking statements contained in this report. Such factors include domestic and
international economic activity, prevailing prices of steel and aluminum scrap
and other raw material costs, interest rates, the continuation of
countervailing import duties on certain of the Company's competitors,
construction delays, market conditions for the Company's customers, any
material changes in purchases by the principal customers of AMSCO and Piper
Impact, environmental regulations and changes in estimates of costs for known
environmental remediation projects and situations, world-wide political
stability and economic growth, the Company's successful implementation of its
internal operating plans, performance issues with key customers, suppliers and
subcontractors, and regulatory changes and legal proceedings. Accordingly,
there can be no assurance that the forward-looking statements contained herein
will occur or that objectives will be achieved.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". This new standard encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and other
equity instruments based on the fair-value method of accounting. The Company is
required to adopt SFAS No. 123 for its fiscal year 1997. The Company expects to
furnish the pro-forma disclosure required under SFAS No. 123, if material, but
plans to elect to continue to follow the accounting provisions of Accounting
Principles Board Opinion No. 25.
26
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1996. Our audits also
included the financial statement schedule listed in the index on page 57.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Quanex Corporation and
subsidiaries as of October 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------------
Deloitte & Touche LLP
Houston, Texas
November 22, 1996
27
<PAGE> 29
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/ Vernon E. Oechsle /s/ Wayne M. Rose
- --------------------------------- ------------------------------
Vernon E. Oechsle Wayne M. Rose
President and Vice President and
Chief Executive Officer Chief Financial Officer
28
<PAGE> 30
Quanex Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
=================================================================================================
October 31, 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents. . . . . . . . . . . . . . . . . . . . $ 35,985 $ 45,213
Accounts and notes receivable, less allowance for doubtful
accounts of $8,351,000 in 1996 and $3,581,000 in 1995 . . . 103,934 104,240
Inventories. . .. . . . . . . . . . . . . . . . . . . . . . 113,287 84,676
Deferred income taxes . . . . . . . . . . . . . . . . . . . 9,998 6,848
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . 134 1,398
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 263,338 242,375
Property, plant and equipment, net. . . . . . . . . . . . . 351,546 258,564
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . 84,343 32,064
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 18,979 13,744
-------- --------
$718,206 $546,747
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . $ 5,575 $ 10,000
Accounts payable . . . . . . . . . . . . . . . . . . . . 93,104 91,730
Accrued expense . . . . . . . . . . . . . . . . . . . . . 50,580 42,087
Current maturities of long-term debt. . . . . . . . . . . - 20,968
Income taxes payable . . . . . . . . . . . . . . . . . . . . 3,807 423
------- --------
Total current liabilities. . . . . . . . . . . . . . . . . 153,066 165,208
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 253,513 111,894
Deferred pension credits . . . . . . . . . . . . . . . . . . 17,293 16,656
Deferred postretirement welfare benefits . . . . . . . . . . 55,628 53,185
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 24,033 29,278
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 20,000 -
------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . 523,533 376,221
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized;
issued & outstanding - none in 1996 and 1995 . . . . . . . - -
Common stock, $.50 par value, 25,000,000 shares authorized;
13,590,400 Shares in 1996 and 13,485,312 shares in 1995
issued and outstanding. . . . . . . . . . . . . . . . . . . 6,795 6,743
Additional paid-in capital. . . . . . . . . . . . . . . . . 94,251 92,406
Retained earnings . . . . . . . . . . . . . . . . . . . . . 96,623 74,426
Unearned compensation . . . . . . . . . . . . . . . . . . . (185) (317)
Adjustment for minimum pension liability. . . . . . . . . . (2,811) (2,732)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . 194,673 170,526
-------- --------
$718,206 $546,747
======== ========
================================================================================================
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 31
Quanex Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
==============================================================================================================
Years ended October 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . $ 895,710 $ 891,195 $ 699,314
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . 772,371 778,067 613,553
Selling, general and administrative. . . . . . . . 56,798 46,647 44,898
--------- --------- ---------
Operating income. . . . . . . . . . . . . . . . . . 66,541 66,481 40,863
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . (11,929) (10,742) (13,944)
Capitalized interest . . . . . . . . . . . . . . . 569 1,872 3,766
Other, net . . . . . . . . . . . . . . . . . . . . 1,526 769 1,818
--------- --------- ---------
Income before income taxes and
extraordinary charge . . . . . . . . . . . . . . . 56,707 58,380 32,503
Income tax expense. . . . . . . . . . . . . . . . . (23,817) (24,520) (13,651)
--------- --------- ---------
Income before extraordinary charge. . . . . . . . . 32,890 33,860 18,852
Extraordinary charge - early extinguishment
of debt. . . . . . . . . . . . . . . . . . . . . . (2,522) (2,021) -
--------- --------- ---------
Net income. . . . . . . . . . . . . . . . . . . . . 30,368 31,839 18,852
Preferred dividends . . . . . . . . . . . . . . . . - (3,957) (5,934)
--------- --------- ---------
Net income attributable to
common stockholders. . . . . . . . . . . . . . . . $ 30,368 $ 27,882 $ 12,918
========= ========= =========
Earnings per common share:
Primary before extraordinary charge. . . . . . . . $ 2.41 $ 2.20 $ .96
Extraordinary charge . . . . . . . . . . . . . . . (0.19) (0.15) -
--------- --------- ---------
Total primary earnings . . . . . . . . . . . . . . $ 2.22 $ 2.05 $ .96
========= ========= =========
Fully diluted before extraordinary charge. . . . . $ 2.20 $ 2.20 $ .96
Extraordinary charge . . . . . . . . . . . . . . . (0.15) (0.15) -
--------- --------- ---------
Total assuming full dilution . . . . . . . . . . . $ 2.05 $ 2.05 $ .96
========= ========= =========
Weighted average number of shares outstanding
Primary. . . . . . . . . . . . . . . . . . . . . . 13,658 13,580 13,496
Assuming full dilution . . . . . . . . . . . . . . 16,585 13,580 13,496
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 32
Quanex Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended October 31, 1996, 1995, and 1994
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Adjustment for
Minimum Pension
Preferred Stock Common Stock Additional Liability/ Total
---------------------------------------- Paid-in Retained Unearned Stockholders'
Shares Amount Shares Amount Capital Earnings Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Other . . . . . . . . . . . . - - 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
Net income . . . . . . . . . - - - - - 31,839 - 31,839
Common dividends
($.59 per share). . . . . . - - - - - (7,932) - (7,932)
Preferred dividends . . . . . - - - - - (4,451) - (4,451)
Conversion of preferred
stock to subordinated
debentures . . . . . . . . 339,681) (84,920) - - 3,350 - - (81,570)
Conversion of preferred
stock to common stock . . . (5,319) (1,330) 42,211 21 1,309 - - -
Adjustment for minimum
pension liability . . . . - - - - - - (1,009) (1,009)
Unearned compensation . . . . - - - - - - 53 53
Other . . . . . . . . . . . . - - 65,377 34 1,424 (111) - 1,347
------- ------- ---------- ------ ------- ------- ------- --------
Balance at October 31, 1995. . . - - 13,485,312 6,743 92,406 74,426 (3,049) 170,526
Net income. . . . . . . . . . - - - - - 30,368 - 30,368
Common dividends
($.60 per share) . . . . . - - - - - (8,115) - (8,115)
Adjustment for minimum
pension liability . . . . . - - - - - - (79) (79)
Unearned compensation . . . . - - - - - - 132 132
Other . . . . . . . . . . . . - - 105,088 52 1,845 (56) - 1,841
------- ------- ---------- ------ ------- ------- ------- --------
Balance at October 31, 1996. . . - $ - 13,590,400 $6,795 $94,251 $96,623 $(2,996) $194,673
======= ======= ========== ====== ======= ======= ======= ========
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
31
<PAGE> 33
Quanex Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
=====================================================================================================================
Years Ended October 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . $ 30,368 $ 31,839 $ 18,852
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 38,416 32,433 28,535
Facilities realignment charge . . . . . . . . . . . - - (4,264)
Deferred income taxes . . . . . . . . . . . . . . . 2,602 6,910 4,786
Deferred pension costs. . . . . . . . . . . . . . . (719) (1,073) 151
Deferred postretirement welfare benefits. . . . . . 2,443 2,443 3,183
--------- --------- ---------
73,110 72,552 51,243
Changes in assets and liabilities net of
effects from acquisitions and dispositions:
Decrease (increase) in accounts and notes
receivable . . . . . . . . . . . . . . . . . . . . 11,921 (21,158) (17,206)
Increase in inventory . . . . . . . . . . . . . . . (16,773) (2,876) (4,901)
Increase (decrease) in accounts payable . . . . . . (6,789) 16,215 13,166
Increase in accrued expenses. . . . . . . . . . . . 1,470 4,969 4,614
Other, net. . . . . . . . . . . . . . . . . . . . . 1,175 (2,580) (900)
--------- --------- ---------
Cash provided by operating activities. . . . . . 64,114 67,122 46,016
INVESTMENT ACTIVITIES:
Acquisition of Piper Impact, Inc., net of cash
and equivalents acquired . . . . . . . . . . . . . . (123,264) - -
Capital expenditures, net of retirements. . . . . . . . (44,260) (26,601) (42,457)
Decrease (increase) in short-term investments . . . . . - 54,070 (6,415)
Proceeds from the sale of Viking Metallurgical
Subsidiary . . . . . . . . . . . . . . . . . . . . - - 6,390
Other, net. . . . . . . . . . . . . . . . . . . . . . . (5,120) (1,878) 1,195
--------- --------- ---------
Cash provided (used) by investment activities. . . (172,644) 25,591 (41,287)
--------- --------- ---------
Cash provided (used) by operating and
investment activities . . . . . . . . . . . . . (108,530) 92,713 4,729
FINANCING ACTIVITIES:
Bank borrowings . . . . . . . . . . . . . . . . . . . 160,000 - -
Notes payable borrowings (repayments) . . . . . . . . (10,000) 10,000 -
Purchase of Senior Notes. . . . . . . . . . . . . . . (44,667) (59,500) -
Repayments of long-term debt. . . . . . . . . . . . . - (20,958) (295)
Common dividends paid . . . . . . . . . . . . . . . . (8,115) (7,932) (7,472)
Preferred dividends paid. . . . . . . . . . . . . . . - (4,451) (5,934)
Other, net. . . . . . . . . . . . . . . . . . . . . . 2,084 1,300 766
--------- --------- ---------
Cash provided (used) by financing activities. . 99,302 (81,541) (12,935)
--------- --------- ---------
Increase (decrease) in cash and equivalents . . . . . . (9,228) 11,172 (8,206)
Cash and equivalents at beginning of period . . . . . . 45,213 34,041 42,247
--------- --------- ---------
Cash and equivalents at end of period . . . . . . . . . $ 35,985 $ 45,213 $ 34,041
========= ======== ========
</TABLE>
================================================================================
See notes to consolidated financial statements.
