<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File Number 1-5725
QUANEX CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1872178
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 West Loop South, Suite 1500, Houston, Texas 77027
------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 961-4600
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1999
- --------------------------------------- ----------------------------
Common Stock, par value $0.50 per share 14,267,458
<PAGE> 2
QUANEX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - July 31, 1999 and
October 31, 1998.................................................................. 1
Consolidated Statements of Income - Three and Nine Months
Ended July 31, 1999 and 1998 ...................... .............................. 2
Consolidated Statements of Cash Flow - Nine months
Ended July 31, 1999 and 1998 ..................................................... 3
Notes to Consolidated Financial Statements........................................... 4 - 7
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition .................................................. 8 - 17
Item 3: Quantitative and Qualitative Disclosure about Market
Risk ................................................................................ 18
Part II. Other Information
Item 1: Legal Proceedings.................................................................... 18
Item 6: Exhibits and Reports on Form 8-K..................................................... 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................................. $ 41,863 $ 26,279
Accounts and notes receivable, net ................... 78,918 85,166
Inventories .......................................... 81,824 85,397
Deferred income taxes ................................ 12,008 11,560
Prepaid expenses ..................................... 2,357 1,410
---------- ----------
Total current assets ......................... 216,970 209,812
Property, plant and equipment .......................... 737,689 702,955
Less accumulated depreciation and amortization ......... (337,183) (307,901)
---------- ----------
Property, plant and equipment, net ..................... 400,506 395,054
Goodwill, net .......................................... 49,644 52,281
Other assets ........................................... 20,362 17,141
---------- ----------
$ 687,482 $ 674,288
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 70,757 $ 75,160
Accrued expenses ..................................... 54,197 56,125
Current maturities of long-term debt ................. 8,628 12,248
Income taxes payable ................................. 1,648 3,300
---------- ----------
Total current liabilities .................... 135,230 146,833
Long-term debt ......................................... 194,428 188,302
Deferred pension credits ............................... 7,113 7,832
Deferred postretirement welfare benefits ............... 7,342 7,092
Deferred income taxes .................................. 35,295 33,412
Other liabilities ...................................... 16,528 18,773
---------- ----------
Total liabilities ............................ 395,936 402,244
Stockholders' equity:
Preferred stock, no par value ........................ -- --
Common stock, $.50 par value ......................... 7,134 7,090
Additional paid-in capital ........................... 110,270 108,624
Retained earnings .................................... 175,826 156,278
Unearned compensation ................................ (171) --
Cumulative foreign currency translation adjustment ... (433) 1,132
Adjustment for minimum pension liability ............. (1,080) (1,080)
---------- ----------
Total stockholders' equity ................... 291,546 272,044
---------- ----------
$ 687,482 $ 674,288
========== ==========
</TABLE>
1
<PAGE> 4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ........................................ $ 206,619 $ 204,854 $ 592,601 $ 589,264
Cost and expenses:
Cost of sales .................................. 161,107 164,500 469,989 485,203
Selling, general and administrative expense .... 12,032 11,650 39,521 34,985
Depreciation and amortization .................. 11,571 10,771 34,548 32,249
---------- ---------- ---------- ----------
Operating income ................................. 21,909 17,933 48,543 36,827
Other income (expense):
Interest expense ............................... (3,595) (3,708) (10,881) (11,113)
Capitalized interest ........................... 383 1,057 1,204 3,753
Other, net ..................................... 274 464 1,099 1,816
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes ......................... 18,971 15,746 39,965 31,283
Income tax expense ............................... (6,640) (5,461) (13,988) (10,949)
---------- ---------- ---------- ----------
Income from continuing operations ................ 12,331 10,285 25,977 20,334
Gain on sale of discontinued operations, net
of income taxes ........................ -- -- -- 13,606
---------- ---------- ---------- ----------
Income before extraordinary charge ............... 12,331 10,285 25,977 33,940
Extraordinary gain - early
extinguishment of debt ...................... -- -- 415 --
---------- ---------- ---------- ----------
Net income ....................................... $ 12,331 $ 10,285 $ 26,392 $ 33,940
========== ========== ========== ==========
Earnings per common share:
Basic:
Continuing operations ...................... $ 0.86 $ 0.73 $ 1.82 $ 1.44
Gain on sale of discontinued operations .... -- -- -- 0.96
Extraordinary item ......................... -- -- 0.03 --
---------- ---------- ---------- ----------
Total basic net earnings ................ $ 0.86 $ 0.73 $ 1.85 $ 2.40
========== ========== ========== ==========
Diluted:
Continuing operations ...................... $ 0.79 $ 0.66 $ 1.71 $ 1.37
Gain on sale of discontinued operations .... -- -- -- 0.80
Extraordinary item ......................... -- -- 0.03 --
---------- ---------- ---------- ----------
Total diluted net earnings .............. $ 0.79 $ 0.66 $ 1.74 $ 2.17
========== ========== ========== ==========
Weighted average shares outstanding:
Basic ......................................... 14,258 14,176 14,243 14,138
========== ========== ========== ==========
Diluted ....................................... 16,737 17,096 16,799 17,048
========== ========== ========== ==========
Common stock dividends per share ................. $ 0.16 $ 0.16 $ 0.48 $ 0.48
</TABLE>
2
<PAGE> 5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
------------------------
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income .................................................... $ 26,392 $ 33,940
Adjustments to reconcile net income
to cash provided by operating activities:
Gain on sale of discontinued operations .................. -- (13,606)
Extraordinary gain on early extinguishment of debt ....... (638) --
Depreciation and amortization ............................ 34,957 32,674
Deferred income taxes .................................... 1,915 3,228
Deferred pension costs ................................... (719) (512)
Deferred postretirement welfare benefits ................. 250 134
Changes in assets and liabilities net of effects from
acquisitions and dispositions:
Decrease in accounts and notes receivable ................ 5,691 12,176
Decrease (increase) in inventory ......................... 3,190 (5,140)
Increase/(decrease) in accounts payable .................. (4,114) 676
Decrease in accrued expenses ............................. (1,661) (974)
Other, net ............................................... (4,940) (10,122)
---------- ----------
Cash provided by operating activities ............... 60,323 52,474
Investment activities:
Proceeds from the sale of discontinued operations ............. -- 31,434
Capital expenditures, net of retirements ...................... (43,885) (39,723)
Other, net .................................................... (842) (2,395)
---------- ----------
Cash used by investment activities .................. (44,727) (10,684)
---------- ----------
Cash provided by operating and
investment activities ............................ 15,596 41,790
Financing activities:
Bank borrowings (repayments), net ............................. 14,196 (10,377)
Purchase of subordinated debentures ........................... (8,799) --
Common dividends paid ......................................... (6,841) (6,791)
Issuance of common stock, net ................................. 1,519 3,174
Other, net .................................................... (59) --
---------- ----------
Cash provided (used) in financing activities ........ 16 (13,994)
Effect of exchange rate changes on cash and equivalents ......... (28) 20
---------- ----------
Increase in cash and equivalents ................................ 15,584 27,816
Cash and equivalents at beginning of period ..................... 26,279 26,851
---------- ----------
Cash and equivalents at end of period ........................... $ 41,863 $ 54,667
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 11,810 $ 12,264
Income taxes .................................................... $ 14,316 $ 16,306
</TABLE>
3
<PAGE> 6
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
The interim consolidated financial statements of Quanex Corporation and
subsidiaries (the "Company") are unaudited, but include all adjustments which
the Company deems necessary for a fair presentation of its financial position
and results of operations. All such adjustments are of a normal recurring
nature. Results of operations for interim periods are not necessarily
indicative of results to be expected for the full year. All significant
accounting policies conform to those previously set forth in the Company's
fiscal 1998 Annual Report on Form 10-K which is incorporated by reference.
