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 April 30, 2001
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 April 30, 2001
- --------------------------------------- -----------------------------
Common Stock, par value $0.50 per share 13,370,302
2
QUANEX CORPORATION
INDEX
Page No.
--------
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - April 30, 2001 and
October 31, 2000 ............................................ 1
Consolidated Statements of Income - Three and Six Months
Ended April 30, 2001 and 2000 ............................... 2
Consolidated Statements of Cash Flow - Six Months
Ended April 30, 2001 and 2000 ............................... 3
Notes to Consolidated Financial Statements ..................... 4 - 10
Item 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition ............................. 11 - 17
Item 3: Quantitative and Qualitative Disclosure about Market
Risk ........................................................... 18
Part II. Other Information
Item 4: Submission of Matters to a Vote of Security Holders ................ 19
Item 5: Other Information................................................... 19 - 20
Item 6: Exhibits and Reports on Form 8-K.................................... 20
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, October 31,
2001 2000
----------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents ..................................... $ 17,332 $ 22,409
Accounts and notes receivable, net ....................... 104,600 98,465
Inventories .............................................. 98,880 101,274
Deferred income taxes .................................... 12,657 12,771
Other current assets ..................................... 2,355 1,027
--------- ---------
Total current assets ............................. 235,824 235,946
Property, plant and equipment .............................. 712,790 681,992
Less accumulated depreciation and amortization ............. (364,482) (343,744)
--------- ---------
Property, plant and equipment, net ......................... 348,308 338,248
Goodwill, net .............................................. 60,720 47,539
Other assets ............................................... 25,284 24,126
--------- ---------
$ 670,136 $ 645,859
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 74,771 $ 77,339
Accrued expenses ......................................... 45,735 50,189
Income taxes payable ..................................... 1,815 3,218
Other current liabilities ................................ 2,153 --
Current maturities of long-term debt ..................... 421 256
--------- ---------
Total current liabilities ........................ 124,895 131,002
Long-term debt ............................................. 221,578 191,657
Deferred pension credits ................................... 5,882 7,026
Deferred postretirement welfare benefits ................... 7,701 7,634
Deferred income taxes ...................................... 26,096 27,620
Other liabilities .......................................... 17,544 14,423
--------- ---------
Total liabilities ................................ 403,696 379,362
Stockholders' equity:
Preferred stock, no par value ............................ -- --
Common stock, $.50 par value ............................. 7,065 7,110
Additional paid-in capital ............................... 109,113 111,061
Retained earnings ........................................ 169,727 165,841
Unearned compensation .................................... (1,197) (467)
Accumulated other comprehensive income ................... (3,193) (301)
--------- ---------
281,515 283,244
Less: Common stock held by rabbi trust .............. (1,873) (3,349)
Less: Cost of shares of common stock in treasury .... (13,202) (13,398)
--------- ---------
Total stockholders' equity ....................... 266,440 266,497
--------- ---------
$ 670,136 $ 645,859
========= =========
1
4
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
April 30, April 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Net sales ............................................. $ 213,758 $ 243,271 $ 407,583 $ 442,565
Cost and expenses:
Cost of sales ....................................... 179,761 200,655 342,428 366,298
Selling, general and administrative expense ......... 12,968 12,856 24,696 26,138
Depreciation and amortization ....................... 11,185 12,909 22,421 25,071
--------- --------- --------- ---------
Operating income ...................................... 9,844 16,851 18,038 25,058
Other income (expense):
Interest expense .................................... (4,122) (4,020) (8,283) (7,350)
Capitalized interest ................................ 432 647 746 1,191
Other, net .......................................... 444 307 1,767 1,309
--------- --------- --------- ---------
Income before income taxes and extraordinary gain ..... 6,598 13,785 12,268 20,208
Income tax expense .................................... (2,309) (4,756) (4,294) (7,004)
--------- --------- --------- ---------
Income before extraordinary gain ...................... 4,289 9,029 7,974 13,204
Extraordinary gain - early extinguishment of debt
(net of taxes) ........................................ -- 358 372 358
--------- --------- --------- ---------
Net income ............................................ $ 4,289 $ 9,387 $ 8,346 $ 13,562
========= ========= ========= =========
Earnings per common share:
Basic:
Income before extraordinary gain ................ $ 0.32 $ 0.66 $ 0.59 $ 0.95
Extraordinary gain .............................. -- 0.02 0.03 0.02
--------- --------- --------- ---------
Total basic net earnings ..................... $ 0.32 $ 0.68 $ 0.62 $ 0.97
========= ========= ========= =========
Diluted:
Income before extraordinary gain ................ $ 0.32 $ 0.61 $ 0.59 $ 0.91
Extraordinary gain .............................. -- 0.02 0.03 0.02
--------- --------- --------- ---------
Total diluted net earnings ................... $ 0.32 $ 0.63 $ 0.62 $ 0.93
========= ========= ========= =========
Weighted average shares outstanding:
Basic .............................................. 13,389 13,774 13,407 13,975
========= ========= ========= =========
Diluted ............................................ 13,481 16,118 13,523 16,406
========= ========= ========= =========
Common stock dividends per share ...................... $ 0.16 $ 0.16 $ 0.32 $ 0.32
2
5
QUANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Six Months Ended
April 30,
---------------------------
2001 2000
--------- ---------
(Unaudited)
Operating activities:
Net income ................................................................... $ 8,346 $ 13,562
Adjustments to reconcile net income
to cash provided by operating activities:
Extraordinary gain on early extinguishment of debt (net of taxes) ....... (372) (358)
Depreciation and amortization ........................................... 22,675 25,340
Deferred income taxes ................................................... (1,801) 159
Deferred pension and postretirement benefits ............................ (1,077) 636
Changes in assets and liabilities net of effects from acquisitions and
dispositions:
Increase in accounts and notes receivable ............................... (2,811) (21,989)
Decrease (increase) in inventory ........................................ 5,037 (11,004)
Increase (decrease) in accounts payable ................................. (4,629) 9,634
Decrease in accrued expenses ............................................ (5,835) (6,330)
Other, net (including income tax refund) ................................ (1,273) 7,867
--------- ---------
Cash provided by operating activities .............................. 18,260 17,517
Investment activities:
Acquisition of Golden Aluminum, net of cash acquired ......................... -- (20,148)
Acquisition of Imperial Products, Inc., net of cash acquired ................. -- (15,303)
Acquisition of Temroc Metals, Inc., net of cash acquired ..................... (17,922) --
Capital expenditures, net of retirements ..................................... (26,485) (24,770)
Other, net ................................................................... (1,094) (1,727)
--------- ---------
Cash used by investment activities ................................. (45,501) (61,948)
--------- ---------
Cash used by operating and investment activities ................... (27,241) (44,431)
Financing activities:
Bank borrowings, net ......................................................... 32,000 69,473
Purchase of subordinated debentures .......................................... (3,942) (9,586)
Purchase of Quanex common stock .............................................. (1,990) (14,204)
Common dividends paid ........................................................ (4,322) (4,521)
Issuance of common stock, net ................................................ 1,530 619
Other, net ................................................................... (1,112) (51)
--------- ---------
Cash provided by financing activities .............................. 22,164 41,730
Effect of exchange rate changes on cash and equivalents ........................ -- 167
--------- ---------
Decrease in cash and equivalents ............................................... (5,077) (2,534)
Cash and equivalents at beginning of period .................................... 22,409 25,874
--------- ---------
Cash and equivalents at end of period .......................................... $ 17,332 $ 23,340
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ..................................... $ 7,642 $ 6,440
Cash paid during the period for income taxes ................................. $ 6,472 $ 4,254
Cash received during the period for income tax refunds ....................... $ (210) $ (7,007)
3
6
QUANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
The interim consolidated financial statements of Quanex Corporation and
subsidiaries ("Quanex" or 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 2000 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 2001
classifications.