32
<PAGE> 34
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 in the United States. For the
years ended October 31, 1996, 1995 and 1994, 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. For fiscal years 1996, 1995 and 1994 cash paid for
income taxes was $19,551,000, $17,572,000, and $10,144,000, respectively. These
amounts are before refunds of $204,000, $47,000, and $294,000, respectively.
Cash paid for interest for fiscal 1996, 1995 and 1994 was $12,084,000,
$10,324,000, and $13,990,000, respectively. Cash payments related to the
facilities realignment charge recorded in fiscal 1992 were $625,000 for fiscal
1994. Non-cash investing and financing activities in fiscal 1995 included the
exchange of $84,920,000 of the Company's Cumulative Convertible Exchangeable
Preferred Stock for the Company's 6.88% Convertible Subordinated Debentures due
June 30, 2007, and the conversion of $1,330,000 of the Company's Cumulative
Convertible Exchangeable Preferred Stock to the Company's common stock. (See
Note 2 regarding the acquisition of Piper Impact, Inc.)
INVENTORIES
Inventories are valued at the lower of cost or market. The accounting methods
used in valuing the Company's inventories are described in Note 4.
LONG-LIVED ASSETS
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 for the goodwill resulting from the acquisition of Nichols Homeshield in
1989, and over twenty-five years for the goodwill resulting from the
acquisition of Piper Impact, Inc. in 1996 (See Note 2). At October 31, 1996
and 1995, accumulated amortization was $7,297,000 and $5,807,000, respectively.
The Company evaluates any possible impairment of goodwill using estimates of
undiscounted future cash flows.
33
<PAGE> 35
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LONG-LIVED ASSETS - CONTINUED
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 20
</TABLE>
During 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of". The
statement establishes accounting standards related to the impairment of
long-lived assets, such as property, plant, equipment and intangibles. The
Company will adopt Statement No. 121 in fiscal 1997 and does not expect a
significant impact on its financial position or results of operations.
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. The Company enters
into interest rate agreements which effectively exchange variable interest rate
debt for fixed interest rate debt. The agreements are used to reduce the
exposure to increasing interest rates. The Company enters into these agreements
with major financial institutions. The Company does not use derivative
financial instruments for trading or speculative purposes. (See Note 14)
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.
Fully diluted earnings per-share amounts assume conversion of the Company's
6.88% Convertible Subordinated Debentures, the elimination of the related
interest and amortization of issuance costs, net of tax, and the issuance of
common stock for all other potentially dilutive common stock equivalents
outstanding.
34
<PAGE> 36
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
USE OF ESTIMATES
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to 1996 presentation.
2. ACQUISITION OF PIPER IMPACT, INC.
On August 9, 1996, the Company acquired the assets, net of various liabilities,
of Piper Impact, Inc. ("Piper Impact"). Piper Impact is a manufacturer of
custom-designed, impact-extruded aluminum and steel parts for the
transportation, electronics and defense markets, with production facilities in
New Albany, Mississippi and Park City, Utah.
Piper Impact's net assets were acquired for approximately $130 million in cash,
cash equivalents, and notes. The acquisition was accounted for using the
purchase method of accounting. The purchase price was allocated to the assets
and liabilities of Piper Impact based on their estimated fair values. The
goodwill associated with the Piper Impact acquisition approximated $54 million,
which is being amortized on a straight-line basis over twenty-five years. To
finance the acquisition, the Company entered into an unsecured revolving
credit/term loan facility which provides for the borrowing of up to $250
million. (See Note 7)
Liabilities assumed included an estimated $20 million related to costs for
further investigation and specified environmental remediation. These cost
estimates include charges for additional studies, remediation, renovations to
affected facilities and equipment, and other compliance expenditures. The
estimated range of costs is $15 million to $25 million of which the accrual
represents management's best estimate of total costs expected to be incurred.
Actual expenditures could differ from current estimates as additional studies
are completed, requiring revisions to the remediation and restoration plan.
The unaudited pro-forma consolidated results of operations of the Company are
shown below as if the acquisition had occurred at the beginning of the fiscal
periods indicated. These results are not necessarily indicative of the results
which would actually have occurred if the purchase had taken place at the
beginning of the periods, nor are they necessarily indicative of future
results.
35
<PAGE> 37
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. ACQUISITION OF PIPER IMPACT, INC.- CONTINUED
<TABLE>
<CAPTION>
October 31,
--------------------------
PRO FORMA 1996 1995
--------------------------
(In thousands, except per share amounts) (Unaudited)
- ----------------------------------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 984,133 $ 997,567
Income before extraordinary charge. . . . . . . . . . . . . . . . 37,663 39,281
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . - 3,957
Net income attributable to common shareholders
before extraordinary charge. . . . . . . . . . . . . . . . . . . 37,663 35,324
Earnings per share before extraordinary charge:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.76 $2.60
Fully diluted. . . . . . . . . . . . . . . . . . . . . . . . . . $2.49 $2.48
</TABLE>
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,
------------------------------------------
1996 1995 1994
------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . . . . . . . . . . . . . $ 18,374 $ 16,302 $ 9,738
State. . . . . . . . . . . . . . . . . . . . . . . . 4,204 1,940 1,359
-------- -------- --------
22,578 18,242 11,097
Deferred . . . . . . . . . . . . . . . . . . . . . . . 1,239 6,278 2,554
-------- -------- --------
23,817 24,520 13,651
Reduction of taxes from extinguishment of debt . . . . (1,826) (1,463) -
-------- -------- --------
$ 21,991 $ 23,057 $ 13,651
======== ======== ========
</TABLE>
36
<PAGE> 38
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. INCOME TAXES - CONTINUED
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.
Significant components of the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
October 31,
-----------------------------
1996 1995
-----------------------------
(In thousands)
<S> <C> <C>
Deferred tax liability:
Property, plant and equipment. . . . . . . . . . . . . . . . . . $ 38,807 $ 39,604
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 820 3,887
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,791 15,446
-------- --------
52,418 58,937
-------- --------
Deferred tax assets:
Postretirement benefit obligation. . . . . . . . . . . . . . . . 21,937 20,834
Other employee benefit obligations . . . . . . . . . . . . . . . 9,594 9,982
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . 6,852 5,691
-------- --------
38,383 36,507
-------- --------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 14,035 $ 22,430
======== ========
Deferred income tax liability - non-current. . . . . . . . . . . $ 24,033 $ 29,278
Deferred tax assets - current. . . . . . . . . . . . . . . . . . (9,998) (6,848)
-------- --------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 14,035 $ 22,430
======== ========
</TABLE>
Income tax expense 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,
----------------------------------------------
1996 1995 1994
----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory tax rate. . . . . . . $ 19,847 $ 20,433 $ 11,376
Increase in taxes resulting from:
State income taxes, net of federal effect . . . . . . 3,055 3,190 1,720
Goodwill. . . . . . . . . . . . . . . . . . . . . . . 334 334 331
Other items, net. . . . . . . . . . . . . . . . . . . 581 563 224
-------- -------- --------
$ 23,817 $ 24,520 $ 13,651
======== ======== ========
</TABLE>
37
<PAGE> 39
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
----------------------------------
1996 1995
----------------------------------
(In thousands)
<S> <C> <C>
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,904 $ 27,655
Finished goods and work in process . . . . . . . . . . . . . . . . 66,376 48,071
--------- ---------
104,280 75,726
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,007 8,950
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,287 $ 84,676
========= =========
The values of inventories in the consolidated balance sheets
are based on the following accounting methods:
LIFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,320 $ 75,726
FIFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,967 8,950
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,287 $ 84,676
======== ========
</TABLE>
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $15,000,000 and $24,000,000 at October
31, 1996 and 1995, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
October 31,
----------------------------
1996 1995
----------------------------
(In thousands)
<S> <C> <C>
Land and land improvements. . . . . . . . . . . . . . . . . . . . . $ 20,159 $ 17,556
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,892 76,364
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . 501,420 424,266
Construction in progress. . . . . . . . . . . . . . . . . . . . . . 41,165 7,139
-------- --------
652,636 525,325
Less accumulated depreciation and amortization. . . . . . . . . . . 301,090 266,761
-------- --------
$351,546 $258,564
======== ========
</TABLE>
The Company had commitments for the purchase or construction of capital assets
amounting to approximately $34 million at October 31, 1996.
38
<PAGE> 40
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
October 31,
-----------------------------------
1996 1995
-----------------------------------
(In thousands)
<S> <C> <C>
Accrued contribution to pension funds . . . . . . . . . . . . . . . $ 2,804 $ 2,703
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,925 3,080
Payroll, payroll taxes and employee benefits. . . . . . . . . . . . 28,467 23,479
State and local taxes . . . . . . . . . . . . . . . . . . . . . . . 2,549 3,346
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,835 9,479
------- -------
$50,580 $42,087
======= =======
</TABLE>
7. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31,
-----------------------------------
1996 1995
-----------------------------------
(In thousands)
<S> <C> <C>
Revolving credit and term loan facility . . . . . . . . . . . . . $ 160,000 $ -
Senior notes. . . . . . . . . . . . . . . . . . . . . . . . . . . - 44,667
Convertible subordinated debentures . . . . . . . . . . . . . . . 84,920 84,920
Industrial Revenue and Economic Development Bonds, unsecured,
payable in annual installments through the year 2005,
bearing interest ranging from 6.50% to 8.375% . . . . . . . . . 3,275 3,275
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,318 -
--------- --------
$ 253,513 $132,862
Less maturities due within one year included in current
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . - 20,968
--------- --------
$ 253,513 $111,894
========= ========
</TABLE>
39
<PAGE> 41
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. LONG-TERM DEBT AND FINANCING ARRANGEMENTS - CONTINUED
On July 23, 1996, the Company replaced its $75 million Revolving Credit and
Letter of Credit Agreement with an unsecured $250 million Revolving Credit and
Term Loan Agreement ("Bank Agreement"). The Bank Agreement consists of a
revolving line of credit ("Revolver") and up to two term loans not to exceed
$100 million in the aggregate and repayable at a time selected by the Company
to be no later than July 23, 2004. Any term loan elections reduce the amount
available under the Revolver. The Bank Agreement expires July 23, 2001, and
provides for up to $25 million for standby letters of credit, limited to the
undrawn amount available under the Revolver. All borrowings under the Revolver
bear interest, at the option of the Company, at either (a) the prime rate or
the federal funds rate plus one percent, whichever is higher, or (b) a
Eurodollar based rate. At October 31, 1996, the Company had $160 million
outstanding under the Revolver and no term loans outstanding. The weighted
average interest rates on borrowings under the Revolver and the old Revolving
Credit Agreement were 6.3% and 7.1% in 1996 and 1995, respectively. As of
October 31, 1996, the Company was in compliance with all Bank Agreement
covenants. Under the Company's most restrictive loan covenants, retained
earnings of $35,571,000 at October 31, 1996 were available for dividends.