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to 1999 classifications.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
Raw materials ...................................... $ 24,079 $ 25,167
Finished goods and work in process ................. 50,935 52,485
------------ ------------
75,014 77,652
Other .............................................. 6,810 7,745
------------ ------------
$ 81,824 $ 85,397
============ ============
</TABLE>
The values of inventories in the consolidated balance sheets are based on
the following accounting methods:
<TABLE>
<S> <C> <C>
LIFO .................................................. $ 62,923 $ 57,594
FIFO .................................................. 18,901 27,803
------------ ------------
$ 81,824 $ 85,397
============ ============
</TABLE>
With respect to inventories valued using the LIFO method, replacement
cost exceeded the LIFO value by approximately $10 million and $12 million at
July 31, 1999, and October 31, 1998, respectively.
3. Acquisition
On October 9, 1998, the Company acquired the stock of Decatur Aluminum Corp.,
a Decatur, Alabama based coiled aluminum sheet manufacturer, for
approximately $19 million. Included in the purchase price was debt totaling
$5 million and other specified liabilities totaling $5 million assumed by the
Company. The newly acquired company has been renamed Nichols
Aluminum-Alabama, Inc. ("Nichols Aluminum Alabama"). Based on preliminary
purchase accounting, goodwill associated with Nichols Aluminum Alabama is
approximately $10 million as of July 31, 1999. Nichols Aluminum Alabama's
operations include cold rolling aluminum sheet to specific gauge, annealing,
leveling, custom painting and slitting to width.
4. Discontinued Operations
In December 1997, the Company completed the sale of its tubing operations,
comprised of Michigan Seamless Tube, Gulf States Tube, and the Tube Group
Administrative Office ("Tubing Operations"). The sale was effective November
1, 1997. The Company recorded an after tax gain on the sale of $12.8 million
during the first quarter of fiscal 1998.
In April 1997, the Company completed the sale of its LaSalle Steel
Company ("LaSalle") subsidiary. The Company recorded an after tax gain on the
sale of $36.3 million in the second quarter of fiscal 1997 and an additional
$833 thousand in the first quarter of 1998 as a result of post-closing
adjustments.
4
<PAGE> 7
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Earnings Per Share
The following table presents information necessary to calculate basic and
diluted earnings per share per FAS 128 for the periods indicated (in
thousands except per share amounts):
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
July 31, 1999 July 31, 1998
------------------------------------------ ------------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income from Cont. Oper. $ 12,331 14,258 $ 0.86 $ 10,285 14,176 $ 0.73
Extra. Gain - early debt ext. -- -- -- --
------------ ------------ ------------ ------------
Total basic net earnings $ 12,331 $ 0.86 $ 10,285 $ 0.73
============ ============ ============ ============
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv.
arising from stock options -- 139 -- 224
Effect of conversion of
subordinated debentures 867 2,340 999 2,696
DILUTED EPS
Income from Cont. Oper. $ 13,198 16,737 $ 0.79 $ 11,284 17,096 $ 0.66
Extra. Gain - early debt ext. -- -- -- --
------------ ------------ ------------ ------------
Total diluted net earnings $ 13,198 $ 0.79 $ 11,284 $ 0.66
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
July 31, 1999 July 31, 1998
------------------------------------------ ------------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income from Cont. Oper. $ 25,977 14,243 $ 1.82 $ 20,334 14,138 $ 1.44
Gain on sale of Discont. Oper. -- -- 13,606 0.96
Extra. Gain - early debt ext. 415 .03 -- --
------------ ------------ ------------ ------------
Total basic net earnings $ 26,392 $ 1.85 $ 33,940 $ 2.40
============ ============ ============ ============
EFFECT OF DILUTIVE SECURITIES
Effect of common stock Equiv.
arising from stock options -- 42 -- 214
Effect of conversion of
subordinated debentures $ 2,796 2,514 $ 2,997 2,696
DILUTED EPS
Income from Cont. Oper. $ 28,773 16,799 $ 1.71 $ 23,331 17,048 $ 1.37
Gain on sale of Discont. Oper. -- -- 13,606 0.80
Extra. Gain - early debt ext. 415 .03 -- --
------------ ------------ ------------ ------------
Total diluted net earnings $ 29,188 $ 1.74 $ 36,937 $ 2.17
============ ============ ============ ============
</TABLE>
5
<PAGE> 8
6. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for the Company's year ending October 31, 1999. SFAS No.