2. Inventories
Inventories consist of the following:
April 30, October 31,
2001 2000
--------- -----------
(In thousands)
Raw materials ............................... $ 25,248 $ 26,473
Finished goods and work in process .......... 66,588 67,981
--------- ---------
91,836 94,454
Other ....................................... 7,044 6,820
--------- ---------
$ 98,880 $ 101,274
========= =========
The values of inventories in the consolidated balance sheets are based
on the following accounting methods:
LIFO ........................................ $ 69,226 $ 69,028
FIFO ........................................ 29,654 32,246
--------- ---------
$ 98,880 $ 101,274
========= =========
With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $10 million at April 30, 2001 and
October 31, 2000, respectively.
3. Acquisitions
On November 30, 2000, Quanex completed the purchase of all of the capital stock
of Temroc Metals, Inc., ("Temroc"), a Minnesota corporation, for approximately
$22 million in cash. Temroc, as a surviving corporation, became a wholly owned
subsidiary of the Company. Goodwill associated with Temroc is approximately $14
million, based on preliminary purchase accounting.
Temroc is a leading aluminum extrusion and fabrication company based in
Hamel, Minnesota where it manufactures customized aluminum extrusions and
fabricated metal products for recreational vehicles, architectural products,
electronics and other markets. Temroc has become part of the Company's
Engineered Products Group and will continue to operate as a manufacturer of
aluminum extrusions and fabricated metal products.
To finance the acquisition, the Company borrowed against its existing $250
million unsecured revolving credit and term loan facility with a group of six
banks.
4
7
4. Earnings Per Share
The computational components of basic and diluted earnings per share are as
follows (shares and dollars in thousands except per share amounts):
For the Three Months Ended For the Three Months Ended
April 30, 2001 April 30, 2000
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------- ----------- ------------- -------
BASIC EPS
Income before extra. gain $ 4,289 13,389 $ 0.32 $ 9,029 13,774 $0.66
Extra. Gain - early debt ext. -- -- 358 .02
------- ------- --------- -----
Total basic net earnings $ 4,289 $ 0.32 $ 9,387 $0.68
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equiv.
arising from stock options -- 8 -- 6
Effect of common stock held
by rabbi trust -- 84 -- 147
Effect of conversion of
subordinated debentures(1) -- -- 813 2,191
DILUTED EPS
Income before extra. gain $ 4,289 13,481 $ 0.32 $ 9,842 16,118 $0.61
Extra. Gain - early debt ext. -- -- 358 .02
------- ------- --------- -----
Total basic net earnings $ 4,289 $ 0.32 $ 10,200 $0.63
For the Six Months Ended For the Six Months Ended
April 30, 2001 April 30, 2000
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------- ----------- ------------- -------
BASIC EPS
Income before extra. gain $ 7,974 13,407 $ 0.59 $ 13,204 13,975 $0.95
Extra. Gain - early debt ext. 372 0.03 358 .02
------- ------- --------- -----
Total basic net earnings $ 8,346 $ 0.62 $ 13,562 $0.97
EFFECT OF DILUTIVE SECURITIES
Effect of common stock equiv.
arising from stock options -- 10 -- 29
Effect of common stock held
by rabbi trust -- 106 -- 136
Effect of conversion of
subordinated debentures(1) -- -- 1,680 2,266
DILUTED EPS
Income before extra. gain $ 7,974 13,523 $ 0.59 $ 14,884 16,406 $0.91
Extra. Gain - early debt ext. 372 0.03 358 .02
------- ------- --------- -----
Total basic net earnings $ 8,346 $ 0.62 $ 15,242 $0.93
(1) Conversion of the Company's 6.88% convertible subordinated debentures into
common stock is anti-dilutive for the three and six month periods ended April
30, 2001 and therefore not included in the calculation of diluted earnings per
share.
5. Comprehensive Income ($ in thousands)
Total comprehensive income for the three and six months ended April 30,
2001 is $3,897 and $5,454, respectively. Total comprehensive income for the
three and six months ended April 30, 2000 is $9,579 and $13,617,
respectively. Included in comprehensive income is net income, the change in
the cumulative foreign currency translation adjustment balance (for fiscal
2000 only), the change in the adjustment for minimum pension liability
balance and the effective portion of the gains and losses on derivative
instruments designated as cash flow hedges.
5
8
6. Long-term Debt
Long-term debt consists of the following:
(In thousands)
April 30, October 31,
2001 2000
--------- -----------
Bank Agreement Revolver ......................................... $142,000 $110,000
Convertible subordinated debentures ............................. 58,727 63,337
Temroc Industrial Development Revenue Bonds ..................... 2,698 --
Industrial Revenue and Economic Development Bonds ............... 3,275 3,275
State of Alabama Industrial Development Bonds ................... 4,500 4,755
Scott County, Iowa Industrial Waste Recycling Revenue Bonds ..... 2,800 2,800
Other ........................................................... 7,999 7,746
-------- --------
$221,999 $191,913
Less maturities due within one year included in current
liabilities ..................................................... 421 256
-------- --------
$221,578 $191,657
======== ========
The Temroc Industrial Development Revenue Bonds were obtained as part of the
acquisition of Temroc. These bonds are due in annual installments through
October 2012. Interest is payable semi-annually at fixed rates from 4.5% to 5.6%
depending on maturity (average rate of 5.1% over the term of the bonds). These
bonds are secured by a mortgage on Temroc's land and building.
6
9
7. Industry Segment Information (in thousands)
THREE MONTHS ENDED Engineered Aluminum Engineered Corporate
APRIL 30, 2001 Steel Mill Sheet Products Piper And
Bars Products(3) (4)(5) Impact Other(1) Consolidated
---------- ----------- ---------- -------- --------- ------------
Net Sales:
To unaffiliated companies $ 74,628 $ 86,327 $ 31,630 $ 21,173 $ -- $213,758
Inter-segment(2) 1,378 3,817 -- -- (5,195) --
-------- -------- -------- -------- -------- --------
Total $ 76,006 $ 90,144 $ 31,630 $ 21,173 $ (5,195) $213,758
======== ======== ======== ======== ======== ========
Operating income (loss) $ 8,665 $ 1,144 $ 3,067 $ 928 $ (3,960) $ 9,844
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED Engineered Aluminum Engineered Corporate
APRIL 30, 2000 Steel Mill Sheet Products Piper And
Bars Products(3) (4) Impact(6) Other(1) Consolidated
---------- ----------- ---------- ---------- --------- ------------
Net Sales:
To unaffiliated companies $ 87,514 $106,642 $ 22,726 $ 26,389 $ -- $243,271
Inter-segment (2) 691 5,206 -- -- (5,897) --
-------- -------- -------- -------- -------- --------
Total $ 88,205 $111,848 $ 22,726 $ 26,389 $ (5,897) $243,271
======== ======== ======== ======== ======== ========
Operating income (loss) $ 15,902 $ 6,582 $ 2,474 $ (3,799) $ (4,308) $ 16,851
======== ======== ======== ======== ======== ========
SIX MONTHS ENDED Engineered Aluminum Engineered Corporate
APRIL 30, 2001 Steel Mill Sheet Products Piper And
Bars Products(3) (4)(5) Impact Other(1) Consolidated
---------- ----------- ---------- -------- --------- ------------
Net Sales:
To unaffiliated companies $144,691 $161,277 $ 57,593 $ 44,022 $ -- $407,583
Inter-segment (2) 2,913 7,683 -- -- (10,596) --
-------- -------- -------- -------- -------- --------
Total $147,604 $168,960 $ 57,593 $ 44,022 $(10,596) $407,583
======== ======== ======== ======== ======== ========
Operating income (loss) $ 16,000 $ 1,424 $ 5,000 $ 2,072 $ (6,458) $ 18,038
======== ======== ======== ======== ======== ========
SIX MONTHS ENDED Engineered Aluminum Engineered Corporate
APRIL 30, 2000 Steel Mill Sheet Products Piper And
Bars Products(3) (4) Impact(6) Other(1) Consolidated
---------- ----------- ---------- ---------- --------- ------------
Net Sales:
To unaffiliated companies $165,829 $182,404 $ 41,144 $ 53,188 $ -- $442,565
Inter-segment (2) 2,118 9,164 -- -- (11,282) --
-------- -------- -------- -------- -------- --------
Total $167,947 $191,568 $ 41,144 $ 53,188 $(11,282) $442,565
======== ======== ======== ======== ======== ========
Operating income (loss) $ 27,737 $ 8,785 $ 4,321 $ (7,272) $ (8,513) $ 25,058
======== ======== ======== ======== ======== ========
(1) Included in "Corporate and Other" are inter-segment eliminations and
corporate expenses.