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures
due June 30, 2007 ("Debentures"). Interest is payable semi-annually on June 30
and December 31 of each year. The Debentures are subject to mandatory annual
sinking fund payments sufficient to redeem 25% of the Debentures issued on each
of June 30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures
before maturity. The Debentures are subordinate to all senior indebtedness of
the Company and are convertible, at the option of the holder, into shares of
the Company's common stock at a conversion price of $31.50 per share.
At October 31, 1994, the Company had $125 million outstanding in Senior Notes.
The Senior Notes paid interest at 10.77% per annum. In December 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. The
Company recorded an extraordinary charge of $2.0 million ($3.5 million before
tax) in the first quarter of 1995 related to the call premium and write-off of
deferred debt issuance costs for the Senior Notes that were repurchased. In
August 1995, the Company made a required annual repayment of $20.8 million
principal amount. In December 1995, the Company acquired the remaining $44.7
million principal amount of the Senior Notes for a purchase price equal to
107.5% of the principal amount plus accrued interest. The second acquisition
and related expenses resulted in an after-tax extraordinary charge of
approximately $2.5 million ($4.3 million before tax) in the first quarter of
1996.
Aggregate maturities of long-term debt at October 31, 1996, are as follows (in
thousands):
<TABLE>
<S> <C>
1997................ $ -
1998................ -
1999................ -
2000................ -
2001................ 160,000
Thereafter.......... 93,513
--------
$253,513
========
</TABLE>
40
<PAGE> 42
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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, 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Assets available for benefits. . . . . . . . $ 28,551 $ 26,013 $ 17,539 $ 12,823
-------- -------- -------- --------
Projected benefit obligation
Vested . . . . . . . . . . . . . . . . . . (25,930) (21,630) (23,830) (18,939)
Nonvested. . . . . . . . . . . . . . . . . (447) (371) (4,691) (5,185)
-------- -------- -------- --------
Accumulated benefit obligation . . . . . (26,377) (22,001) (28,521) (24,124)
Effect of future salary increases. . . . . (11,095) (11,024) (334) (299)
-------- -------- -------- --------
Total projected benefit obligation . . . . . (37,472) (33,025) (28,855) (24,423)
-------- -------- -------- --------
Assets less than projected
benefit obligation.. . . . . . . . . . . . $ (8,921) $ (7,012) $(11,316) $(11,600)
======== ======== ========= =========
Consisting of:
Amounts to be offset against future
pension costs:
Assets in excess of obligation at
adoption. . . . . . . . . . . . . . . . $ 876 $ 979 $ 177 $ 233
Obligation (increase) decrease due to
plan amendments . . . . . . . . . . . . 294 350 (5,837) (4,621)
Actuarial gains (losses). . . . . . . . . (977) (235) (5,117) (5,046)
Minimum liability adjustment. . . . . . . - 10,444 9,087
Amounts recognized in consolidated balance
sheets:
Deferred pension credit . . . . . . . . . (7,657) (7,489) (9,636) (9,167)
Accrued contribution to pension funds . . (1,457) (617) (1,347) (2,086)
-------- -------- --------- --------
$ (8,921) $ (7,012) $(11,316) $(11,600)
======== ========= ======== ========
</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, 1996 and 1995, 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 $10,444,000
and $9,087,000; intangible assets of $5,837,000 and $4,607,000; and
stockholders' equity reductions, net of income taxes, of $2,811,000 and
$2,732,000, as of October 31, 1996 and 1995, respectively.
41
<PAGE> 43
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. PENSION PLANS AND RETIREMENT BENEFITS - CONTINUED
The projected unit credit method was used to determine the actuarial present
value of the accumulated benefit obligation and the projected benefit
obligation. For 1996, 1995 and 1994 the discount rates were 7.5%, 7.5%, and 8%,
respectively. The expected long term rate of return on assets was 10% for the
three year period ending October 31, 1996. The assumed rate of increase in
future compensation levels was 4.5% in 1996 and 1995, and 5% in 1994. 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,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Benefits earned during the year. . . . . . . . . . . . $ 3,345 $ 3,067 $ 3,040
Interest cost on projected benefit obligation. . . . . 4,578 4,075 3,388
Actual return on plan assets . . . . . . . . . . . . . (5,040) (4,566) (275)
Net amortization and deferral. . . . . . . . . . . . . 1,603 1,490 (2,727)
------- ------ -------
$ 4,486 $ 4,066 $ 3,426
======= ======= =======
</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 $2,940,000, $2,767,000, and $2,478,000 during fiscal 1996, 1995,
and 1994, 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 $2,959,000, $4,107,000, and $2,982,000 at October 31, 1996, 1995
and 1994, 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 healthcare 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
1996, the Company made benefit payments totaling $2,474,000, compared to
$2,547,000 and $1,892,000 in fiscal 1995 and 1994, respectively.
42
<PAGE> 44
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - CONTINUED
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,
----------------------------------
1996 1995
----------------------------------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (33,541) $ (35,021)
Fully eligible active plan participants . . . . . . . . . . . (7,989) (7,764)
Other active plan participants. . . . . . . . . . . . . . . . (16,510) (15,874)
--------- ---------
(58,040) (58,659)
Plan assets at fair value . . . . . . . . . . . . . . . . . . - -
--------- ---------
Accumulated postretirement benefit obligation
in excess of plan assets. . . . . . . . . . . . . . . . . . (58,040) (58,659)
Unrecognized prior service cost . . . . . . . . . . . . . . . (2,406) (2,941)
Unrecognized net loss from past experience different from
that assumed and from changes in assumption . . . . . . . . 4,818 8,415
--------- ---------
Accrued postretirement benefit cost . . . . . . . . . . . . . $ (55,628) $ (53,185)
========= =========
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31,
--------------------------------------------------
1996 1995 1994
--------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost - benefits attributed to service
during the period. . . . . . . . . . . . . . . . . $ 827 $ 780 $ 945
Interest cost on accumulated postretirement
benefit obligation . . . . . . . . . . . . . . . . 4,136 4,166 3,839
Net amortization and deferral. . . . . . . . . . . (46) 44 291
------- ------- -------
Net periodic postretirement benefit cost . . . . . $ 4,917 $ 4,990 $ 5,075
======= ======= =======
</TABLE>
The assumed healthcare cost trend rate was 9.4% in 1996, decreasing uniformly
to 5.0% in the year 2003 and remaining level thereafter. The assumed discount
rate used to measure the accumulated postretirement benefit obligation was 7.5%
at October 31, 1996 and 1995.
If the healthcare cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of October 31, 1996 would be
increased by 11.3%. The effect of this change on the sum of the service cost
and interest cost would be an increase of 12.1%.
43
<PAGE> 45
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. INDUSTRY SEGMENT INFORMATION
Quanex is principally a specialized 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>
Corporate
Year ended Hot Rolled Cold Finished Steel Aluminum and
October 31, 1996 Steel Bars Steel Bars Tubes Products(1) Other(2) Consolidated
- --------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated
companies............. 499.8 Tons 176.5 Tons 94.2 Tons 254,559 Lbs.
Intersegment........... 27.0 - - -
---------- ---------- --------- ------------
Total...................... 526.8 Tons 176.5 Tons 94.2 Tons 254,559 Lbs.
========== ========== ========= ============
Net sales:
To unaffiliated
companies ............ $ 272,012 $ 158,549 $ 120,282 $ 344,867 895,710
Intersegment(3) ....... 15,278 -- -- -- (15,278) --
--------- --------- --------- --------- --------- ---------
Total ..................... $ 287,290 $ 158,549 $ 120,282 $ 344,867 (15,278) $ 895,710
========= ========= ========= ========= ========= =========
Operating income
(loss) ............... $ 38,181 $ 10,359 $ 7,640 $ 25,088 $ (14,727) $ 66,541
Depreciation and
amortization:
Operating ......... $ 17,815 $ 1,453 $ 2,285 $ 14,694 $ 108 $ 36,355
Other ............. -- -- -- 1,490 571 2,061
--------- --------- --------- --------- --------- ---------
$ 17,815 $ 1,453 $ 2,285 $ 16,184 $ 679 $ 38,416
Capital expenditures $ 19,319 $ 6,581 $ 4,779 $ 15,031 $ 133 $ 45,843
Identifiable assets $ 167,029 $ 54,740 $ 47,755 $ 412,048 $ 36,634 $ 718,206
</TABLE>
(1) Includes three months of Piper Impact's operations.
(2) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(3) Intersegment sales are conducted on an arm's-length basis.
44
<PAGE> 46
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. INDUSTRY SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Corporate
Year ended Hot Rolled Cold Finished Steel Aluminum and
October 31, 1995 Steel Bars Steel Bars Tubes Products Other(1) Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated
companies............. 480.7 Tons 182.9 Tons 94.2 Tons 230,039 Lbs.
Intersegment........... 22.3 - - -
---------- ---------- --------- ------------
Total...................... 503.0 Tons 182.9 Tons 94.2 Tons 230,039 Lbs.