130 establishes standards for the reporting and displaying of comprehensive
income and its components. In accordance with this new pronouncement, the
Company has calculated total comprehensive income for the three and nine
months ended July 31, 1999 to be $12,513 and $24,827, respectively.
Comprehensive income for the three and nine months ended July 31, 1998 is
$10,407 and $33,493, respectively. Included in comprehensive income is net
income, the change in the cumulative foreign currency translation adjustment
balance and the change in the adjustment for minimum pension liability
balance.
7. Extraordinary Item
During the first nine months of fiscal 1999, the Company accepted unsolicited
block offers to buy back $9.7 million principal amount of the 6.88%
Convertible Subordinated Debentures for $8.8 million in cash. An after tax
extraordinary gain of $415 thousand was recorded on these transactions in the
second fiscal quarter of 1999. The principal amount of bonds outstanding as
of July 31, 1999 was $73,720,000.
8. Second Amended and Restated Rights Agreement
The Company approved an amended shareholder rights plan during the second
quarter of fiscal 1999. Named the Second Amended and Restated Rights
Agreement, the updated plan went into effect April 15, 1999 and replaced the
Amended and Restated Rights Agreement which was established 10 years earlier.
The Amended and Restated Rights Agreement and the Preferred Share Purchase
Rights granted pursuant thereto were scheduled to expire on April 26, 1999.
With the Second Amended and Restated Rights Agreement, Quanex's shareholder
rights plan has been extended 10 years to April 15, 2009. Additionally, the
purchase price was increased from $60.00 to $90.00.
9. Long-term Debt
On June 1, 1999, the Company borrowed $3 million unsecured principal amount
of Scott County, Iowa Variable Rate Demand Industrial Waste Recycling Revenue
Bonds Series 1999. The bonds require 15 annual principal payments of $200
thousand beginning on July 1, 2000. The variable interest rate is established
by the remarketing agent based on the lowest weekly rate of interest which
would permit the sale of the bonds at par, on the basis of prevailing
financial market conditions. Interest is payable on the first business day of
each calendar month. Interest rates on these bonds for the current fiscal
year period have ranged from 3.0% to 3.7%.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
------------ ------------
<S> <C> <C>
Revolving credit agreements ...................................... $ 97,280 $ 83,212
Convertible subordinated debentures .............................. 73,720 83,420
Term loan ........................................................ 6,551 8,031
Bank borrowings due within one year .............................. 7,403 11,120
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
State of Alabama Industrial Development Bonds .................... 4,755 4,755
Scott County, Iowa Industrial Waste Recycling Revenue Bonds ...... 3,000 --
Other ............................................................ 7,072 6,737
------------ ------------
$ 203,056 $ 200,550
Less maturities due within one year included in current
liabilities ...................................................... 8,628 12,248
------------ ------------
$ 194,428 $ 188,302
============ ============
</TABLE>
6
<PAGE> 9
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Industry Segment Information
<TABLE>
<CAPTION>
Corporate
Three Months Ended Engineered Aluminum Mill Engineered and
July 31, 1999 Steel Bars Sheet Products Products Other(1) Consolidated
- ---------------------------------- ---------- -------------- ---------- --------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies ....... $ 75,637 $ 70,719 $ 60,263 $ 0 $206,619
Intersegment(2) ................. 1,152 5,953 0 (7,105) --
-------- -------- -------- -------- --------
Total ............................ $ 76,789 $ 76,672 $ 60,263 $ (7,105) $206,619
======== ======== ======== ======== ========
Operating income (loss) .......... $ 16,829 $ 4,002 $ 4,898 $ (3,820) $ 21,909
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Corporate
Three Months Ended Engineered Aluminum Mill Engineered and
July 31, 1998 Steel Bars Sheet Products Products Other(1) Consolidated
- ---------------------------------- ---------- -------------- ---------- --------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies ........ $ 80,018 $ 63,339 $ 61,497 $ 0 $ 204,854
Intersegment(2) .................. 741 7,533 -- (8,274) --
-------- -------- -------- ------- ----------
Total ............................. $ 80,759 $ 70,872 $ 61,497 $(8,274) $ 204,854
======== ======== ======== ======= ==========
Operating income (loss)(3) ........ $ 14,638 $ 3,225 $ 1,137 $(1,067) $ 17,933
======== ======== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Corporate
Nine Months Ended Engineered Aluminum Mill Engineered and
July 31, 1999 Steel Bars Sheet Products Products Other(1) Consolidated
- ---------------------------------- ---------- -------------- ---------- --------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies ........ $212,584 $209,168 $170,849 $ -- $592,601
Intersegment(2) .................. 4,161 15,791 1 (19,953) --
-------- -------- -------- -------- --------
Total ............................. $216,745 $224,959 $170,850 $(19,953) $592,601
======== ======== ======== ======== ========
Operating income (loss) ........... $ 42,446 $ 9,201 $ 7,735 $(10,839) $ 48,543
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Corporate
Nine Months Ended Engineered Aluminum Mill Engineered and
July 31, 1998 Steel Bars Sheet Products Products Other(1) Consolidated
- ---------------------------------- ---------- -------------- ---------- ---------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Sales:
To unaffiliated companies ........ $ 247,446 $ 176,465 $ 165,353 $ -- $ 589,264
Intersegment(2) .................. 2,357 17,209 -- (19,566) --
--------- --------- --------- --------- ---------
Total ............................. $ 249,803 $ 193,674 $ 165,353 $ (19,566) $ 589,264
========= ========= ========= ========= =========
Operating income (loss)(3) ........ $ 42,760 $ (438) $ 2,944 $ (8,439) $ 36,827
========= ========= ========= ========= =========
</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) At the start of fiscal year 1999, Quanex changed its inventory valuation
method for measuring segment results from LIFO to FIFO This change has no
impact on consolidated results, which remain LIFO based. Prior year's data
have not been restated, however, the following information is being
provided to allow comparability. The effect on operating income of
switching to FIFO method of inventory valuation for segment reporting
during 1998 would have been as follows:
<TABLE>
<CAPTION>
Corporate
Engineered Aluminum Mill Engineered and
Steel Bars Sheet Products Products Other Consolidated
----------- -------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended July 31, 1998 $ -- $(1,400) $ -- $ 1,400 $ --
Nine months ended July 31, 1998 $ -- $(1,891) $ (165) $ 2,056 $ --
</TABLE>
7
<PAGE> 10
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
GENERAL
The discussion and analysis of Quanex Corporation and its subsidiaries' (the
"Company"'s) financial condition and results of operations should be read in
conjunction with the July 31, 1999 and October 31, 1998 Consolidated Financial
Statements of the Company and the accompanying notes.