(2) Inter-segment sales are conducted on an arm's length basis.
(3) Results include Nichols Aluminum - Golden operations acquired January 25,
2000.
(4) Results include Imperial Products, operations acquired April 3, 2000.
(5) Fiscal 2001 results include Temroc operations acquired November 30, 2000.
(6) Fiscal 2000 results include Piper Europe operations, which was disposed of
in July 2000.
7
10
8. Stock Repurchase Program - Treasury Stock
In December 1999, Quanex announced that its board of directors approved a
program to repurchase up to 2 million shares of the Company's common stock in
the open market or in privately negotiated transactions. During the six months
ended April 30, 2001, the Company repurchased 107,800 shares at a cost of
approximately $2.0 million. These shares were not canceled, but instead were
treated as treasury stock of the Company.
The cumulative cost of shares acquired as treasury shares, net of
shares reissued, is $13.2 million as of April 30, 2001 and is reflected as a
reduction of stockholders' equity in the balance sheet.
9. Extraordinary Item
During the six months ended April 30, 2001, the Company accepted unsolicited
block offers to buy back $4.6 million principal amount of the 6.88% Convertible
Subordinated Debentures for $3.9 million in cash. An after tax extraordinary
gain of $372 thousand was recorded on this transaction. The principal amount of
the convertible subordinated debentures outstanding as of April 30, 2001 was
$58,727,300.
10. Financial Instruments and Risk Management
Effective November 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 138, which requires the Company
to measure all derivatives at fair value and to recognize them in the balance
sheet as an asset or liability, depending on the Company's rights or obligations
under the applicable derivative contract. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Metal Exchange Forward Contracts
The Company's aluminum mill sheet products segment, Nichols Aluminum, uses
various grades of aluminum scrap as well as prime aluminum ingot as a raw
material for its manufacturing process. The price of this aluminum raw material
is subject to fluctuations due to many factors in the aluminum market. In the
normal course of business, Nichols Aluminum enters into firm price sales
commitments with its customers. In an effort to reduce the risk of fluctuating
raw material prices, the Company enters into firm price raw material purchase
commitments (which are designated as "normal purchases" under SFAS No. 133) as
well as forward contracts on the London Metal Exchange ("LME"). The Company's
risk management policy as it relates to these LME contracts is to enter into
contracts to cover the raw material needs of the Company's committed sales
orders as well as a certain level of forecasted aluminum sales, net of fixed
price purchase commitments.
With the use of firm price raw material purchase commitments and LME
contracts, the Company aims to protect the gross margins from the effects of
changing prices of aluminum. To the extent that the raw material costs factored
into the firm price sales commitments are matched with firm price raw material
purchase commitments, changes in aluminum prices should have no effect on the
Company. Where firm price sales commitments are matched with LME contracts, the
Company is subject to the ineffectiveness of LME contracts to perfectly hedge
raw material prices.
The Company has grouped the LME contracts into two types: customer
specific and non-customer specific. The customer specific contracts have been
designated as cash
8
11
flow hedges of forecasted aluminum raw material purchases in accordance with
SFAS No. 133. The non-customer specific LME contracts that are used to manage or
balance the raw material needs have not been designated as hedges and,
therefore, do not receive hedge accounting under SFAS No. 133. Both types of
contracts are measured at fair market value on the balance sheet.
As of April 30, 2001, open LME forward contracts have maturity dates
extending through October 2003. At April 30, 2001, these contracts covered
notional volumes of 33,785,805 pounds and had fair values of approximately $275
thousand (net gain), which is recorded as part of other current and non-current
assets and liabilities in the financial statements.
The effective portion of the gains and losses related to the customer
specific forward LME contracts designated as hedges are reported in other
comprehensive income. These gains and losses are reclassified into earnings in
the periods in which the related inventory is sold. As of April 30, 2001, losses
of approximately $240 thousand ($147 thousand net of taxes) are expected to be
reclassified from other comprehensive income into earnings over the next twelve
months. Gains and losses on these customer specific hedge contracts, including
amounts recorded related to hedge ineffectiveness, are reflected in "Cost of
Sales" in the income statement. For the three and six months ended April 30,
2001, a net loss of $569 thousand and a net gain of $688 thousand, respectively,
was recognized in "Cost of Sales" representing the amount of the hedges'
ineffectiveness. (No components of these gains and losses were excluded from the
assessment of hedge effectiveness. Additionally, no hedge contracts were
discontinued due to the determination that the original forecasted transaction
would not occur. Therefore, there was no income statement impact related to that
action.)
The entire amount of gains and losses of the non-customer specific forward
LME contracts not designated as hedges are reflected in "Cost of Sales" in the
income statement in the period in which they occur. These gains and losses
include the changes in fair market value during the period for all open and
closed contracts.
Interest Swap Agreement
In fiscal 1996, the Company entered into interest rate swap agreements,
which effectively converted $100 million of its variable rate debt under the
Bank Agreement to fixed rate. The Company's risk management policy related to
these swap agreements is to hedge the exposure to interest rate movements on a
portion of its long-term debt. Under the swap agreements, payments are made
based on a fixed rate ($50 million at 7.025% and $50 million at 6.755%) and
received on a LIBOR based variable rate (4.34% at April 30, 2001). Differentials
to be paid or received under the agreements are recognized as interest expense.
The agreements mature in 2003. The Company has designated the interest rate swap
agreements as cash flow hedges of future interest payments on its variable rate
long-term debt.
On November 1, 2000, the Company recorded a derivative liability of $918
thousand, representing the fair value of the swaps as of that date. A
corresponding amount, net of income taxes of $358 thousand, was recorded to
other comprehensive income.
The fair value of the swaps as of April 30, 2001 was a loss of $4.7
million, which is recorded as part of other current and non-current liabilities.
Gains and losses related to the swap agreements will be reclassified into
earnings in the periods in which the related hedged interest payments are made.
As of April 30, 2001, losses of approximately $2.0 million ($1.2 million net of
taxes) are expected to be reclassified into earnings over the next twelve
months. Gains and losses on these agreements, including amounts recorded related
to hedge ineffectiveness, are reflected in "interest expense" in the income
statement. A net loss of $116 and $309 thousand was recorded in interest expense
in the three and six months ended April 30, 2001 representing the amount of the
hedge's ineffectiveness. (No components of the swap instruments' losses were
excluded from the assessment of hedge effectiveness. Additionally, none of the
swap agreements were discontinued
9
12
due to the determination that the original forecasted transaction would not
occur. Therefore, there was no income statement impact related to that action.)
If the floating rates were to change by 10% from April 30, 2001 levels, the
fair market value of these swaps would change by approximately $933 thousand. In
terms of the impact on cash flow to the Company, as floating interest rates
decline, the market value of the swap agreement rises, thus increasing the
quarterly cash settlement of the swaps paid by the Company. However, the
interest paid on the floating rate debt balance decreases. The inverse situation
occurs with rising interest rates.
10
13
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 April 30, 2001 and October 31, 2000 Consolidated Financial
Statements of the Company and the accompanying notes.
PRIVATE SECURITIES LITIGATION REFORM ACT
Certain of the statements contained in this document and in documents
incorporated by reference herein, including those made under the caption
"Managements Discussion and Analysis of Results of Operations and Financial
Condition" are "forward-looking" statements as defined under the Private
Securities Litigation Reform Act of 1995. Generally, the words "believe,"
"expect," "intend," "estimate," "anticipate," "project," "will" and similar
expressions identify forward-looking statements, which generally are not
historical in nature. All statements which address future operating performance,
events or developments that we expect or anticipate will occur in the future
including statements relating to volume, sales, operating income and earnings
per share, and statements expressing general optimism about future operating
results are forward-looking statements. Forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from our Company's historical experience and our present expectations
or projections. As and when made, management believes that these forward-looking
statements are reasonable. However, caution should be taken not to place undue
reliance on any such forward-looking statements since such statements speak only
as of the date when made and there can be no assurance that such forward-looking
statements will occur. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors exist that could cause the Company's actual results to differ
materially from the expected results described in or underlying our Company's
forward-looking statements. Such factors include domestic and international
economic activity, prevailing prices of steel and aluminum scrap and other raw
material costs, energy 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, changes in estimates
of costs for known environmental remediation projects and situations, world-wide
political stability and economic growth, the Company's successful implementation
of its internal operating plans, performance issues with key customers,
suppliers and subcontractors, and regulatory changes and legal proceedings.