========== ========== ========= ============
Net sales:
To unaffiliated
companies ............ $269,040 $170,675 $119,915 $331,565 -- $891,195
Intersegment(2) 13,060 -- -- -- $(13,060) --
-------- -------- -------- -------- -------- --------
Total ..................... $282,100 $170,675 $119,915 $331,565 $(13,060) $891,195
======== ======== ======== ======== ======== ========
Operating income
(loss) ............... $ 41,552 $ 11,461 $ 8,724 $ 22,080 $(17,336) $ 66,481
Depreciation and
amortization:
Operating ......... $ 15,284 $ 1,310 $ 1,966 $ 12,183 $ 113 $ 30,856
Other ............. -- -- -- 952 277 1,229
-------- -------- -------- -------- -------- --------
$ 15,284 $ 1,310 $ 1,966 $ 13,135 $ 390 $ 32,085
Capital expenditures $ 12,215 $ 2,108 $ 3,478 $ 8,704 $ 149 $ 26,654
Identifiable assets $172,544 $ 54,985 $ 43,777 $230,586 $ 44,855 $546,747
</TABLE>
(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
45
<PAGE> 47
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. INDUSTRY SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Corporate
Year ended Hot Rolled Cold Finished Steel Aluminum and
October 31, 1994(3) Steel Bars Steel 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 $(15,062) $ 40,863
Depreciation and
amortization:
Operating ......... $ 12,862 $ 1,268 $ 1,992 $ 11,130 $ 97 $ 27,349
Other ............. -- -- -- 947 239 1,186
-------- -------- -------- -------- -------- --------
$ 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.
(3) During 1994, $4.3 million was charged against a general facilities
realignment reserve recorded in 1992 and included in "Corporate and Other".
Of the $4.3 million total charge, $2.5 million related to the Aluminum
Products segment, $900 thousand related to the Steel Tubes segment and $900
thousand related to write-downs of assets classified in "Corporate and
Other".
46
<PAGE> 48
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 were $17.20 and $250, respectively, and for each Depositary
Share were $1.72 and $25, respectively. Dividends on the Preferred Stock and
Depositary Shares were cumulative and payable quarterly, commencing September
30, 1992. The Company was prohibited from paying any dividends on Common Stock
(other than in Common Stock or junior stock) unless all required preferred
dividends had been paid.
The Preferred Stock was 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. The Preferred Stock was 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.
47
<PAGE> 49
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. PREFERRED STOCK - DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES
- CONTINUED
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Debentures. Interest is payable
semi-annually on June 30 and December 31 of each year. The Debentures are
subject to mandatory annual sinking fund payments sufficient to redeem 25% of
the Debentures issued on each of June 30, 2005 and June 30, 2006, to retire a
total of 50% of the Debentures before maturity. The Debentures are subordinate
to all senior indebtedness of the Company and are convertible, at the option of
the holder, into shares of the Company's common stock at a conversion price of
$31.50 per share.
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
none in 1996, none in 1995, and 22,400 in 1994. The amount charged to
compensation expense was $132,000 in 1996, $53,000 in 1995, and $92,000 in
1994.
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 624,035, 140,151,
and 435,151 shares available for granting of options at October 31, 1996, 1995,
and 1994, respectively. Stock option transactions for the three years ended
October 31, 1996, were as follows:
<TABLE>
<CAPTION>
Shares
Shares Under Average Price
Exercisable Option Per Share
------------------- --------------------- -----------------
<S> <C> <C> <C>
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
=======
Granted . . . . . . . . . . . . 295,000 20
Exercised . . . . . . . . . . . (28,768) 15
Cancelled . . . . . . . . . . . - -
---------
Balance at October 31, 1995 567,243 1,061,033 $20
=======
Granted . . . . . . . . . . . . 269,650 28
Exercised . . . . . . . . . . . (69,503) 12
Cancelled . . . . . . . . . . . ( 3,534) 22
---------
Balance at October 31, 1996 726,609 1,257,646 $22
======= =========
</TABLE>
48
<PAGE> 50
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. RESTRICTED STOCK AND STOCK OPTION PLANS - CONTINUED
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 20,000, 40,000, and
40,000 shares available for granting of options at October 31, 1996, 1995 and
1994, respectively. Stock option transactions for the three years ended October
31, 1996, were as follows:
<TABLE>
<CAPTION>
Shares
Shares Under Average Price
Exercisable Option Per Share
------------------- --------------------- -----------------
<S> <C> <C> <C>
Balance at October 31, 1993 10,000 20,000 $17
======
Granted . . . . . . . . . . . . - -
Exercised . . . . . . . . . . . - -
Cancelled . . . . . . . . . . . - -
------
Balance at October 31, 1994 13,333 20,000 $17
======
Granted . . . . . . . . . . . . - -
Exercised . . . . . . . . . . . - -
Cancelled . . . . . . . . . . . - -
------
Balance at October 31, 1995 16,666 20,000 $17
======
Granted . . . . . . . . . . . . 20,000 20
Exercised . . . . . . . . . . . - -
Cancelled . . . . . . . . . . . - -
------
Balance at October 31, 1996 20,000 40,000 $18
====== ======
</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. 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
51,000, 72,000, and 93,000 shares available for granting of options at October
31, 1996, 1995 and 1994, respectively. Stock option transactions for the three
years ended October 31, 1996, were as follows:
49
<PAGE> 51
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. RESTRICTED STOCK AND STOCK OPTION PLANS - CONTINUED
<TABLE>
<CAPTION>
Shares
Shares Under Average Price
Exercisable Option Per Share
------------------- --------------------- -----------------
<S> <C> <C> <C>
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
=======
Granted . . . . . . . . . . . . 21,000 20
Exercised . . . . . . . . . . . - -
Cancelled . . . . . . . . . . . - -
-------
Balance at October 31, 1995 87,000 108,000 $20
=======
Granted . . . . . . . . . . . . 21,000 29
Exercised . . . . . . . . . . . (6,000) 19
Cancelled . . . . . . . . . . . - -
-------
Balance at October 31, 1996 102,000 123,000 $22
======= =======
</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
shares exercisable at October 31, 1996, 1995, and 1994. There were no
transactions related to these stock options during the years ended October 31,
1996, 1995, and 1994.
14. FINANCIAL INSTRUMENTS
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, 1996.
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 consolidated statements of
income.
50
<PAGE> 52
Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. FINANCIAL INSTRUMENTS - CONTINUED
In the fourth quarter of fiscal 1996, the Company entered into interest rate
swap agreements, which effectively converted $100 million of its variable rate
debt under the Bank Agreement, to fixed rate. Under these agreements, payments
are made based on a fixed rate ($50 million at 7.025%, and $50 million at
6.755%) and received on a LIBOR based variable rate (5.53125% at October 31,
1996). Differentials to be paid or received under the agreements are recognized
as interest expense. The agreements mature in 2003.
The fair values of the Company's financial assets approximate the carrying
values reported on the consolidated balance sheet. The fair value of long-term
debt was $256.9 million and $129.8 million, as of October 31, 1996 and 1995,
respectively, as compared to carrying values at October 31, 1996 and 1995 of
$253.5 million and $132.9 million, respectively.
The unrealized losses related to the interest rate swaps are $3.1 million (none
in 1995) on the total notional amount of $100 million (none in 1995).
The fair value of long-term debt was based on the quoted market price, recent
transactions, or based on rates available to the Company for instruments with
similar terms and maturities. The fair value of interest rate swaps were
estimated by discounting expected cash flows using quoted market interest
rates.
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. In connection with the acquisition of Piper Impact, Inc.,
liabilities assumed included an estimated $20 million related to costs for
further investigation and specified environmental remediation. (See Note 2)
51
<PAGE> 53
Quanex Corporation
SUPPLEMENTARY FINANCIAL DATA
================================================================================
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly information for the years ended October 31, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1996:
Net sales ............................ $ 188,772 $ 218,341 $ 225,463 $ 263,134
Gross profit ......................... 21,696 27,317 32,354 41,972
Income before extraordinary charge ... 4,047 8,132 9,145 11,566
Extraordinary charge -early
extinguishment of debt ............. (2,522) -- -- --
Net income ........................... 1,525 8,132 9,145 11,566
Earnings per share:
Primary before extraordinary
charge ............................ .30 .60 .67 .84
Extraordinary charge - early
extinguishment of debt ............ (.19) -- -- --
Primary ............................ .11 .60 .67 .84
Assuming full dilution ............. .11 .55 .61 .75
1995:
Net sales ............................ $ 199,886 $ 234,347 $ 228,172 $ 228,790
Gross profit ......................... 22,697 29,747 30,156 30,528
Income before extraordinary charge ... 4,653 9,822 9,603 9,782
Extraordinary charge - early
extinguishment of debt ............. (2,021) -- -- --
Net income ........................... 2,632 9,822 9,603 9,782
Earnings per share:
Primary before extraordinary
charge ............................ .23 .62 .63 .72
Extraordinary charge -early
extinguishment of debt ............ (.15) -- -- --
Primary ............................ .08 .62 .63 .72
Assuming full dilution ............. .08 .60 .59 .65
</TABLE>
52
<PAGE> 54
Quanex Corporation
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
================================================================================
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning costs and at end
Description of year expenses Write-offs Other of year
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended October 31, 1996...................... $ 3,581 $10,462 $(5,692) $ - $ 8,351
Year ended October 31, 1995...................... $ 3,593 $ 574 $ (586) $ - $ 3,581
Year ended October 31, 1994...................... $ 2,025 $ 1,805 $ (237) $ - $ 3,593
</TABLE>
53
<PAGE> 55
QUARTERLY FINANCIAL RESULTS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<C> <C> <C> <C> <C>
NET SALES (millions)
- --------------------------------------------------------------------------------
January ........................ 188.77 199.89 149.52 141.43 124.88
April .......................... 218.34 234.35 172.23 161.37 148.41
July ........................... 225.46 228.17 181.09 153.50 141.90
October ........................ 263.14 228.79 196.47 159.85 156.90
- --------------------------------------------------------------------------------
Total ..................... 895.71 891.20 699.31 616.15 572.09
GROSS PROFIT (millions)
January ........................ 21.70 22.70 14.33 11.64 12.04
April .......................... 27.32 29.75 20.38 16.37 18.38
July ........................... 32.35 30.15 23.54 16.92 15.20
October ........................ 41.97 30.53 27.51 20.25 19.69
- --------------------------------------------------------------------------------
Total ..................... 123.34 113.13 85.76 65.18 65.31
NET INCOME (LOSS) (millions)
January ........................ 1.53 2.63 1.77 .49 (24.55)
April .......................... 8.13 9.82 3.78 1.90 3.15
July ........................... 9.14 9.61 5.77 2.68 2.23
October ........................ 11.57 9.78 7.53 3.36 .26
- --------------------------------------------------------------------------------
Total ..................... 30.37 31.84 18.85 8.43 (18.91)
NET EARNINGS (LOSS)
PER PRIMARY COMMON SHARE
January ........................ .11 .08 .02 (.07) (2.05)
April .......................... .60 .62 .17 .03 .25
July ........................... .67 .63 .32 .09 .08
October ........................ .84 .72 .45 .13 (.09)
- --------------------------------------------------------------------------------
Total ..................... 2.22 2.05 .96 .18 (1.70)
QUARTERLY COMMON STOCK DIVIDENDS
January ........................ .15 .14 .14 .14 .13
April .......................... .15 .15 .14 .14 .13
July ........................... .15 .15 .14 .14 .13
October ........................ .15 .15 .14 .14 .13
- --------------------------------------------------------------------------------
Total ..................... .60 .59 .56 .56 .52
COMMON STOCK SALES PRICE (High & Low)
January......................... 21 1/8 24 5/8 21 1/4 27 27
18 20 16 1/8 17 5/8 16 1/8
April........................... 22.3/8 23 7/8 22 3/8 20 7/8 29 7/8
19 5/8 21 19 1/8 14 1/4 24 3/4
July............................ 23.7/8 26 5/8 23 17 3/4 31 3/4
19 3/8 22 1/8 18 1/8 14 21 1/2
October......................... 28 3/4 26 27 1/4 20 3/4 24 3/4
19 5/8 18 5/8 20 3/4 16 1/2 15 1/2
</TABLE>
54
<PAGE> 56
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
55
<PAGE> 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, information on
directors and executive officers of the Registrant is incorporated herein by
reference from the Registrant's Definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, information on
executive compensation is incorporated herein by reference from the
Registrant's Definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, information on
security ownership of certain beneficial owners and management is incorporated
herein by reference from the Registrant's Definitive Proxy Statement to be
filed pursuant to Regulation 14A within 120 days after the close of the fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, information on
certain relationships and related transactions is incorporated herein by
reference from the Registrant's Definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the close of the fiscal year.