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, construction
delays, market conditions for the Company's customers, any material changes in
purchases by the Company's principal customers, 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 and Year 2000
readiness efforts, 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.
RESULTS OF OPERATIONS
Overview
Summary Information as % of Sales: (Dollars in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
1999 1998 1999 1998
Dollar % of Dollar % of Dollar % of Dollar % of
Amount Sales Amount Sales Amount Sales Amount Sales
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 206.6 100% $ 204.9 100% $ 592.6 100% $ 589.3 100%
Cost of Sales 161.1 78 164.5 80 470.0 79 485.2 82
Sell., gen. and admin. 12.0 6 11.7 6 39.5 7 35.0 6
Deprec. and amort. 11.6 5 10.8 5 34.6 6 32.3 6
------- --- ------- --- ------- --- ------- ---
Operating Income 21.9 11% 17.9 9% 48.5 8% 36.8 6%
Interest Expense (3.6) (2) (3.7) (2) (10.9) (2) (11.1) (2)
Capitalized Interest .4 0 1.1 1 1.2 0 3.7 1
Other, net .2 0 .5 0 1.1 0 1.8 0
Income tax expense (6.6) (3) (5.5) (3) (13.9) (2) (10.9) (2)
------- --- ------- --- ------- --- ------- ---
Income from continuing operations
$ 12.3 6% $ 10.3 5% $ 26.0 4% $ 20.3 3%
======= ======= ======= =======
</TABLE>
The Company achieved higher earnings for the third quarter and the nine-month
period of fiscal 1999 compared with the same periods of fiscal 1998. The primary
contributing factors were higher sales and operating efficiencies in the Nichols
Aluminum division resulting from sales by Nichols Aluminum-Alabama, Inc.
("Nichols Aluminum Alabama") which was acquired in October 1998, increased sales
of value added products, lower material costs, and other operating improvements
achieved at most business units. Additionally, there were some benefits realized
at the engineered steel bar business which amounted to approximately $2 million
(pre-tax) as a result of an insurance
8
<PAGE> 11
recovery and a litigation settlement received during the first quarter of fiscal
1999.
Business Segments
Pursuant to SFAS 131, the Company has three reportable segments: engineered
steel bars, aluminum mill sheet products, and engineered products. The
engineered steel bar segment consists of engineered steel bars manufacturing,
steel bar and tube heat treating services and steel bar and tube wear and
corrosion resistant finishing services. The aluminum mill sheet segment
manufactures mill finished and coated aluminum sheet. The engineered products
segment manufactures impact-extruded and machined aluminum and steel parts,
aluminum window and patio door screens, window frames and other roll formed
products and stamped shapes.
The following table sets forth selected operating data for the Company's
three business segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
1999 1998 1999 1998
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Engineered Steel Bars:
Net sales ............................ $ 76,789 $ 80,759 $ 216,745 $ 249,803
Operating income ..................... 16,829 14,638 42,446 42,760
Deprec. and amort..................... 4,056 3,384 12,168 10,146
Identifiable assets .................. $ 231,962 $ 207,496 $ 231,962 $ 207,496
Aluminum Mill Sheet Products:(1)
Net sales ............................ $ 76,672 $ 70,872 $ 224,959 $ 193,674
Operating income (loss) .............. 4,002 3,225 9,201 (438)
Deprec. and amort..................... 3,112 2,719 9,370 8,187
Identifiable assets .................. $ 197,355 $ 160,154 $ 197,355 $ 160,154
Engineered Products:
Net sales ............................ $ 60,263 $ 61,497 $ 170,850 $ 165,353
Operating income ..................... 4,898 1,137 7,735 2,944
Deprec. and amort..................... 4,013 4,634 12,554 13,814
Identifiable assets .................. $ 210,914 $ 273,795 $ 210,914 $ 273,795
</TABLE>
(1) 1999 results include Nichols Aluminum Alabama's operations acquired October
9, 1998. (See Note 3 to financial statements)
9
<PAGE> 12
The engineered steel bar business earned best-ever quarterly operating
income in the three months ended July 31, 1999. For the nine months ended July
31, 1999, operating income was slightly below the same period ended 1998. Demand
in the automotive and heavy truck markets continues to be strong, but other
markets are experiencing fair to weak business conditions. This slowdown and
global competition contributed to lower volumes and sales for engineered steel
bars for the nine months ended July 31, 1999. Despite lower volume and net
sales, operating income levels remained relatively strong. This is largely due
to the lower material costs and increased sales of value-added products
experienced during the first nine months of fiscal 1999 as compared to 1998.
Additionally, there were some benefits realized which amounted to approximately
$2 million (pretax) as a result of an insurance recovery and a litigation
settlement received during the first quarter of fiscal 1999.
The aluminum mill sheet business achieved increases in volume, net sales
and operating income for the first nine months of fiscal 1999 as compared to the
same period ended 1998. These increases were largely a result of the additional
finishing capacity brought by the acquisition of Nichols Aluminum Alabama in
October of 1998. All of Nichols' facilities are benefiting from the acquisition
which allows them to realize gains and efficiencies obtainable by running at
higher volumes and operating with greater flexibility. The casting plant is
utilizing its two new rotary furnaces and dross recovery system to melt more
economical aluminum scrap and improve the yield of scrap to molten metal.
Continuous improvement projects are underway at Nichols' casting and finishing
operations to identify and remove constraints throughout their manufacturing
processes including restoration and improvement projects for the Alabama-based
mill.
The engineered products business reported improved operating income in the
first nine months ended July 31, 1999 as compared to the same prior year period.