Accordingly, there can be no assurance that the forward-looking statements
contained herein will occur or that objectives will be achieved. All written and
verbal forward-looking statements attributable to the Company or persons acting
on its behalf are expressly qualified in their entirety by such factors.
RESULTS OF OPERATIONS
Summary Information as % of Sales: (Dollars in millions)
THREE MONTHS ENDED APRIL 30, SIX MONTHS ENDED APRIL 30,
2001 2000 2001 2000
Dollar % of Dollar % of Dollar % of Dollar % of
Amount Sales Amount Sales Amount Sales Amount Sales
------ ----- ------ ----- ------ ----- ------ -----
Net Sales $213.8 100% $243.3 100% $407.5 100% $442.6 100%
Cost of Sales 179.8 84 200.6 83 342.4 84 366.3 83
Sell., gen. and admin. 13.0 6 12.9 5 24.7 6 26.1 6
Deprec. and amort. 11.2 5 12.9 5 22.4 6 25.1 5
------ ---- ------ ---- ------ ---- ------ ----
Operating Income 9.8 5% 16.9 7% 18.0 4% 25.1 6%
Interest Expense (4.0) (2) (4.0) (2) (8.2) (2) (7.4) (2)
Capitalized Interest .4 0 .6 0 .7 0 1.2 0
Other, net .4 0 .3 0 1.8 1 1.3 0
Income tax expense (2.3) (1) (4.8) (2) (4.3) (1) (7.0) (1)
------ ---- ------ ---- ------ ---- ------ ----
Income from cont. oper. $ 4.3 2% $ 9.0 3% $ 8.0 2% $ 13.2 3%
====== ====== ====== ======
11
14
Overview
General economic slowdown and sluggish demand, particularly in the durable goods
and building and construction markets, coupled with competitive pricing
pressures and high energy costs have impacted the results for the second quarter
of fiscal 2001.
Manufacturing activity continues to be sluggish and our customers remain
cautious with new orders and in the management of their inventory. However, the
engineered steel bar, aluminum mill sheet, and engineered products groups
exceeded first quarter results in both sales and operating income. Engineered
products, due in part from the benefit of acquisitions, and Piper Impact, with
the benefits of higher productivity and cost cutting efforts, both reported
higher operating income compared to last year's second quarter.
Business Segments
The following table sets forth selected operating data for the Company's
four business segments:
Three Months Ended April 30, Six Months Ended April 30,
---------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands) (In thousands)
Engineered Steel Bars:
Net sales ............................ $ 76,006 $ 88,205 $ 147,604 $ 167,947
Operating income ..................... 8,665 15,902 16,000 27,737
Deprec. and amort. ................... 5,289 4,924 10,524 9,850
Identifiable assets .................. $ 275,329 $ 262,832 $ 275,329 $ 262,832
Aluminum Mill Sheet Products:(1)
Net sales ............................ $ 90,144 $ 111,848 $ 168,960 $ 191,568
Operating income ..................... 1,144 6,582 1,424 8,785
Deprec. and amort. ................... 3,513 3,454 7,102 6,795
Identifiable assets .................. $ 225,392 $ 244,768 $ 225,392 $ 244,768
Engineered Products:(2)(3)
Net sales ............................ $ 31,630 $ 22,726 $ 57,593 $ 41,144
Operating income ..................... 3,067 2,474 5,000 4,321
Deprec. and amort. ................... 1,324 847 2,546 1,620
Identifiable assets .................. $ 91,460 $ 64,667 $ 91,460 $ 64,667
Piper Impact:(4)
Net sales ............................ $ 21,173 $ 26,389 $ 44,022 $ 53,188
Operating income (loss) .............. 928 (3,799) 2,072 (7,272)
Deprec. and amort. ................... 918 3,608 1,968 6,679
Identifiable assets .................. $ 48,987 $ 154,378 $ 48,987 $ 154,378
(1) Results include Nichols Aluminum - Golden operations acquired January 25,
2000.
(2) Results include Imperial Products operations acquired April 3, 2000.
(3) Fiscal 2001 results include Temroc operations acquired November 30, 2000.
(4) Fiscal 2000 results include Piper Europe operations which was disposed of
in July 2000.
The engineered steel bar business, MACSTEEL, has been able to maintain
profitability while the severity of the distressed conditions in the steel
industry are forcing others to restructure. It is a difficult business
environment for all steel makers, and Quanex's primary markets, namely
transportation and capital goods, have certainly been impacted.
Over the quarter, MACSTEEL has moved more aggressively into secondary
markets such as defense, oil and service center markets. Additionally, they have
been able to pick up some business from troubled competitors. MACSTEEL recently
returned to a five-day per week schedule from a four-day per week schedule.
Other initiatives at MACSTEEL include a rigid cost-containment program.
12
15
The aluminum mill sheet products business, Nichols Aluminum, experienced
reduced business activity in the building and construction markets but remained
profitable. Sheet pricing is extremely competitive at this time and mills are
aggressively seeking available business, resulting in lower margins. However,
second quarter operating income was up significantly from the first quarter. In
addition to process improvement and efficiency initiatives, Nichols has been
attempting to reduce their fixed costs with a 10% workforce reduction
implemented at the end of the second quarter.
The engineered products business is also experiencing slower business in
their markets, but managed to outperform the same period last year and last
quarter with increases in sales and operating income. Results have benefited
from the acquisitions of Imperial Products, ("Imperial") and Temroc Metals
("Temroc") and new product development initiatives. Cost reduction programs are
also in place for this business segment. Employees are undergoing training for
accelerating the implementation of lean manufacturing practices in an effort to
reduce waste and improve inventory turns.
Piper Impact reported another profitable quarter compared to the
operating loss of the same period last year. Autoliv and ordnance demand
remained good given the economic environment. Productivity and new product
development initiatives have gained momentum and are contributing to the
improved results. Piper continues to focus on new product development
opportunities to reduce its dependency on one large customer. Internally, they
remain sharply focused on reducing costs in an effort to remain profitable at
lower sales levels (reduce breakeven point).
Fiscal Quarter and Six Months ended April 30, 2001 vs. 2000
Net Sales - Consolidated net sales for the three and six months ended April 30,
2001 were $213.8 million and $407.6 million, respectively, representing a
decrease of $29.5 million, or 12%, and $35.0 million, or 8%, when compared to
consolidated net sales for the same periods in 2000. All operating segments,
with the exception of the engineered products group, experienced decreased net
sales.
Net sales from the Company's engineered steel bar business for the three
and six months ended April 30, 2001, were $76.0 million and $147.6 million,
respectively, representing a decrease of $12.2 million, or 14%, and $20.3
million, or 12%, when compared to the same periods last year. This decrease was
principally due to lower sales volume resulting from weaker markets in the
transportation and capital goods industry. The business continued to experience
pricing pressures; however, due to the increased volume of MACPLUS, a value
added product, the impact on overall average sales price was minimized.
Net sales from the Company's aluminum mill sheet products business for the
three and six months ended April 30, 2001, were $90.1 million and $169.0
million, respectively, representing a decrease of $21.7 million, or 19%, and
$22.6 million, or 12%, when compared to the same periods last year. The six
months ending April 30, 2001, included the results of Nichols Aluminum Golden
which was acquired January 25, 2000. The decrease in net sales was due to lower
sales volume as well as lower selling prices. Volume was affected by more severe
winter weather than was experienced in the prior year, as well as a general
economic slowdown which negatively affected the building and construction
markets. Sales prices were impacted by the extremely competitive pricing
environment and the fact that all mills are aggressively seeking available
business during the economic slowdown.