56
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
PAGE
Independent Auditors' Report.................................. 26
Consolidated Balance Sheets................................... 28
Consolidated Statements of Income............................. 29
Consolidated Statements of Stockholders' Equity............... 30-31
Consolidated Statements of Cash Flow.......................... 32
Notes to Consolidated Financial Statements.................... 33-50
2. Financial Statement Schedule
Schedule II - Valuation and qualifying accounts............... 52
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.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Name of Exhibit
------- ---------------
<S> <C>
2.1 Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation, Piper
Impact, Inc., A Tennessee corporation, B. F. Sammons and
M. W. Robbins, filed as Exhibit 2.1 of the Company's
Report on Form 8-K, dated August 9, 1996, and incorporated
herein by reference.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, filed as Exhibit 3.1 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1995, and incorporated herein by reference.
*3.2 Amended and Restated Bylaws of the Registrant, as amended
through December 12, 1996.
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 Form of Indenture relating to the Registrant's 6.88%
Convertible 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>
57
<PAGE> 59
<TABLE>
<S> <C>
4.5 $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), N.A. as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, 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 and the amendment filed as
Exhibit 10.23 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995.
+10.5 Quanex Corporation 1988 Stock Option Plan, as amended, 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, together with the amendment filed
as Exhibit 10.17 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.
+10.6 Quanex Corporation Deferred Compensation Plan, as amended
and restated filed as Exhibit 10.6 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1995, and incorporated herein by reference..
</TABLE>
58
<PAGE> 60
<TABLE>
<S> <C>
+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, together
with the amendment filed as Exhibit 10.16 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1995, 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, as amended, 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, together with the amendment filed as
Exhibit 10.14 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.
+10.13 Quanex Corporation 1989 Non-Employee Director Stock Option
Plan, as amended, filed as Exhibit 4.4 of the Registrant's
Form S-8, Registration No. 33-35128, together with the
amendment filed as Exhibit 10.15 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
January 31, 1995, and incorporated herein by reference.
+10.14 Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1994, and incorporated herein by
reference.
</TABLE>
59
<PAGE> 61
<TABLE>
<S> <C>
+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.
+10.18 Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31,1994,
and incorporated herein by reference.
*+10.19 1996 Employee Stock Option Plan and Restricted Stock Plan.
*11 Statement re computation of per share earnings.
*21 Subsidiaries of the Registrant.
*23 Consent of Deloitte & Touche LLP.
*27 Financial Data Schedule
</TABLE>
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith
As permitted by Item 601(b)(4)(iii)(A) 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.
60
<PAGE> 62
(b) Reports on Form 8-K
A Current Report on Form 8-K dated August 9, 1996, as amended by a Form
8-K/A dated October 1, 1996, was filed during the quarter ended October
31, 1996, reporting under Items 2 and 7 thereof, the acquisition of the
assets of Piper Impact. Item 7 of Form 8-K/A included the following
financial statements:
(a) Financial Statements of Piper Impact, Inc.
Independent Auditor's Report
Balance Sheets as of December 31, 1995 and 1994 and July 31, 1996
Statements of Earnings for the Years Ended December 31, 1995 and
1994 and the Seven-Month Periods Ended July 31, 1996 and 1995
Statements of Cash Flows for the Years Ended December 31, 1995 and
1994 and the Seven-Month Periods Ended July 31, 1996 and 1995
Notes to Financial Statements
(b) Unaudited Pro Forma Consolidated Financial Information of Quanex
Corporation
Pro Forma Consolidated Balance Sheet as of July 31, 1996
Pro Forma Consolidated Statement of Income - Year Ended
October 31, 1995
Pro Forma Consolidated Statement of Income - Nine Months Ended
July 31, 1996
Notes to Pro Forma Consolidated Financial Statement
61
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUANEX CORPORATION
By: /s/ VERNON E. OECHSLE December 13, 1996
-------------------------------------------
VERNON E. OECHSLE
Director, 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.
By: /s/ ROBERT C. SNYDER December 13, 1996
-------------------------------------------
ROBERT C. SNYDER
Director and Chairman
By: /s/ VERNON E. OECHSLE December 13, 1996
-------------------------------------------
VERNON E. OECHSLE
Director, President and
Chief Executive Officer
By: /s/ JAMES H. DAVIS December 13, 1996
-------------------------------------------
JAMES H. DAVIS
Executive Vice President and
Chief Operating Officer
(Principal Operating Officer)
By: /s/ CARL E. PFEIFFER December 13, 1996
-------------------------------------------
CARL E. PFEIFFER
Director
By: /s/ GERALD B. HAECKEL December 13, 1996
-------------------------------------------
GERALD B. HAECKEL
Director
62
<PAGE> 64
By: /s/ JOHN D. O'CONNELL December 13, 1996
-------------------------------------------
JOHN D. O'CONNELL
Director
By: /s/ DONALD G. BARGER, JR. December 13, 1996
-------------------------------------------
DONALD G. BARGER, JR.
Director
By: /s/ VINCENT R. SCORSONE December 13, 1996
-------------------------------------------
VINCENT R. SCORSONE
Director
By: /s/ MICHAEL J. SEBASTIAN December 13, 1996
-------------------------------------------
MICHAEL J. SEBASTIAN
Director
By: /s/ WAYNE M. ROSE December 13, 1996
-------------------------------------------
WAYNE M. ROSE
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ VIREN M. PARIKH December 13, 1996
-------------------------------------------
VIREN M. PARIKH
Controller
(Principal Accounting Officer)
63
<PAGE> 65
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Name of Exhibit
- ------- ---------------
<S> <C>
2.1 Asset Purchase Agreement dated July 31, 1996, among the
Company, Piper Impact, Inc., a Delaware corporation, Piper
Impact, Inc., A Tennessee corporation, B. F. Sammons and
M. W. Robbins, filed as Exhibit 2.1 of the Company's
Report on Form 8-K, dated August 9, 1996, and incorporated
herein by reference.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, filed as Exhibit 3.1 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1995, and incorporated herein by reference.
*3.2 Amended and Restated Bylaws of the Registrant, as amended
through December 12, 1996.
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 Form of Indenture relating to the Registrant's 6.88%
Convertible 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>
64
<PAGE> 66
<TABLE>
<S> <C>
4.5 $250,000,000 Revolving Credit and Term Loan Agreement
dated as of July 23, 1996, among the Company, Comerica
Bank, as Agent, and Harris Trust and Savings Bank and
Wells Fargo Bank (Texas), N.A. as Co-Agents, filed as
Exhibit 4.1 of the Company's Report on Form 8-K, dated
August 9, 1996, 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 and the amendment filed as
Exhibit 10.23 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995.
+10.5 Quanex Corporation 1988 Stock Option Plan, as amended, 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, together with the amendment filed
as Exhibit 10.17 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.
+10.6 Quanex Corporation Deferred Compensation Plan, as amended
and restated filed as Exhibit 10.6 of the Registrant's
Annual Report on Form 10-K for the year ended October 31,
1995, and incorporated herein by reference..
</TABLE>
65
<PAGE> 67
<TABLE>
<S> <C>
+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, together
with the amendment filed as Exhibit 10.16 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1995, 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, as amended, 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, together with the amendment filed as
Exhibit 10.14 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.
+10.13 Quanex Corporation 1989 Non-Employee Director Stock Option
Plan, as amended, filed as Exhibit 4.4 of the Registrant's
Form S-8, Registration No. 33-35128, together with the
amendment filed as Exhibit 10.15 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
January 31, 1995, and incorporated herein by reference.
+10.14 Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1994, and incorporated herein by
reference.
</TABLE>
66
<PAGE> 68
<TABLE>
<S> <C>
+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.
+10.18 Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31,1994,
and incorporated herein by reference.
*+10.19 1996 Employee Stock Option Plan and Restricted Stock Plan.
*11 Statement re computation of per share earnings.
*21 Subsidiaries of the Registrant.
*23 Consent of Deloitte & Touche LLP.
*27 Financial Data Schedule
</TABLE>
- ---------------
+ Management Compensation or Incentive Plan
* Filed herewith
67
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED (December 12, 1996)
BY-LAWS
of
QUANEX CORPORATION
(a Delaware Corporation)
Offices
1. The Corporation shall at all times maintain a registered
office in the State of Delaware.
2. The Corporation may also have offices at such other places
within or outside of the State of Delaware as the Board of Directors shall from
time to time appoint or the business of the Corporation require.
Capital Stock
3. The Board of Directors may authorize the issuance of the
capital stock of the Corporation at such times, for such consideration, and on
such terms and conditions as the Board may deem advisable, subject to any
restrictions and provisions of law, the Certificate of Incorporation of the
Corporation or any other provisions of these by-laws.
4. The shares of the Corporation shall be represented by
certificates, provided that the Board of Directors may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the Corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue. The certificates shall
otherwise be in such form as may be determined by the Board of Directors, shall
be issued in numerical order, shall be
<PAGE> 2
entered in the books of the Corporation as they are issued and shall exhibit
the holder's name and number of shares.