The fabricated products division (AMSCO and Homeshield) of this business
continued to realize strong demand in its primary homebuilding and remodeling
markets. Also contributing to the business's better results are ongoing cost
management, lower amortization, new product, and productivity improvement
programs. At Piper Impact, new cellular manufacturing techniques are being
implemented to further reduce costs and improve customer service. As of the end
of May 1999, production has ceased at the Piper Utah facility and all of its
operations have been consolidated in Mississippi. The Company is beginning to
see higher sales levels of new products, especially at Piper Europe which have
helped to offset lower demand for the older generation aluminum air bag
components. Several other new applications for impact-extrusions are in various
stages of development for both Piper Impact and Piper Europe.
Outlook
The Company currently expects that overall business levels for the remainder of
fiscal 1999 should be similar to those experienced during 1998, excluding the
one-time, mostly non-cash restructuring charge taken in the fourth quarter of
fiscal 1998. The engineered products segment anticipates softening demand for
aluminum air bag components partially offset by seasonally strengthening demand
for fabricated residential building products. The improved spreads resulting
from lower steel scrap for the first nine months of 1999 may not continue for
the remainder of 1999 as steel scrap prices are higher. The Company also expects
continued benefits to sales and earnings for the remainder of fiscal 1999 from
the acquisition of Nichols Aluminum Alabama. Domestic and global market factors
will impact the Company and any slowdown in the U.S. economy could adversely
affect demand and pricing for many of the Company's products.
Fiscal Quarter and Nine months ended July 31, 1999 vs. 1998
Net Sales - Consolidated net sales for the three and nine months ended July 31,
1999, were $206.6 and $592.6 million, respectively, representing an
10
<PAGE> 13
increase of $1.8 million, or 1%, and an increase of $3.3 million, or 1%, when
compared to consolidated net sales for the same periods in 1998. For the three
months ended July 31, 1999, increased net sales in the aluminum mill sheet
business were partially offset by lower net sales at the Company's engineered
steel bar and engineered products businesses. For the nine months ended July 31,
1999, increased net sales at the aluminum mill sheet and engineered products
businesses were partially offset by lower net sales at the Company's engineered
steel bar business.
Net sales from the Company's engineered steel bar business for the three
and nine months ended July 31, 1999, were $76.8 and $216.7 million,
respectively, representing a decrease of $4.0 million, or 5%, and $33.1 million,
or 13%, when compared to the same periods last year. This decline was
principally due to the reduced demand in some of the durable goods market,
inventory adjustments by some customers and pricing pressures resulting from
global sourcing of engineered bars and forged components.
Net sales from the Company's aluminum mill sheet products business for the
three and nine months ended July 31, 1999, were $76.7 and $225.0 million,
respectively, representing an increase of $5.8 million, or 8%, and $31.3
million, or 16%, when compared to the same periods last year. This increase was
largely due to the acquisition of Nichols Aluminum Alabama in October of 1998.
Net sales from the Company's engineered products business for the three and
nine months ended July 31, 1999, were $60.3 and $170.9 million, respectively,
representing a decrease of $1.2 million, or 2%, and an increase of $5.5 million,
or 3%, when compared to the same periods last year. The decrease in the three
month period ended July 31, 1999 is largely due to decreased demand for older
generation aluminum airbag components at the Piper facilities, partially offset
by sales of new non-airbag products as well as increased demand for building and
construction products in the Fabricated Products division. The increase in net
sales for the nine months ended July 31, 1999 is due to increased sales at both
Piper facilities as well as the Fabricated Products division due to
comparatively strong demand for residential and automotive products.
Operating income - Consolidated operating income for the three and nine
months ended July 31, 1999, was $21.9 and $48.5 million, respectively,
representing an increase of $4.0 million, or 22%, and $11.7 million, or 32%,
when compared to the same periods last year. For the three months ended July 31,
1999, all business segments had increased operating income, partially offset by
increased expenses at the corporate office. For the nine months ended July 31,
1999, the aluminum mill sheet and engineered products businesses had increased
operating income, partially offset by lower operating income at the engineered
steel bar business and higher expenses at the corporate office.
Included in the Company's consolidated operating income is the impact of
accounting for the LIFO valuation method of inventory (See Note 2 to the
financial statements). At the start of fiscal year 1999, Quanex changed its
inventory valuation method for measuring segment results from LIFO to FIFO. This
change has no impact on consolidated results, which remain LIFO based. Prior
year's data have not been restated. See Note 10 to the financial statements for
further discussion.
Operating income from the Company's engineered steel bar business for the
three and nine months ended July 31, 1999, was $16.8 and $42.4 million,
respectively, representing an increase of $2.2 million, or 15%, and a decrease
of $.3 million, or 1%, when compared to the same periods last year. The increase
in the three months ended July 31, 1999 compared to 1998 was largely due to the
higher spreads resulting from lower material prices and increased sales of
value-added products. The decrease in the nine months ended July 31, 1999 was
due to reduced volume and net sales, largely offset by higher spreads
11
<PAGE> 14
and productivity improvements realized from the Phase III project completed in
1998. Additionally, approximately $2 million of benefits were realized as a
result of an insurance recovery and a litigation settlement received in the
first fiscal quarter of 1999.
Operating income from the Company's aluminum mill sheet products business
for the three and nine months ended July 31, 1999, was $4.0 and $9.2 million,
respectively, representing an increase of $.8 million and $9.6 million compared
to the same periods last year. This increase was largely due to higher sales and
operating efficiencies realized from the acquisition of Nichols Aluminum Alabama
and improved spreads resulting from lower aluminum scrap prices as well as
benefits from the new rotary furnaces and the dross recovery system.
Operating income from the Company's engineered products business for the
three and nine months ended July 31, 1999, was $4.9 and $7.7 million,
respectively, representing an increase of $3.8 million, or 331%, and $4.8
million, or 163%, when compared to the same periods last year. The improvement
was largely due to increased sales at the Fabricated Products Division (AMSCO
and Homeshield) for the three and nine month periods as well as at the Piper
facilities for the nine month period. Additionally, this business experienced
lower material costs which contributed to improved spreads, lower amortization
expense and some success at cost management measures.