Net sales from the Company's engineered products business for the three
and six months ended April 30, 2001, were $31.6 million and $57.6 million,
respectively, representing an increase of $8.9 million, or 39%, and $16.4
million, or 40%, when compared to the same periods last year. The increase was
largely due to the contributions from Imperial, which was acquired in April
2000, and Temroc, acquired November 30, 2000. Additionally, the group's net
sales
13
16
benefited from the capital expansion project at AMSCO which was completed in
November 2000 and new product development initiatives.
Net sales from the Company's Piper Impact business for the three and six
months ended April 30, 2001, were $21.2 million and $44.0 million, respectively,
representing a decrease of $5.2 million, or 20%, and $9.2 million, or 17%, when
compared to the same periods last year. Net sales for the period ending April
30, 2000 included sales from Piper Impact Europe which was sold in July of 2000.
Comparable net sales of Piper's operations, excluding Piper Europe, improved 6%
and 10%, respectively, for the three and six month periods over the same prior
year periods as a result of increased sales volumes of aluminum airbags
components, as well as some success at new product development.
Operating income - Consolidated operating income for the three and six
months ended April 30, 2001 were $9.8 million and $18.0 million, respectively,
representing a decrease of $7.0 million, or 42%, and $7.0 million, or 28%, when
compared to the same periods last year. Lower operating income at the Company's
engineered steel bar and aluminum mill sheet businesses were partially offset by
improved operating results at the engineered products and Piper Impact
businesses as well as lower corporate level expenses.
Operating income from the Company's engineered steel bar business for the
three and six months ended April 30, 2001, was $8.7 million and $16.0 million,
respectively, representing a decrease of $7.2 million, or 46%, and $11.7
million, or 42%, when compared to the same periods last year. This decrease was
due largely to lower net sales resulting from the sluggish demand in the
transportation and capital goods markets. Lower material scrap prices helped
offset some of the impact of reduced volume and lower selling price. The
business also experienced increased utility costs resulting from rising energy
prices and higher outside processing costs with the increased MACPLUS volume.
Operating income from the Company's aluminum mill sheet products
business for the three and six months ended April 30, 2001, was $1.1 million,
and $1.4 million, respectively, representing a decrease of $5.4 million, or 83%,
and $7.4 million, or 84%, when compared to the same periods last year. The
decline largely resulted from significantly lower net sales and higher energy
costs.
Operating income from the Company's engineered products business for the
three and six months ended April 30, 2001, was $3.1 million and $5.0 million,
respectively, representing an increase of $0.6 million, or 24%, and $0.7
million, or 16%, when compared to the same periods last year. The increase was
due largely to the acquisition of Imperial, acquired in April of 2000 and
Temroc, acquired November 30, 2000.
Operating income from the Company's Piper Impact business for the three
and six months ended April 30, 2001 was $0.9 million and $2.1 million,
respectively, compared to operating losses of $3.8 million and $7.3 million for
the same prior year periods. The prior year's results included the operating
loss of Piper Impact Europe which was sold in July of 2000. Comparative
operating income, excluding Piper Europe, improved 135% and 140% from the same
prior year's results. This improvement is a result of increased net sales as
well as lower costs resulting from cellular manufacturing and cost cutting
efforts. Additionally, depreciation expense declined with the reduced asset
base, which resulted from the asset impairment charge recorded in the fourth
quarter of fiscal 2000.
In addition to the four operating segments mentioned above, corporate
level operating expenses for the three and six months ended April 30, 2001, were
$4.0 million and $6.5 million, respectively compared to $4.3 million and $8.5
million, 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 inter-segment eliminations as well as inter-company gains and
losses from derivative instruments. (See Note 2 to the financial statements
regarding LIFO valuation method of inventory accounting.)
14
17
Selling, general and administrative expenses was $13.0 million and $24.7
million, respectively, for the three and six months ended April 30, 2001
representing an increase of $0.1 million, or 1%, and a decrease of $1.4 million,
or 6%, when compared to the same periods last year. The decrease in the six
months ended April 30, 2001 as compared to the same prior year period is largely
due to the sale of Piper Europe in July of 2000, cost cutting measures at the
remaining Piper Impact facilities and lower corporate level expenses. These
decreases were partially offset, however, by the expenses of Imperial and
Temroc, which were acquired in April 2000 and November 2000, respectively.
Depreciation and amortization decreased by $1.7 million, or 13%, and $2.7
million, or 11%, respectively, for the three and six months ended April 30,
2001, as compared to the same periods last year. The engineered steel bar,
aluminum mill sheet products and engineered products business all experienced
increased depreciation amounts due to recently completed capital projects as
well as the acquisitions of Nichols Aluminum Golden, Imperial and Temroc. This
increase was more than offset, however, by the decreased depreciation at Piper
Impact which resulted from the sale of Piper Impact Europe as well as the asset
impairment charge taken in the fourth quarter of the prior fiscal year.
Interest expense increased by $102 thousand, or 3%, and $933 thousand, or
13%, respectively, for the three and six months ended April 30, 2001, as
compared to the same fiscal period of 2000. The increase was primarily due to
the additional borrowings made during the period to finance the acquisition of
Temroc as well as the purchase of company stock and subordinated debentures.
(See Notes 3, 8 and 9 to the financial statements.)
Capitalized interest decreased by $215 and $445 thousand, respectively,
for the three and six months ended April 30, 2001, as compared to the same
periods of 2000, due to the completion of the Phase V expansion project at
MACSTEEL(R) in December 2000.
Net income was $4.3 and $8.3 million, respectively, for the three and six
months ended April 30, 2001, compared to $9.4 and $13.6 million for the same
periods of 2000. In addition to the items mentioned above, the six month period
ended April 30, 2001 included an extraordinary gain of $372 thousand on the
purchase of subordinated debentures, compared to $358 thousand for the three and
six month periods ended April 30, 2000.
Outlook
MACSTEEL enters the third quarter with a stronger backlog and new programs
that are starting to produce results. MACSTEEL fully expects to continue showing
operating improvements as the year progresses and to have more profitable third
and fourth quarters compared to the first half of fiscal 2001. Overall, they
continue to outperform their competitors in a tough market, and are continuing
to obtain new business with their transportation customers.
At Nichols Aluminum, bookings and backlog continue to increase and
business conditions appear to be improving. Improved results are expected for
the third and fourth quarters of fiscal 2001 as compared to the first half of
2001.
Higher operating results are also anticipated at the engineered products
group for the remainder of the fiscal year 2001, compared to the first half of
the year as well as the second half of the prior fiscal year. These improvements
are expected as a result of the acquisitions of Imperial and Temroc, new product
initiatives and cost reductions programs.
While Piper Impact, excluding Piper Europe, showed a significant
improvement for the six months ended April 30, 2001 as compared to the same
prior year period in net sales and operating income, the aluminum air bag
component business is expected to continue to decline. The third quarter outlook
is down slightly because of further reductions in aluminum extrusion demand, but
new programs should partially offset this decline. The Company is evaluating
other strategic
15
18
alternatives for this business, including its possible sale, and expects to
arrive at a decision during the second half of fiscal 2001 regarding this
matter.
In summary, the Company continues to experience slower demand in the
automotive, capital goods, building and construction markets. The Company
expects overall business to improve in coming quarters as new programs ramp up,
customer activity increases and markets slowly improve. For the third quarter of
fiscal 2001, operating results are expected to lag last year's comparable
quarter but to show significant improvement from the second quarter of 2001.
The Company previously indicated in its April 19, 2001 quarterly update
that the fiscal year 2001 fully diluted earnings per share are expected to be
between $1.75 and $2.00. Based on actual results for the first half of the year
and outlook for the second half, the Company continues to expect earnings to be
in that range.