5. The shares of the capital stock of the Corporation are
transferable only on the books of the Corporation upon surrender, in the case
of certificated shares, of the certificates therefor properly endorsed for
transfer, or otherwise properly assigned, and upon the presentation of such
evidences of ownership of the shares and validity of the assignment as the
Corporation may require.
6. The Corporation shall be entitled to treat the person in whose
name any share of stock is registered as the owner thereof for purposes of
dividends and other distributions in the course of business or in the course of
recapitalization, consolidation, merger, reorganization, liquidation, or
otherwise, and for the purpose of votes, approvals and consents by
shareholders, and for the purpose of notices to shareholders, and for all other
purposes whatsoever, and shall not be bound to recognize any equitable or other
claim to or interest in such share on the part of any other person, whether or
not the Corporation shall have notice thereof, save as expressly required by
the laws of the State of Delaware.
7. The Board of Directors may appoint one or more transfer agents
and registrars, and may require certificates for shares to bear the signature
of such transfer agent(s) and registrar(s).
8. Upon the presentation to the Corporation of a proper affidavit
attesting the loss, destruction or mutilation of any certificate for shares of
stock of the Corporation, the Board of Directors may direct the issuance of a
new certificate or uncertificated shares in lieu of and to replace the
certificate so alleged to be lost, destroyed or mutilated. The Board of
Directors may require as a condition precedent to the issuance of a new
certificate or uncertificated shares any or all of the following: (a)
additional evidence of the loss, destruction or mutilation claimed; (b)
advertisement of the loss in such manner as the Board of Directors may direct
or approve; (c) a bond or agreement of indemnity, in such form and amount and
with such surety (or without surety) as the Board of Directors may direct or
approve; and (d) the order of approval of a court.
Shareholders and Meetings of Shareholders
9. All meetings of shareholders shall be held at such place
within or outside of the State of Delaware as shall be fixed by the Board of
Directors and stated in the notice of meeting.
10. The Annual Meeting of Shareholders of the Corporation shall be
held on such date and at such time as is fixed by the Board of Directors and
stated in the notice of meeting. Directors shall be elected in accordance with
the provisions of the Certificate of Incorporation of the Corporation and these
by-laws and such other business shall be transacted as may properly come before
the meeting.
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<PAGE> 3
11. The Annual Meeting of Shareholders may be adjourned by the
presiding officer of the meeting for any reason (including, if the presiding
officer determines that it would be in the best interests of the Corporation to
extend the period of time for the solicitation of proxies) from time to time
and place to place until the presiding officer shall determine that the
business to be conducted at the meeting is completed, which determination shall
be conclusive.
12. At an Annual Meeting of the Shareholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an Annual Meeting, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise properly brought before the meeting by
or at the direction of the Board of Directors or (c) otherwise properly brought
before the meeting by a shareholder of the Company. For business to be
properly brought before an annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, not
less than 60 days nor more than 180 days prior to the anniversary date of the
immediately preceding annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 45 days later than the anniversary
date of the immediately preceding annual meeting, notice by the shareholder to
be timely must be received not later than the close of business on the tenth
day following the earlier of the date on which a written statement setting
forth the date of the annual meeting was mailed to shareholders or the date on
which it is first disclosed to the public. A shareholder's notice to the
Secretary shall set forth as to each matter the shareholder proposes to bring
before the annual meeting (a) a brief description of the business desired to be
brought before the annual meeting, (b) the name and address, as they appear on
the Corporation's books, of the shareholder proposing such proposal, (c) the
class and number of shares of the Corporation which are beneficially owned by
the shareholder and (d) any material interest of the shareholder in such
business. In addition, if the shareholder's ownership of shares of the
Corporation, as set forth in the notice, is solely beneficial, documentary
evidence of such ownership must accompany the notice. Notwithstanding anything
in the by-laws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 12.
The presiding officer of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that any business which was not properly
brought before the meeting is out of order and shall not be transacted at the
meeting.
13. Except as otherwise required by law and subject to the rights
of the holders of any claim or series of stock having a preference over the
Common Stock as to dividends or on liquidation, a special meeting of
shareholders may be called only by the President or Secretary and then only at
the written request of a majority of the directors, provided that, if as of the
date of the request for such special meeting there is a Related Holder as
defined in Article FOURTEENTH of the Certificate of Incorporation, such
majority shall include a majority of the Continuing Directors, as defined in
Article FOURTEENTH of the Certificate of Incorporation or by the holders of
four-fifths (80%) of the voting power of all of the then outstanding shares of
capital stock of the
-3-
<PAGE> 4
Corporation then entitled to vote generally in the election of directors. The
request shall state the purpose or purposes for which the meeting is to be
called. The notice of every special meeting of shareholders shall state the
purpose for which it is called. At any special meeting of shareholders, only
such business shall be conducted as shall be provided for in the resolution or
resolutions calling the special meeting or, where no such resolution or
resolutions have been adopted, only such business shall be conducted as shall
be provided in the notice to shareholders of the special meeting. Any special
meeting of shareholders may be adjourned by the presiding officer of the
meeting for any reason (including, if the presiding officer determines that it
would be in the best interests of the Corporation to extend the period of time
for the solicitation of proxies) from time to time and from place to place
until the presiding officer shall determine that the business to be conducted
at the meeting is completed, which determination shall be conclusive.
14. Written notice of each meeting of shareholders shall be mailed
to each shareholder of record at his last address as it appears on the books of
the Corporation at least ten days prior to the date of the meeting.
15. The Board of Directors shall have power to close the stock
transfer books of the Corporation for a period not more than sixty nor less
than ten days preceding the date of any meeting of shareholders, or the date
for payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect; provided, however, that in lieu of closing the stock transfer books as
aforesaid, the Board of Directors may fix in advance a date not more than sixty
nor less than ten days preceding the date of any meeting of shareholders, or
the date for any payment of dividends, or the date for allotment of rights, or
the date when any change or conversion or exchange of capital stock shall go
into effect, as a record date for the determination of the shareholders
entitled to vote at any such meeting or entitled to receive payment of any such
dividend or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion or exchange of capital stock, and in
such cases only such shareholders as shall be shareholders of record on the
date so fixed shall be entitled to vote at such meeting, or to receive payment
of such dividend, or to receive such allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any stock on the
books of the Corporation after any such record date fixed as aforesaid. This
by-law shall in no way affect the rights of a shareholder and his transferee or
transferor as between themselves.
16. The holders of a majority of the outstanding shares of stock
of the Corporation having voting power with respect to a subject matter
(excluding shares held by the Corporation for its own account) present or
represented by proxy shall constitute a quorum at the meeting of shareholders
for the transaction of business with respect to such subject matter. In the
absence of a quorum, the shareholders present in person or by proxy shall have
power to adjourn the meeting from time to time, without notice other than an
announcement at the meeting, until a quorum is present. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each shareholder of record
-4-
<PAGE> 5
entitled to vote at the meeting. At such adjourned meeting, any business may
be transacted which might have been transacted at the meeting as originally
notified.
17. When a quorum is present or represented at any meeting of
shareholders, the affirmative vote of the holders of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote
on the subject matter shall be the act of the shareholders in all matters,
unless the matter is one upon which, by express provision of the corporation
laws of the State of Delaware, of the Certificate of Incorporation or of these
by-laws, a different vote is required, in which case such express provision
shall govern and control the decision of that matter. Directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy and entitled to vote on the election of directors.
18. Every shareholder having the right to vote shall be entitled
to vote in person, or by proxy appointed by an instrument in writing subscribed
by such shareholder (which for purposes of this paragraph may include a
signature and form of proxy pursuant to a facsimile or telegraphic form of
proxy or any other instruments acceptable to the Judge of Election), bearing a
date not more than three years prior to voting, unless such instrument provides
for a longer period, and filed with the Secretary of the Corporation before, or
at the time of, the meeting. If such instrument shall designate two or more
persons to act as proxies, unless such instrument shall provide to the
contrary, a majority of such persons present at any meeting at which their
powers thereunder are to be exercised shall have and may exercise all the
powers of voting thereby conferred, or if only one be present, then such powers
may be exercised by that one; or, if an even number attend and a majority do
not agree on any particular issue, each proxy so attending shall be entitled to
exercise such powers in respect of the same portion of the shares as he is of
the proxies representing such shares.
19. Unless otherwise provided by the Certificate of Incorporation
or by the corporation laws of the State of Delaware, each shareholder of the
Corporation shall, at every meeting of shareholders, be entitled to one vote in
person or by proxy for each share of capital stock of the Corporation
registered in his name.
20. Any other corporation owning voting shares in this Corporation
may vote the same by its President or by proxy appointed by him, unless some
other person shall be appointed to vote such shares by resolution of the Board
of Directors of such shareholder corporation. A partnership holding shares of
this Corporation may vote such shares by any general partner or by proxy
appointed by any general partner.
21. Shares standing in the name of a deceased person may be voted
by the executor or administrator of such deceased person, either in person or
by proxy. Shares standing in the name of a guardian, conservator or trustee
may be voted by such fiduciary, either in person or by proxy, but no such
fiduciary shall be entitled to vote shares held in such fiduciary capacity
without a transfer of such shares into the name of such fiduciary. Shares
standing in the name of a receiver
-5-
<PAGE> 6
may be voted by such receiver. A shareholder whose shares are pledged shall
be entitled to vote such shares, unless in the transfer by the pledgor on the
books of the Corporation, he has expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or his proxy, may represent the stock
and vote thereon.
22. The order of business and all other matters of procedure at
every meeting of the shareholders may be determined by the presiding officer of
the meeting, who shall be the Chairman of the Board of Directors, the President
or such other officer of the Corporation as designated by the Board. The
presiding officer of the meeting shall have all the powers and authority vested
in a presiding officer by law or practice without restriction, including,
without limitation, the authority, in order to conduct an orderly meeting, to
impose reasonable limits on the amount of time at the meeting taken up in
remarks by any one shareholder and to declare any business not properly brought
before the meeting to be out of order.
23. The Board shall appoint one or more Judges of Election to
serve at every meeting of the shareholders.
Directors and Meetings of Directors
24. The business of the Corporation shall be managed by a Board of
Directors who shall exercise all the powers of the Corporation not reserved to
or conferred on the shareholders by statute, the Certificate of Incorporation
or the by-laws of the Corporation.