In addition to the three operating segments mentioned above, operating
expenses for corporate and other for the three and nine months ended July 31,
1999 was $3.8 and $10.8 million, respectively, compared to $1.1 and $8.4
million, respectively, for the same periods last year. Included in corporate and
other are the corporate office expenses, impact of LIFO valuation method of
inventory accounting and intersegment eliminations. (See notes 2 and 10 to the
financial statements regarding LIFO valuation method of inventory accounting.)
Selling, general and administrative expenses increased by $.4 million, or
3%, and $4.5 million, or 13%, respectively, for the three and nine months ended
July 31, 1999, as compared to the same periods of last year. This increase is
largely a result of the acquisition of Nichols Aluminum Alabama, Year 2000
readiness efforts, relocation expenses and consulting expenses for system
implementations.
Depreciation and amortization increased by $.8 million, or 7%, and $2.3
million, or 7%, respectively, for the three and nine months ended July 31, 1999,
as compared to the same periods of last year. The increase is principally due to
increased depreciation at the engineered steel bar and aluminum mill sheet
products businesses for recently completed projects as well as the inclusion of
Nichols Aluminum Alabama, which was acquired in October 1998, partially offset
by lower amortization at the engineered products business.
Interest expense remained relatively constant for the three and nine months
ended July 31, 1999, as compared to the same periods of 1998.
Capitalized interest decreased by $.7 and $2.5 million, respectively, for
the three and nine months ended July 31, 1999, as compared to the same periods
of 1998 primarily due to the completion of significant capital projects at
MACSTEEL during 1998.
Other, net decreased $.2 and $.7 million, respectively, for the three and
nine months ended July 31, 1999, as compared to the same periods of 1998
primarily as a result of decreased investment income on lower cash balances.
Income from continuing operations increased $2.0 million, or 20%, and $5.6
million, or 28%, respectively, for the three and nine months ended July 31,
12
<PAGE> 15
1999, as compared to the same periods of 1998. The increase in the three month
period was principally due to increased operating earnings from each of the
Company's three operating segments. The increase in the nine month period was
principally due to increased operating earnings from the Company's aluminum mill
sheet products and the engineered products businesses while the engineered steel
bar business had slightly lower operating earnings.
Net income was $12.3 and $26.4 million, respectively, for the three and
nine months ended July 31, 1999, compared to $10.3 and $33.9 million for the
same periods of 1998. Included in net income for the first quarter of fiscal
1998 was $13.6 million of gain on the sale of discontinued operations, net of
taxes. Included in net income for the second fiscal quarter of 1999 was $415
thousand of extraordinary gain on the early extinguishment of debt, net of
taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash on hand, cash flow from
operations, and borrowings under its $250 million unsecured Revolving Credit and
Term Loan Agreement ("Bank Agreement"). There have been no significant changes
to the terms of the Company's debt structure during the nine month period ended
July 31, 1999. See Note 9 to the financial statements for detail regarding the
outstanding borrowings under the Company's various facilities.
On June 1, 1999, the Company borrowed $3 million unsecured principal amount
of Scott County, Iowa Variable Rate Demand Industrial Waste Recycling Revenue
Bonds Series 1999. The bonds require 15 annual principal payments of $200
thousand beginning on July 1, 2000. The variable interest rate is established by
the remarketing agent based on the lowest weekly rate of interest which would
permit the sale of the bonds at par, on the basis of prevailing financial market
conditions. Interest is payable on the first business day of each calendar
month.
During the first nine months of fiscal 1999 the Company accepted
unsolicited block offers to buy back $9.7 million principal amount of
convertible subordinated debentures for $8.8 million in cash. An after tax
extraordinary gain of $415 thousand was recorded on these transactions.
At July 31, 1999, the Company had commitments of approximately $20 million
for the purchase or construction of capital assets, primarily relating to the
Company's continued expansions at MACSTEEL and Piper Impact. The Company plans
to fund these capital expenditures 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 the nine months ended July 31, 1999
was $60.3 million. This represents an increase of $7.8 million, or 15%, compared
to the nine months ended July 31, 1998. This increase is primarily a result of
several factors including:
1) increased cash resulting from the improved operating earnings of the first
nine months of fiscal 1999 compared to the same period of 1998 and
2) lower taxes paid in the nine month period ended July 31, 1999 compared to
1998, (higher tax payments were made in the nine months ended 1998 due
largely to the gain on the sale of discontinued operations).
13
<PAGE> 16
Investment Activities
Net cash used by investment activities during the nine months ended July 31,
1999 was $44.7 million compared to $10.7 million for the same period of 1998.
Fiscal 1998 cash from investing activities included proceeds from the sale of
the Tubing Operations of $31.4 million. Capital expenditures and other
investment activities increased $2.6 million in the nine month period ended July
31, 1999 as compared to the same period of 1998. The Company estimates that
fiscal 1999 capital expenditures will approximate $55 to $60 million.
Financing Activities
Net cash provided by financing activities for the nine months ended July 31,
1999 was $16 thousand, compared to $14.0 million used for the same prior year
period. The Company borrowed $14.2 million during the first nine months of
fiscal 1999, as compared to the repayment of $10.4 million during the same
period last year. During 1999, the Company purchased $9.7 million principal
value of its subordinated debentures for $8.8 million in cash. In addition, cash
provided by the issuance of common stock was $1.7 million less in the nine
months ended July 31, 1999 as compared to the same prior year period.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits", which is effective for the
Company's year ending October 31, 1999. This statement defines new disclosure
requirements for pension and other postretirement benefits in an effort to
facilitate financial analysis by adding useful information and deleting
disclosures that the FASB considers no longer useful. The Company continues to
analyze SFAS No. 132 to determine what additional disclosures will be required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's year
ending October 31, 2001. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will
analyze SFAS No. 133 to determine what, if any, impact or additional disclosure
requirements this pronouncement will have.
YEAR 2000
The Company, like other businesses, is facing the Year 2000 issue. Many computer
systems and equipment with embedded chips or processors use only two digits to
represent the calendar year. This could result in computational or operational
errors as dates are compared across the century boundary causing possible
disruptions in business operations. The Year 2000 issue can arise at any point
in the Company's supply, manufacturing, processing, distribution, and financial
chains.