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"). At April 30, 2001, the Company had $142
million borrowed under the Bank Agreement. This represents a $32 million
increase over October 31, 2000 borrowing levels. The borrowings were primarily
used to finance the acquisition of Temroc (see Note 3 to the financial
statements) and to repurchase $4.6 million principal amount of the Company's
subordinated debentures. There have been no significant changes to the terms of
the Company's debt structure during the three and six month periods ended April
30, 2001. (See Note 6 to the financial statements for detail regarding the
outstanding borrowings under the Company's various facilities.)
At April 30, 2001, the Company had commitments of approximately $21
million for the purchase or construction of capital assets. The Company plans to
fund these capital expenditures through cash flow from operations and, if
necessary, additional borrowings.
During the first six months of fiscal 2001, the Company accepted
unsolicited block offers to buy back $4.6 million principal amount of the 6.88%
Convertible Subordinated Debentures for $3.9 million in cash.
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 common stock dividends.
Operating Activities
Cash provided by operating activities during the six months ended April
30, 2001 was $18.3 million compared to $17.5 million for the same six month
period of 2000. Though the total amount is comparable from year to year, there
were differences in the components. Net income, adding back depreciation and
amortization provided $31.0 million compared to $38.9 million of cash for the
same six month period of 2000. The period ended April 30, 2001 included lower
working capital requirements as compared to the same period of the prior year as
a result of slowing business. The period ended April 30, 2000 included a $7.0
million tax refund resulting from overpayment of estimated taxes in fiscal 1999,
compared to a $210 thousand refund received in the same period of 2001.
Investment Activities
Net cash used by investment activities during the six months ended April
30, 2001 was $45.5 million compared to $61.9 million for the same period of
2000. Fiscal 2001 cash used by investment activities included cash paid for the
acquisition of Temroc totaling $17.9 million, net of cash acquired. Fiscal 2000
cash used by investing activities included cash paid for the acquisition of
Nichols Aluminum Golden totaling $20.1 million, net of cash acquired and
Imperial totaling $15.3 million, net of cash acquired. Capital expenditures and
other
16
19
investment activities decreased $1.1 million in the six month period ended April
30, 2001 as compared to the same periods of 2000. The Company estimates that
fiscal 2001 capital expenditures will total approximately $55 to $60 million.
Financing Activities
Net cash provided by financing activities for the six months ended April
30, 2001 was $22.2 million compared to $41.7 million for the same prior year
period. The Company's net borrowings were $32.0 million during the first six
months of fiscal 2001, compared to $69.5 million during the same period last
year. During the six months ended April 30, 2001, the Company expended $3.9
million to purchase subordinated debentures compared to $9.6 million for the
same prior year period. Also, during the six months ended April 30, 2001, the
Company paid $2.0 million to repurchase 107,800 shares of its own common stock;
however, in the same period last year, it paid $14.2 million to repurchase
approximately 668,500 shares.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101. SAB No. 101 provides the staff's views in
applying Generally Accepted Accounting Principles ("GAAP") to revenue
recognition in financial statements. It does not change any of the existing
rules on revenue recognition. All registrants are expected to apply the
accounting and disclosures described in this bulletin. The staff, however, will
not object if registrants that have not applied this accounting do not restate
prior financial statements provided they report a change in accounting principle
in accordance with APB Opinion No. 20, Accounting Changes, no later than the
first fiscal quarter of the fiscal year beginning after December 15, 1999.
However, SAB No. 101B delays the implementation of SAB No. 101 until no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company will be analyzing SAB No. 101 to determine what, if any, impact or
additional disclosure requirements are necessary. Any such impact will be
addressed and reflected in the fourth fiscal quarter of the Company's year
ending October 31, 2001 in accordance with SAB No. 101B.
17
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Effective November 1, 2000, the Company adopted SFAS No. 133, which requires the
Company to measure all derivatives at fair value and to recognize them in the
balance sheet as an asset or liability, depending on the Company's rights or
obligations under the applicable derivative contract. The Company utilizes
certain "derivative instruments" to manage its exposure to market risk. Prior to
the adoption of SFAS No. 133, these derivative instruments were not recorded in
the financial statements until their settlement. (See Note 10 for further
discussion.)
The following discussion of the Company and its subsidiaries' exposure
to various market risks contains "forward looking statements" that involve risks
and uncertainties. These projected results have been prepared utilizing certain
assumptions considered reasonable in light of information currently available to
the Company. Nevertheless, because of the inherent unpredictability of interest
rates and metal commodity prices as well as other factors, actual results could
differ materially from those projected in such forward looking information.
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 most of the Company's variable rate debt,
thus limiting the potential impact that increasing interest rates would have on
earnings. At October 31, 2000 (prior to the adoption of SFAS No. 133) the
unrealized losses related to the interest rate swap agreements were $918
thousand. As of April 30, 2001, a liability of $4.7 million related to the
interest rate swap agreements was recorded in the financial statements. If the
floating rates were to change by 10% from April 30, 2001 levels, the fair market
value of these swaps would change by approximately $933 thousand. 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. In terms of the impact on cash flow to the Company, as floating
interest rates decline, the market value of the swap agreement rises, thus
increasing the quarterly cash settlement of the swaps paid by the Company.
However, the interest paid on the floating rate debt balance decreases. The
inverse situation occurs with rising interest rates.
The Company uses futures contracts to hedge a portion of its exposure to
price fluctuations of aluminum. The exposure is related to the Company's backlog
of aluminum sales orders with committed prices as well as future aluminum sales
for which a sales price increase would lag a raw material cost increase. Hedging
gains and losses are included in "Cost of sales" in the income statement. Prior
to the adoption of SFAS No. 133, gains and losses related to open contracts were
unrealized and not reflected in the consolidated statements of income. At
October 31, 2000, the Company had open futures contracts with unrealized losses
of $372 thousand. As of April 30, 2001, (after the adoption of SFAS No. 133) the
Company had open futures contracts with fair values of approximately $275
thousand (net gain) which was recorded as part of other current and other
non-current assets and liabilities. At October 31, 2000 and April 30, 2001,
these contracts covered a notional volume of 25,738,940 and 33,785,805 pounds of
aluminum, respectively. A hypothetical 10% change from the April 30, 2001
average London Metal Exchange ("LME") ingot price of $.705 per pound would
increase or decrease the unrealized pretax gains/losses related to these
contracts by approximately $2.4 million. However, it should be noted that any
change in the value of these contracts, real or hypothetical, would be
substantially offset by an inverse change in the cost of purchased aluminum
scrap.
Other than the items mentioned above, there were no other material
quantitative or qualitative changes during the first six months of fiscal 2001
in the Company's market risk sensitive instruments.
18
21
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On February 22, 2001, the Company held its Annual Meeting of Stockholders (the
"Annual Meeting").
At the Annual Meeting, Carl E. Pfeiffer and Vincent R. Scorsone were
elected as directors for a three-year term until the Annual Meeting of
Stockholders in 2004. The following sets forth the number of shares that voted
for and for which votes were withheld of each of such persons:
For Withheld
---------- --------
Carl E. Pfeiffer 11,862,623 116,258
Vincent R. Scorsone 11,888,635 90,246
Item 5 - Other Information
RAYMOND A. JEAN ELECTED AS CHAIRMAN OF THE BOARD OF DIRECTORS
On May 22, 2001, Raymond A. Jean was elected the sixth Chairman of the board of
directors since Quanex was incorporated in Michigan as Michigan Seamless Tube
Company on April 27, 1927. Mr. Jean's election follows the orderly transition of
corporate leadership from Vernon E. Oechsle, who retired as Chief Executive
Officer this past February and resigned as a Director and Chairman of the board
of directors on May 21, 2001.
MICHAEL R. BAYLES - VICE PRESIDENT, STRATEGIC PLANNING AND BUSINESS DEVELOPMENT
On May 22, 2001, Michael R. Bayles joined the Company as Vice President -
Strategic Planning and Business Development. He will report directly to Raymond
A. Jean, Chairman and Chief Executive Officer. In his new position, Mr. Bayles
is responsible for developing corporate-wide strategies for growth through
merger and acquisition activities, formation of strategic business alliances,
and licensing agreements.