25. Except as otherwise fixed pursuant to the provisions of the
Certificate of Incorporation relating to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors under specified circumstances,
the number of directors shall be as fixed from time to time by resolution of
the Board, provided the number shall be not less than three. The directors,
other than those who may be elected by the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, shall be divided into three classes as nearly equal in number as
possible, with the term of office of one class expiring each year. The term of
office of each director shall expire at the third Annual Meeting after election
of the class to which he belongs. During the intervals between Annual Meetings
of Shareholders, any vacancy occurring in the Board of Directors caused by
resignation, removal, death or other incapacity, and any newly-created
directorships resulting from an increase in the number of directors, shall be
filled by a majority vote of the directors then in office, whether or not a
quorum. Each director chosen to fill a vacancy shall hold office for the
unexpired term in respect of which such vacancy occurs. Each director chosen
to fill a newly-created directorship shall hold office until the next election
of the class for which such director shall have been chosen.
-6-
<PAGE> 7
26. No person may be elected or re-elected a director of the
Corporation if at the time of his election or reelection he shall have attained
the age of 70 years, provided however, that a director who shall attain the age
of 70 years while serving as a director shall continue in office until the
expiration of the term for which he was elected and, provided further that with
respect to any person who was a director on November 1, 1996, the reference to
"70 years" shall be changed to "72 years."
27. Subject to the rights of holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, nominations for the election of directors may be made by the Board
of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote in the election of directors generally. However,
any shareholder entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later than (i)
with respect to an election to be held at an Annual Meeting of Shareholders, 90
days prior to the anniversary date of the date of the immediately preceding
annual meeting, and (ii) with respect to an election to be held at a special
meeting of shareholders for the election of directors, the close of business on
the tenth day following the date on which a written statement setting forth the
date of such meeting is first mailed to shareholders provided that such
statement is mailed no earlier than 120 days prior to the date of such meeting.
Notwithstanding the foregoing if an existing director is not standing for
reelection to a directorship which is the subject of an election at such
meeting or if a vacancy exists as to a directorship which is the subject an
election, whether as a result of resignation, death, an increase in the number
of directors, or otherwise, then a shareholder may make a nomination with
respect to such directorship at anytime not later than the close of business on
the tenth day following the date on which a written statement setting forth the
fact that such directorship is to be elected and the name of the nominee
proposed by the Board of Directors is first mailed to shareholders. Each
notice of a nomination from a shareholder shall set forth: (a) the name and
address of the shareholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (d) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the Securities
Exchange Act of 1934 and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations); and (e) the
consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
-7-
<PAGE> 8
28. Any director may be removed from office as a director at any
time, but only for cause, by the affirmative vote of shareholders of record
holding a majority of the outstanding shares of stock of the Corporation
entitled to vote in elections of directors at a meeting of the shareholders
called for that purpose.
29. Regular meetings of the Board of Directors shall be held at
such times and at such place or places as the directors shall, from time to
time, determine at a prior meeting. Special meetings of the Board may be
called by the Chairman of the Board or President of the Corporation and shall
be called by either of said officers upon the written request of any two
directors. Special meetings shall be held at the office of the Corporation or
at such place as is stated in the notice of the meeting. No notice shall be
required for regular meetings of the Board. Notices of special meetings shall
be given by mail at least five days before the meeting or by telephone,
telecopy or telegram at least 24 hours before the meeting. Notices may be
waived. Notices need not include any statement of the purpose of the meeting.
30. When all of the directors shall be present at any meeting,
however called or notified, they may act upon any business that might lawfully
be transacted at regular meetings of the Board, or at special meetings duly
called, and action taken at such meetings shall be as valid and binding as if
legally called and notified. Members of the Board of Directors may participate
in a meeting of the Board by means of conference telephone or similar
communications equipment to the full extent and with the same effect as
authorized and permitted by Delaware law.
31. One-third of the total number of the members of the Board of
Directors shall constitute a quorum for the transaction of business, and the
acts of a majority of the directors present at any meeting at which there is a
quorum present shall be the acts of the Board; provided, however, that the
directors may act in such other manner, with or without a meeting, as may be
permitted by the laws of the State of Delaware and provided further, that if
all of the directors shall consent in writing to any action taken by the
Corporation, such action shall be as valid as though it had been authorized at
a meeting of the Board.
32. Directors shall receive such compensation and such fees for
attendance at meetings of the Board or of committees thereof and such other
compensation as shall be fixed by a majority of the entire Board.
Committees of Directors
33. The Board of Directors shall establish an Executive Committee,
an Audit and Environmental Compliance Committee, a Compensation and Management
Development Committee, a Nominating and Corporate Governance Committee, a
Finance and Investment Committee, and such other committees as may be
established by resolution of a majority of the whole Board. Each of such
committees shall consist of one or more members of the Board. Members of
committees of
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<PAGE> 9
the Board of Directors shall be elected annually by vote of a majority of the
Board. Presence of one-half of the committee members, shall constitute a
quorum. Committees may act by majority vote of the members present at a
meeting. Each of such committees shall have and may exercise such of the
powers of the Board of Directors in the management of the business and affairs
of the Corporation as may be provided in these by-laws or by resolution of the
Board of Directors. Each of such committees may authorize the seal of the
Corporation to be affixed to all papers which may require it. The Board of
Directors may designate one or more directors as alternate members of any such
committee, who may replace any absent or disqualified member at any meeting of
such committee. Meetings of committees may be called by any member of a
committee by written, telegraphic or telephonic notice and shall be held at
such time and place as shall be stated in the notice of meeting. Any member of
a committee may participate in any meeting by means of conference telephone or
similar communications equipment. In the absence or disqualification of a
member of any committee the member or members thereof present at any meeting
and not disqualified from voting, whether or not constituting a quorum may, if
deemed advisable, unanimously appoint another member of the Board to act at the
meeting in the place of the disqualified or absent member. Each committee may
fix such other rules and procedures governing conduct of meetings as it shall
deem appropriate.
34. The Executive Committee of the Board of Directors shall
consist of not less than three directors. The Executive Committee shall have
and exercise the authority of the Board of Directors between meetings of the
Board, subject to such limitations and restrictions as the Board may impose in
a resolution duly adopted by the Board.
35. The Audit and Environmental Compliance Committee shall consist
of not less than three members of the Board of Directors, none of whom shall be
officers of the Corporation. The Committee shall be responsible for
recommending to the entire Board engagement and discharge of independent
auditors of the financial statements of the Corporation, shall review the
professional service provided by independent auditors, shall review the
independence of independent auditors, shall review with the auditors the plan
and results of the auditing engagement, shall consider the range of audit and
non-audit fees, shall review the adequacy of the Corporation's system of
internal accounting controls, shall review the results of procedures for
internal auditing and shall consult with the internal auditor of the
Corporation with respect to all aspects of the Corporation's internal auditing
program, and shall direct and supervise special investigations as deemed
necessary by the Committee. Additionally, the Committee will review and
confirm with the Board of Directors the Company's compliance with applicable
laws and regulations relating to health, safety, and the environment which may
represent material financial exposure to the Company.
36. The Compensation and Management Development Committee shall
recommend to the Board the compensation to be paid to officers and key
employees of the Corporation and the compensation of members of the Board of
Directors. The Committee shall also make recommendations to the Board of
Directors regarding structural organization of the Corporation and
-9-
<PAGE> 10
selection of senior management personnel and their replacements and successors.
Except as otherwise provided in any specific plan adopted by the Board, the
Committee shall be responsible for administration of executive incentive
compensation plans, stock option plans and other forms of direct or indirect
compensation of officers and key employees. In addition, the Committee shall
review levels of pension benefits and insurance programs for officers and key
employees. The Committee shall act as the committee administering the
Executive Incentive Plan of the Corporation.
37. The Nominating and Corporate Governance Committee shall
recommend to the Board nominees for election as directors, shall consider
performance of incumbent directors, shall recommend to the Board whether an
incumbent director whose term expires shall be nominated for reelection, and
shall establish and recommend to the Board of Directors such corporate
governance guidelines as may be appropriate.
38. The Finance and Investment Committee shall review, as
appropriate, advise and consult with senior management concerning the general
financial affairs of the Company including the capital structure of the
Company, financing plans, cash flow projections, dividend policy, stock
re-purchase programs, currency exchange agreement procedure, loan agreements,
capital investment policy, and appropriate target rates of return.
Additionally, the Committee shall monitor and review the establishment of
investment objectives, policies, and performance criteria for the management of
the Company's retirement and benefit plan assets, and review annually the
performance gain/loss of the Company's retirement and benefit plan asset
investments.
39. Any action required or permitted to be taken at any meeting of
any committee of the Board of Directors may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all of the
members of such committee.
Officers
40. The Board of Directors shall elect a Chief Executive Officer,
a President, who may also be the Chief Executive Officer, and a Secretary, and
may elect a Chairman, a Treasurer, one or more vice presidents, including an
Executive Vice President and a Vice President-Finance, a Controller, a
Controller-Operations, and one or more assistant secretaries and assistant
treasurers. The Chief Executive Officer of the Corporation shall be a director
of the Corporation. Any two of the above offices, except those of President
and Vice President, may be held by the same person but no officers shall
execute, acknowledge or verify any instrument in more than one capacity.
41. Officers of the Corporation shall hold office until they
resign or until their successors are chosen and qualified; provided, however,
that no person shall serve as an officer of the Corporation beyond the last day
of the fiscal year of the Corporation during which such person reaches age 65.
Any officer, agent or employee may be removed at any time, with or without
cause, by the Board but such removal shall be without prejudice to the
contractual rights, if any, of the
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<PAGE> 11
person so removed. Election or appointment of an officer or agent shall not of
itself create contract rights. Vacancy occurring in any office or position at
any time may be filled by the Board. All officers, agents and employees of the
Corporation shall respectively have such authority and perform such duties in
the conduct and management of the Corporation as may be delegated by the Board
of Directors or by these by-laws.
42. Officers shall receive such compensation as may from time to
time be determined by the Board of Directors. Agents and employees shall
receive such compensation as may from time to time be determined by the
President of the Company or, if the Board of Directors has elected a Chairman
of the Board and has designated such Chairman of the Board to be the Chief
Executive Officer of the Company, by the Chairman of the Board.
43. The Chairman of the Board shall preside at all meetings of the
shareholders and at all meetings of the directors. In the absence of the
Chairman of the Board, the President shall so preside.