State of Readiness
The Company began addressing the Year 2000 issue in 1997, with an initial
assessment of Year 2000 readiness efforts at each of its operating units. Based
on responses from the operating units, a standardized Year 2000 Plan format was
developed. By July 1998, each operating unit had developed a Year 2000 Plan that
included the following components:
1. Inventory of all systems - identifying them as critical and non-critical
2. Assessment of all systems for Year 2000 compliance
3. Development of a project schedule for remediation or replacement of
non-compliant systems
4. Development of a project schedule for testing the compliant systems
14
<PAGE> 17
5. Development of a list of significant vendors/suppliers for surveying their
Year 2000 readiness efforts
The Year 2000 issue is being addressed within the Company by its individual
business units, and progress is reported periodically to management. The Company
has committed necessary resources to conduct risk assessment and to take
corrective actions, where required.
Business and Information Systems (Information Technology Systems)
Engineered Steel Bars Segment:
Engineered Steel Bars Segment has completed the inventory, assessment,
remediation/replacement and testing phases for all systems with the exception of
the Payroll and Human Resources Management system. The Payroll and Human
Resources Management system is expected to be remediated and tested by October
1999 for this segment.
Aluminum Mill Sheet Products Segment:
Aluminum Mill Sheet Products segment upgraded its main business system and
tested it for Y2K compliance as planned in July 1999. All other critical
business systems, with the exception of the Payroll and Human Resources
Management system, have been inventoried, assessed, remediated or replaced and
tested for Y2K compliance. The Payroll and Human Resources Management system is
expected to be remediated or replaced and tested by October 1999.
Engineered Products Segment:
Engineered Products Segment has finished the inventory and assessment phases for
all business systems. Fabricated Products Division has remediated or replaced 95
percent of its critical business systems. Upgrading the balance of the systems,
and testing of all IT Systems is scheduled to be complete by October 1999. Piper
Impact is approximately 90 percent finished in the process of implementing an
Enterprise Resource Planning ("ERP") system. Completion of this implementation,
including testing, is projected to occur by the end of September 1999.
Remediation/replacement and testing of remaining business systems at Piper are
at different stages of completion, ranging from 75 to 90 percent. It is
anticipated that remediation, replacement and testing of all critical business
systems will be complete by October 1999.
Non-Information Technology Systems
For Non-IT systems, the inventory phase is complete at all business segments.
The Company is relying on a combination of vendor certification and internal
testing for assessment phase. At Engineered Steel Bars Segment, assessment,
replacement, and testing phases have been completed on all the critical systems.
Assessment and testing, with corrective action as required, at the other two
business segments is ranging between 60 and 80 percent accomplished, with
anticipated completion by October 31, 1999.
Third Party Relationships
The Company's business units are in the process of surveying the Year 2000
readiness efforts of critical external parties, including suppliers and
customers. Approximately 700 major suppliers have been contacted. Over 70
percent have responded, with varying levels of readiness being reported.
Follow-up surveys and risk assessments are expected to be complete by the end of
September 1999. Monitoring risk in this area will continue through the fourth
quarter of 1999, as many suppliers will not have completed their Year 2000
readiness efforts until such time.
A survey of major customers' Year 2000 readiness efforts is in progress.
Approximately 500 major customers have been contacted. Less than 50 percent
15
<PAGE> 18
have responded. Monitoring and risk assessment will continue through the fourth
quarter of 1999.
Contingency Planning
The Company is developing contingency plans intended to mitigate possible
disruption in business operations that may result from the Year 2000 issue. All
of the business units have completed an initial draft of such plans. These plans
include stockpiling necessary materials and inventories, securing alternate
sources of supply, adjusting facility shutdown and start-up schedules,
development of manual procedures to execute transactions and complete processes
and other appropriate measures. Once developed, contingency plans will be
continually refined, as additional information becomes available.
Independent Verification and Validation
The Company commissioned a third party review of its Y2K program. Detailed
interviews were conducted at the Company's Group and Corporate offices, and at
most plant locations. The results of this review highlighted the progress being
made and pointed out areas where additional resources were needed. As a result
of the review, the Company augmented the staff resources working on the Y2K
program with several experienced Y2K project managers and technicians in order
to address the requirements identified. The Company also retained a consultant
to provide Y2K Program coordination support for the Corporate Office, and to
assist in the audit of readiness efforts at the business segments.
Cost
Year 2000 activities and associated costs are being managed within each business
unit. The historical costs of remediation and other activities directly
connected with Year 2000 issues incurred as of July 31, 1999 were $1.8 million.
The timing of these expenses may vary and is not necessarily indicative of
readiness efforts or progress to date. Not included in these historical costs
are expenditures associated with normal upgrades and acquisition or
implementation of new business systems planned for other business reasons and
not accelerated due to Year 2000 issues. As of now, the Company's best estimate
of total costs directly related to Year 2000 issues, is between $2 and $3
million.
Risks
The Company is a diversified and decentralized company comprised of three
business segments. Each of these segments has multiple operating units,
resulting in thirteen separate Year 2000 Plans. The Company does not have
standardized systems throughout Quanex Corporation and its subsidiaries. This
diversification has allowed the Company to spread the risk of the Year 2000
issue, since no one system is responsible for the entire financial and
operational needs of the Company.
While the diversification reduces the risk of a material Year 2000 issue
affecting the entire Company, this same diversification increases the
possibility that the Year 2000 issue will cause a problem at one or more units
since many more systems exist than in a centralized environment. Management is
addressing this issue by requiring regular periodic reporting from each business
unit and monitoring the progress with follow-up review by independent
consultants. However, if implementation of the ERP systems at Piper Impact is
not completed in a timely manner, contingency plans will be implemented to
minimize disruptions in business operations that may result from the Year 2000
issue.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
16
<PAGE> 19
operations due to Year 2000 issues could affect the Company's operations. While
each business unit is evaluating the status of its major suppliers' Year 2000
readiness efforts and develop contingency plans to manage the risk, it cannot
eliminate the potential for disruption due to third party failures.