Mr. Bayles brings more than 25 years of experience in corporate line and
staff leadership positions. Before joining the Company, he was a member of the
board of directors and Executive Vice President of Helm Financial, a west coast
firm engaged in the leasing of transportation equipment. Prior to joining Helm
Financial, Mr. Bayles was President and Chief Operating Officer of Standard Car
Truck Company, a privately held company serving the railroad components market.
He remains a member of their board of directors. Michael's other career
assignments include marketing and operations with Varlen Corporation and I.C.
Industries.
Mr. Bayles, 49, holds a Bachelor of Science degree in Business
Administration and Economics from the University of Missouri. He also holds a
Masters of Business Administration Degree from the University of Pittsburgh.
JOSEPH J. ROSS ELECTED TO BOARD OF DIRECTORS
Joseph J. Ross was elected to the Company's board of directors. Mr. Ross, 55, is
Chairman and Chief Executive Officer of Federal Signal Corporation, a global
manufacturer of leading niche products in four operating groups: environmental
vehicles and related products, fire rescue vehicles, safety and signaling
products, and consumable industrial tooling.
19
22
Mr. Ross graduated from St. Mary's University in Winona, Minnesota. He
received his law degree from DePaul University in Chicago, Illinois. Mr. Ross
also served on the board of trustees of St. Mary's University in Winona,
Minnesota.
Item 6 - Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit 10.1 Quanex Corporation 1997 Key Employee Stock Plan (formerly
known as the Quanex Corporation 1997 Key Employee Stock
Option Plan), as amended and restated, dated October 20,
1999.
Exhibit 10.2 Amendment to Quanex Corporation 1997 Key Employee Stock Plan
(formerly known as the Quanex Corporation 1997 Key Employee
Stock Option Plan), dated December 9, 1999.
Exhibit 10.3 Amendment to Quanex Corporation 1997 Key Employee Stock Plan
(formerly known as the Quanex Corporation 1997 Key Employee
Stock Option Plan) effective July 1, 2000.
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 Registrants 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.
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter for which
this report is being filed.
20
23
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
Date: June 11, 2001 Controller (Chief Accounting Officer)
/s/ Terry M. Murphy
-------------------------------------
Terry M. Murphy
Vice President - Finance and Chief
Date: June 11, 2001 Financial Officer
21
24
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Quanex Corporation 1997 Key Employee Stock Plan (formerly
known as the Quanex Corporation 1997 Key Employee Stock
Option Plan), as amended and restated, dated October 20,
1999.
10.2 Amendment to Quanex Corporation 1997 Key Employee Stock Plan
(formerly known as the Quanex Corporation 1997 Key Employee
Stock Option Plan), dated December 9, 1999.
10.3 Amendment to Quanex Corporation 1997 Key Employee Stock Plan
(formerly known as the Quanex Corporation 1997 Key Employee
Stock Option Plan) effective July 1, 2000.
22
1
EXHIBIT 10.1
QUANEX CORPORATION
1997 KEY EMPLOYEE STOCK PLAN
Amended and Restated
Effective October 20, 1999
2
QUANEX CORPORATION
1997 KEY EMPLOYEE STOCK PLAN
TABLE OF CONTENTS
Section
-------
ARTICLE I - PURPOSE OF PLAN
ARTICLE II - DEFINITIONS
Affiliate...............................................................................2.1
Agreement...............................................................................2.2
Award...................................................................................2.3
Board...................................................................................2.4
Code....................................................................................2.5
Committee...............................................................................2.6
Company.................................................................................2.7
Disability..............................................................................2.8
Employee................................................................................2.9
Fair Market Value......................................................................2.10
Option.................................................................................2.11
Optionee...............................................................................2.12
Plan...................................................................................2.13
Restricted Period......................................................................2.14
Restricted Stock.......................................................................2.15
Restricted Stock Award.................................................................2.16
Retained Distributions.................................................................2.17
Retire or Retirement...................................................................2.18
Stock..................................................................................2.19
ARTICLE III - ELIGIBILITY
ARTICLE IV - STOCK SUBJECT TO PLAN
ARTICLE V - GENERAL PROVISIONS RELATING TO ALL OPTIONS
Authority to Grant Options .............................................................5.1
Non-Transferability.....................................................................5.2
No Rights as a Stockholder..............................................................5.3
Tax Withholding.........................................................................5.4
Changes in the Company's Capital Structure..............................................5.5
3
ARTICLE VI - VARIABLE PROVISIONS RELATING TO SPECIFIC OPTIONS
Option Price............................................................................6.1
Duration of Options.....................................................................6.2
Amount Exercisable......................................................................6.3
Exercise of Options.....................................................................6.4
Substitution Options....................................................................6.5
ARTICLE VII - GENERAL PROVISIONS RELATING TO ALL RESTRICTED STOCK AWARDS
Authority to Grant Awards...............................................................7.1
Transferability and Rights with Respect to Restricted Stock.............................7.2
Withholding Tax.........................................................................7.3
Changes in Capital Structure............................................................7.4
ARTICLE VIII - VARIABLE PROVISIONS RELATING TO SPECIFIC RESTRICTED STOCK AWARDS
Vesting of Restricted Stock.............................................................8.1
Consequence of Vesting..................................................................8.2
ARTICLE IX - REQUIREMENTS OF LAW
ARTICLE X - ADMINISTRATION
ARTICLE XI - AMENDMENT OR TERMINATION OF PLAN
ARTICLE XII - MISCELLANEOUS
No Employment Obligation...............................................................12.1
Forfeiture for Cause...................................................................12.2
Written Agreement......................................................................12.3
Indemnification of the Committee and the Board.........................................12.4
Other Compensation Plans...............................................................12.5
Other Awards...........................................................................12.6
Section 83(b) Elections................................................................12.7
Arbitration of Disputes................................................................12.8
Gender.................................................................................12.9
Headings..............................................................................12.10
Governing Law.........................................................................12.11
4
ARTICLE I
PURPOSE OF PLAN
The Plan is for key employees of the Company and its
Affiliates and is intended to advance the best interests of the Company, its
Affiliates, and its stockholders by providing those persons who are not officers
but have substantial responsibility for the management and growth of the Company
and its Affiliates with additional incentives and an opportunity to obtain or
increase their proprietary interest in the Company, thereby encouraging them to
continue in the employ of the Company or any of its Affiliates.
I-1
5
ARTICLE II
DEFINITIONS
The words and phrases defined in this Article shall have the meaning
set out in these definitions throughout this Plan, unless the context in which
any such word or phrase appears reasonably requires a broader, narrower, or
different meaning.
II.1 "AFFILIATE" means any parent corporation and any subsidiary
corporation. The term "parent corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company if, at the
time of the action or transaction, each of the corporations other than the
Company owns stock possessing 50 percent or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain. The
term "subsidiary corporation" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Award, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50 percent or more of
the total combined voting power of all classes of stock in one of the other
corporations in the chain.
II.2 "AGREEMENT" means a written agreement setting forth the terms
of an Award.
II.3 "AWARD" means an Option or a Restricted Stock Award granted
under this Plan.
II.4 "BOARD" means the board of directors of the Company.
II.5 "CODE" means the Internal Revenue Code of 1986, as amended.
II.6 "COMMITTEE" means the committee designated by the Board.
II.7 "COMPANY" means Quanex Corporation, a Delaware corporation.
II.8 "DISABILITY" means a mental or physical disability which, in
the opinion of a physician selected by the Committee, shall prevent the Employee
from earning a reasonable livelihood with the Company or any Affiliate and which
can be expected to result in death or which has lasted or can be expected to
last for a continuous period of not less than 12 months and which: (a) was not
contracted, suffered or incurred while the Employee was engaged in, or did not
result from having engaged in, a felonious criminal enterprise; (b) did not
result from alcoholism or addiction to narcotics; and (c) did not result from an
injury incurred while a member of the Armed Forces of the United States for
which the Employee receives a military pension.
II.9 "EMPLOYEE" means a person employed by the Company or any
Affiliate.
II.10 "FAIR MARKET VALUE" of the Stock as of any date means (a) the
closing sale price of the Stock on that date (or, if there was no sale on such
date, the next preceding date on which there was such a sale) on the principal
securities exchange on which the Stock is listed; or (b) if the Stock
II-1
6
is not listed on a securities exchange, an amount as determined by the Committee
in its sole discretion.