44. The Board of Directors shall designate either the Chairman of
the Board or the President as the Chief Executive Officer of the Company. The
Chief Executive Officer of the Company shall supervise and direct the
operations of the business in accordance with the policies determined by the
Board of Directors. If the President is not designated the Chief Executive
Officer, the President shall be the Chief Operating Officer of the Company and
shall be responsible for the general supervision and control of the business
and the affairs of the Company subject to the directions of the Chief Executive
Officer and the Board of Directors. The Chief Operating Officer, in the
absence or incapacity of the Chief Executive Officer, shall perform the duties
of that office.
45. The Vice President, in the absence or incapacity of the
President, shall perform the duties of that office. If there be an executive
vice president, he shall perform the duties of the President in the event of
his absence or incapacity. If there be more than one vice president, and no
executive vice president, the Board of Directors may designate the Vice
President who is to perform the duties of the President in the event of his
absence or incapacity. Each Vice President shall have such other duties and
authority as shall be assigned by the President or may be delegated by the
Board of Directors. The Vice President-Finance shall be responsible for and
direct the Treasurer, Controller, and Director of Data Processing of the
Corporation in all treasury, accounting, cost and budgeting, and data
collection functions. He will report directly to the President with a report
and policy relationship to the Chairman of the Board and the Board of
Directors.
46. The Secretary shall attend all meetings of the Board of
Directors and all meetings of shareholders and shall record all votes and
minutes from all proceedings in a book to be kept for that purpose. He shall
keep in safe custody the seal of the Corporation and, when authorized by the
Board, affix the same to any instrument requiring it, and when so affixed, it
shall be attested by his
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<PAGE> 12
signature or by the signature of the Treasurer or an Assistant Secretary. The
Secretary shall perform such other duties and have such other authorities as
are delegated to him by the Board of Directors.
47. The Treasurer shall be responsible for the care and custody of
all funds and other financial assets, taxes, corporate debt, order entry and
sales invoicing including credit memos, credit and collection of accounts
receivable, cash receipts, and the banking and insurance functions of the
Corporation. He shall report directly to and perform such other duties as
shall be assigned by the Vice President-Finance.
48. The Controller shall be responsible for the installation and
supervision of all general accounting records of the Corporation, preparation
of financial statements and the annual and operating budgets and profit plans,
continuous audit of accounts and records of the Corporation, preparation and
interpretation of statistical records and reports, taking and costing of all
physical inventories and administering the inventory levels, supervision of
accounts payable and cash disbursements function and hourly and salary
payrolls. He shall report directly to and perform such other functions as
shall be assigned him by the Vice President-Finance.
49. The Board of Directors of the Corporation may require any
officer, agent or employee to give bond for the faithful discharge of his duty
and for the protection of the Corporation, in such sum and with such surety as
the Board deems advisable.
Banking, Checks and Other Instruments
50. The Board of Directors shall by resolution designate the bank
or banks in which the funds of the Corporation shall be deposited, and such
funds shall be deposited in the name of the Corporation and shall be subject to
checks drawn as authorized by resolution of the Board of Directors.
51. The Board of Directors may in any instance designate the
officers and agents who shall have authority to execute any contract,
conveyance, or other instrument on behalf of the Corporation; or may ratify or
confirm any execution. When the execution of any instrument has been
authorized without specification of the executing officer or agents, the
Chairman of the Board, if designated as the Chief Executive Officer of the
Corporation, President or any Vice President, and the Secretary or Assistant
Secretary or Treasurer or Assistant Treasurer may execute the same in the name
and on behalf of the Corporation and may affix the corporate seal thereto.
Fiscal Year
52. The fiscal year of the Corporation shall begin on the first
day of November and end on the thirty-first day of October.
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Books and Records
53. The proper officers and agents of the Corporation shall keep
and maintain such books, records and accounts of the Corporation's business and
affairs and such stock ledgers and lists of shareholders as the Board of
Directors shall deem advisable and as shall be required by the laws of the
State of Delaware or other states or jurisdictions empowered to impose such
requirements.
Indemnification
54. Each director or officer of the Corporation who was or is made
a party or is threatened to be made a party to or is involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity while
serving as a director, officer, employee or agent, shall be indemnified and
held harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be
amended (the "DGCL"), (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification conferred in this Section shall
be a contract right and shall include the right to be paid by the Corporation
the expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the DGCL requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered
by such person while a director or officer, including, without limitation,
service to an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under the applicable provisions of the DGCL.
The Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
55. The indemnification and advancement of expenses provided in
paragraph 53 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
agreement, vote of stockholders, vote of disinterested directors,
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insurance arrangement or otherwise, both as to action in his or her official
capacity and as to action in another capacity or holding such officer.
Amendments
56. These by-laws may be altered, amended or repealed and new
by-laws may be adopted at any regular meeting of the shareholders or Board of
Directors; or at any special meeting of the shareholders or Board of Directors;
provided that notice of such proposed making, alteration or repeal be included
in the notice of such special meeting. The Board of Directors may take such
action by the vote of a majority of those Directors present and voting at a
meeting where a quorum is present, provided that if there is a Related Holder
as defined in Article FOURTEENTH of the Certificate of Incorporation, such
majority shall include a majority of the Continuing Directors, as defined in
Article FOURTEENTH of the Certificate of Incorporation. In accordance with the
provisions of the Certificate of Incorporation, the shareholders may make new
by-laws, or adopt, alter, amend, or repeal by-laws adopted by either the
shareholders or the Board of Directors by the affirmative vote of the holders
of not less than four-fifths of the voting power of all of the then outstanding
shares of capital stock of the Corporation then entitled to vote generally for
the election of directors. The power of the shareholders and the Board shall
include the fixing and appointing of the number of directors in accordance with
the provisions of the Certificate of Incorporation.
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<PAGE> 1
EXHIBIT 10.19
QUANEX CORPORATION 1996
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLAN
SECTION 1. PURPOSE
The purpose of the Quanex Corporation 1996 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.
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 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.
<PAGE> 2
(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 1996 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.
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
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<PAGE> 3
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
The maximum number of shares of Common Stock subject to
Options that may be awarded to any Employee under the Plan during any
consecutive three year period 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 during any consecutive three year period is 250,000.
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.
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<PAGE> 4
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
(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
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<PAGE> 5
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
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-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
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<PAGE> 6
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 persons 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 5
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. After the death of the optionee, his executors, administrators
or any person or persons 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 the Committee may provide for a different option
termination date in the Option Agreement with respect to such Option.
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
-6-
<PAGE> 7
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.
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
-7-
<PAGE> 8
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 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.
-8-
<PAGE> 9
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.
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.
-9-
<PAGE> 10
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 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
-10-
<PAGE> 11
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.
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
-11-
<PAGE> 12
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.
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
October 10, 2005.
-12-
<PAGE> 1
EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Years Ended October 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Income before extraordinary charge ......................... $ 32,890 $ 33,860 $ 18,852
Extraordinary charge - early extinguishment of debt......... (2,522) (2,021) --
-------- -------- --------
Net income ................................................. 30,368 31,839 18,852
Preferred dividend requirements ............................ -- (3,957) (5,934)
-------- -------- --------
Net income attributable to
common stockholders ...................................... $ 30,368 $ 27,882 $ 12,918
======== ======== ========
Weighted average shares
outstanding-primary ...................................... 13,658 13,580 13,496
======== ======== ========
Earnings per common share:
Primary:
Income before extraordinary charge ..................... $ 2.41 $ 2.20 $ 0.96
Extraordinary charge ................................... (0.19) (0.15) --
-------- -------- --------
Earnings per common share ............................ $ 2.22 $ 2.05 $ 0.96
======== ======== ========
Income before extraordinary charge ......................... $ 32,890 $ 33,860 $ 18,852
Extraordinary charge - early extinguishment of debt......... (2,522) (2,021) --
-------- -------- --------
Net income ................................................. 30,368 31,839 18,852
Interest on 6.88% convertible subordinated
debentures and amortization of related issuance
costs, net of applicable income taxes .................... 3,567 1,188 --
-------- -------- --------
Adjusted net income ........................................ $ 33,935 $ 33,027 $ 18,852
======== ======== ========
Weighted average shares
outstanding-primary ...................................... 13,658 13,580 13,496
Effect of common stock equivalents
arising from stock options ............................... 231 -- 72
Preferred stock assumed converted
to common stock .......................................... -- 1,825 2,738
Subordinated debentures assumed
converted to common stock ................................ 2,696 899 --
-------- -------- --------
Weighted average shares
outstanding-fully diluted ................................ 16,585 16,304 16,306
======== ======== ========
Earnings per common share:
Assuming full dilution:
Earnings before extraordinary charge ................... $ 2.20 $ 2.15 $ 1.16
Extraordinary charge ................................... (0.15) (0.12) --
-------- -------- --------
Earnings per common share ............................ $ 2.05 $ 2.03 $ 1.16
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF QUANEX CORPORATION JURISDICTION OF INCORPORATION
- ---------------------------------- -----------------------------
<S> <C>
LaSalle Steel Company Delaware
Michigan Seamless Tube Company Delaware
Piper Impact, Inc. Delaware
Quanex Metals, Inc. Delaware
Quanex Wire, Inc. Delaware
Quanex Foreign Sales Corporation U.S. Virgin Islands
</TABLE>
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITOR'S 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 of Quanex Corporation
on Form S-8 of our report dated November 22,1996 appearing in this Annual
Report on Form 10-K of Quanex Corporation for the year ended October 31, 1996.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
December 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of October 31, 1996 and the income statement for the year ended
October 31, 1996 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-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 35,985
<SECURITIES> 0
<RECEIVABLES> 103,934
<ALLOWANCES> 8,351
<INVENTORY> 113,287
<CURRENT-ASSETS> 263,338
<PP&E> 652,636
<DEPRECIATION> 301,090
<TOTAL-ASSETS> 718,206
<CURRENT-LIABILITIES> 153,066
<BONDS> 253,513
0
0
<COMMON> 6,795
<OTHER-SE> 187,878
<TOTAL-LIABILITY-AND-EQUITY> 718,206
<SALES> 895,710
<TOTAL-REVENUES> 895,710
<CGS> 772,371
<TOTAL-COSTS> 772,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,462
<INTEREST-EXPENSE> 11,929
<INCOME-PRETAX> 56,707
<INCOME-TAX> 23,817
<INCOME-CONTINUING> 32,890
<DISCONTINUED> 0
<EXTRAORDINARY> 2,522
<CHANGES> 0
<NET-INCOME> 30,368
<EPS-PRIMARY> 2.220
<EPS-DILUTED> 2.050
</TABLE>