The Company is also dependent upon its customers for sales and cash flow.
Year 2000 interruptions in the operations of its major customers could result in
reduced sales, increased inventory or receivable levels and cash flow
reductions. The Company is in the process of surveying its major customers' Year
2000 readiness efforts to assess risk and develop plans to minimize the impact
on its operations.
The Company believes that it is taking all reasonable steps to ensure Year
2000 readiness. Its ability to meet the projected goals, including the costs of
addressing the Year 2000 issue and the dates upon which compliance will be
attained, depends on the availability and cost of personnel trained in this
area, the timing and success of Year 2000 remediation and testing efforts, the
Year 2000 readiness of its key suppliers and customers and the successful
development and implementation of contingency plans. Although these and other
unanticipated Year 2000 issues could have an adverse effect on the results of
operations or financial condition of the Company, it is not possible to
anticipate the extent of impact or the worst case scenario at this time, since
the contingency plans are still under development.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS QUARTERLY REPORT ON
FORM 10-Q ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURE ACT.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the Euro, on January 1, 1999. The new currency was introduced in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services among the participating countries.
On January 1, 1999, the participating countries adopted the Euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash (banking) transactions. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, Euro-denominated bills and coins will be issued for cash
transactions. For a period of six months from this date, both legacy currencies
and the Euro will be legal tender. On or before July 1, 2002, the participating
countries will withdraw all legacy currency and use exclusively the Euro.
At the current time, the Company does not believe that the conversion to
the Euro will have a material impact on its business or its financial
statements.
17
<PAGE> 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company holds certain floating-rate obligations. The exposure of these
obligations to increases in short-term interest rates is limited by interest
rate swap agreements entered into by the Company. These swap agreements
effectively fix the interest rate on all of the Company's variable rate debt,
thus limiting the potential impact that increasing interest rates would have on
earnings. At October 31, 1998 the unrealized losses related to the interest rate
swap agreements were $8.5 million. As of July 31, 1999, the unrealized losses
related to the interest rate swap agreements were $1.7 million. It should be
noted that any change in value of these contracts, real or hypothetical, would
be significantly offset by an inverse change in the value of the underlying
hedged item.
Other than the item mentioned above, there were no other material quantitative
or qualitative changes during the first nine months of fiscal 1999 in the
Company's market risk sensitive instruments.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
On or about May 26, 1999, the federal government filed in the United States
District court for the Southern District of Texas a complaint and proposed
consent decree with respect to alleged violations of the Clean Water Act by the
Company and Vision Metals, Inc. at the Company's former facility in Rosenberg,
Texas. Among other things, the complaint alleged that during the Company's
ownership the plant had discharged water which contained pollutants at levels
greater than applicable effluent limits, had not appropriately monitored its
discharges, and had not adequately notified the federal Environmental Protection
Agency of exceedances. Under the consent decree, which is subject to public
comment and approval of the court, all of the complaint's allegations against
the Company would be settled by payment of a civil penalty in the amount of
$466,421. The Company tendered this matter to Vision Metals for defense and
indemnification pursuant to the purchase agreement by which Vision Metals
acquired the Rosenberg facility and assumed certain environmental liabilities.
Vision Metals has accepted the Company's tender without reservation. The court
approved and entered the consent decree on or about August 2, 1999.
Item 6 - Exhibits and Reports on Form 8-K.
Exhibit 3 Amended and Restated Bylaws of the Registrant, as amended
through August 26, 1999.
Exhibit 27 Financial Data Schedule - July 31, 1999.
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not
filed with this Quarterly Report on Form 10-Q 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.
No reports on Form 8-K were filed by the Company during the quarter for which
this report is being filed.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements 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
/s/ Viren M. Parikh
-----------------------------------------
Viren M. Parikh
Controller (Chief Accounting Officer)
Date September 10,1999
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3 Amended and Restated Bylaws of the Registrant, as amended through
August 26, 1999.
27 Financial Data Schedule - July 31, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 3
AMENDED AND RESTATED (August 26, 1999)
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 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
<PAGE> 2
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.
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
<PAGE> 3
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 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
<PAGE> 4
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 entitled to vote at the meeting. At such adjourned
meeting, any
<PAGE> 5
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
<PAGE> 6
a receiver 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.
<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.
<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 may designate one or more committees of the
Board as may be established from time to time 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 the Board of Directors shall be elected
annually by vote of a majority of the Board. Presence of
<PAGE> 9
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. 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
35. 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.
36. 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 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 Bylaws.
<PAGE> 10
37. 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.
38. 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.
39. 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 Chairman of the Board
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.
40. 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.
41. 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 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.
42. 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,
<PAGE> 11
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.
43. 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.
44. 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
45. 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.
46. 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
47. The fiscal year of the Corporation shall begin on the first day of
November and end on the thirty-first day of October.
Books and Records
48. 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
<PAGE> 12
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
49. 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.
50. 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, 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.
<PAGE> 13
Amendments
51. These Bylaws 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS
OF JULY 31, 1999 AND THE INCOME STATEMENT FOR THE NINE MONTHS ENDED JULY 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 41,863
<SECURITIES> 0
<RECEIVABLES> 78,918
<ALLOWANCES> 0
<INVENTORY> 81,824
<CURRENT-ASSETS> 216,970
<PP&E> 737,689
<DEPRECIATION> (337,183)
<TOTAL-ASSETS> 687,482
<CURRENT-LIABILITIES> 135,230
<BONDS> 194,428
0
0
<COMMON> 7,134
<OTHER-SE> 284,412
<TOTAL-LIABILITY-AND-EQUITY> 687,482
<SALES> 592,601
<TOTAL-REVENUES> 592,601
<CGS> 509,510
<TOTAL-COSTS> 509,510
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,881
<INCOME-PRETAX> 39,965
<INCOME-TAX> 13,988
<INCOME-CONTINUING> 25,977
<DISCONTINUED> 0
<EXTRAORDINARY> 415
<CHANGES> 0
<NET-INCOME> 26,392
<EPS-BASIC> 1.85
<EPS-DILUTED> 1.74
</TABLE>