II.11 "OPTION" means a nonqualified option granted under this Plan to
purchase shares of Stock.
II.12 "OPTIONEE" means a person who is granted an Option under this
Plan.
II.13 "PLAN" means the Quanex Corporation 1997 Key Employee Stock Plan,
as set out in this document and as it may be amended from time to time.
II.14 "RESTRICTED PERIOD" means the period designated by the Committee
during which Restricted Stock may not be sold, assigned, transferred, pledged,
or otherwise encumbered.
II.15 "RESTRICTED STOCK" means those shares of Common Stock issued
pursuant to a Restricted Stock Award which are subject to the restrictions,
terms, and conditions set forth in the related Agreement.
II.16 "RESTRICTED STOCK AWARD" means an award of Restricted Stock
pursuant to Section 7.1.
II.17 "RETAINED DISTRIBUTIONS" MEANS ANY SECURITIES OR OTHER PROPERTY
(OTHER THAN REGULAR CASH DIVIDENDS) DISTRIBUTED BY THE COMPANY IN RESPECT OF
RESTRICTED STOCK DURING ANY RESTRICTED PERIOD.
II.18 "RETIRE" or "RETIREMENT" means retirement in accordance with the
terms of a retirement plan that is qualified under section 401(a) of the Code
and maintained by the Company or an Affiliate in which the employee is a
participant.
II.19 "STOCK" means the common stock of the Company, $.50 par value. In
addition, for purposes of the Plan and the Awards, the term Stock shall be
deemed to include any rights to purchase ("Rights") the Series A Junior
Participating Preferred Stock of the Company that may then be trading with the
Stock as provided in the Rights Agreement between the Company and Chemical Bank
relating to the Rights.
II-2
7
ARTICLE III
ELIGIBILITY
The individuals who shall be eligible to receive Awards shall be those
key Employees, who are not officers of the Company or an Affiliate, as the
Committee shall determine from time to time.
III-1
8
ARTICLE
STOCK SUBJECT TO THE PLAN
The total amount of the Common Stock with respect to which Awards may
be granted shall not exceed in the aggregate 250,000 shares. The class and
aggregate number of shares which may be subject to the Options granted under
this Plan shall be subject to adjustment under Section 5.5. The class and
aggregate number of shares which may be subject to the Restricted Stock Awards
granted under the Plan shall also be subject to adjustment under Section 7.4.
Shares may be treasury shares or authorized but unissued shares. If any Award
under the Plan shall expire or terminate for any reason without having been
exercised in full, or if any Award shall be forfeited, the shares subject to the
unexercised or forfeited portion of such Award shall again be available for the
purposes of the Plan.
IV-1
9
ARTICLE V
GENERAL PROVISIONS RELATING TO OPTIONS
V.1 AUTHORITY TO GRANT OPTIONS. The Committee may grant Options to
those individuals as it shall from time to time determine under the terms and
conditions of this Plan. Subject only to any applicable limitations set out in
this Plan, the number of shares of Stock to be covered by any Option shall be as
determined by the Committee.
V.2 NON-TRANSFERABILITY. Except as expressly provided otherwise in an
Optionee's Option Agreement, Options shall not be transferable by the Optionee
otherwise than by will or under the laws of descent and distribution, and shall
be exercisable, during the Optionee's lifetime, only by him.
V.3 NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a
stockholder with respect to Stock covered by his Option until the date a stock
certificate is issued for the Stock.
V.4 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to
deduct from other compensation payable to each Optionee any sums required by
federal, state, or local tax law to be withheld with respect to the grant or
exercise of an Option. In the alternative, the Company may require the Optionee
(or other person exercising the Option) to pay the sum directly to the Company
or an Affiliate. If the Optionee (or other person exercising the Option) is
required to pay the sum directly, payment in cash or by check of such sums for
taxes shall be made on the date of exercise. The Company shall have no
obligation upon exercise of any Option until payment has been received, unless
withholding (or offset against a cash payment) as of or prior to the date of
exercise is sufficient to cover all sums due with respect to that exercise. The
Company and its Affiliates shall not be obligated to advise an Optionee of the
existence of the tax or the amount which the employer corporation will be
required to withhold.
V.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. If the Company shall
effect a subdivision or consolidation of shares or other capital adjustment of,
or the payment of a dividend in capital stock or other equity securities of the
Company on, its Common Stock, or other increase or reduction of the number of
shares of the Common Stock outstanding without receiving consideration therefor
in money, services, or property, or the reclassification of its Stock, in whole
or in part, into other equity securities of the Company, then (a) the number,
class and per share price of shares of Stock subject to outstanding Options
hereunder shall be appropriately adjusted (or in the case of the issuance of
other equity securities as a dividend on, or in a reclassification of, the
Stock, the Options shall extend to such other securities) in such a manner as to
entitle an Optionee to receive, upon exercise of an Option, for the same
aggregate cash compensation, the same total number and class or classes of
shares (or in the case of a dividend of, or reclassification into, other equity
securities, such other securities) he would have held after such adjustment if
he had exercised his Option in full immediately prior to the event requiring the
adjustment, or, if applicable, the record date for determining stockholders to
be affected by such adjustment; and (b) the number and class of shares then
reserved for issuance under the Plan (or in the case of a dividend of, or
reclassification into, other equity securities, such other securities) shall be
adjusted by substituting for the total
V-1
10
number and class of shares of Stock then received, the number and class or
classes of shares of Stock (or in the case of a dividend on, or reclassification
into, other equity securities, such other securities) that would have been
received by the owner of an equal number of outstanding shares of Stock as the
result of the event requiring the adjustment. Comparable rights shall accrue to
each Optionee in the event of successive subdivisions, consolidations, capital
adjustment, dividends or reclassifications of the character described above.
If the Company shall distribute to all holders of its shares of Stock
(including any such distribution made to non-dissenting stockholders in
connection with a consolidation or merger in which the Company is the surviving
corporation and in which holders of shares of Stock continue to hold shares of
Stock after such merger or consolidation) evidences of indebtedness or cash or
other assets (other than cash dividends payable out of consolidated retained
earnings not in excess of, in any one year period, the greater of (a) $1.00 per
share of Stock or (b) two times the aggregate amount of dividends per share paid
during the preceding calendar year and dividends or distributions payable in
shares of Stock or other equity securities of the Company described in the
immediately preceding paragraph), then in each case the Optionee's exercise
price specified in his Option Agreement ("Exercise Price") shall be adjusted by
reducing the Option Price in effect immediately prior to the record date for the
determination of stockholders entitled to receive such distribution by an amount
equal to the Fair Market Value, as determined in good faith by the Board (whose
determination shall be described in a statement filed in the Company's corporate
records and be available for inspection by any holder of an Option) of the
portion of the evidence of indebtedness or cash or other assets so to be
distributed applicable to one share of Stock; provided that in no event shall
the Option Price be less than the par value of a share of Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become effective
on the date of the distribution retroactive to the record date for the
determination of the stockholders entitled to receive such distribution.
Comparable adjustments shall be made in the event of successive transactions of
the character described above.
If the Company shall make a tender offer for, or grant to all of its
holders of its shares of Stock the right to require the Company or any
subsidiary of the Company to acquire from such stockholders shares of Stock, at
a price in excess of the Current Market Price (a "Put Right") or the Company
shall grant to all of its holders for its shares of Stock the right to acquire
shares of Stock for less than the Current Market Price (a "Purchase Right"),
then, in the case of a Put Right, the Option Price shall be adjusted by
multiplying the Option Price in effect immediately prior to the record date for
the determination of stockholders entitled to receive such Put Right by a
fraction, the numerator of which shall be the number of shares of Stock then
outstanding minus the number of shares of Stock which could be purchased at the
Current Market Price for the aggregate amount which would be paid if all Put
Rights are exercised and the denominator of which is the number of shares of
Stock which would be outstanding if all Put Rights are exercised; and, in the
case of a Purchase Right, the Option Price shall be adjusted by multiplying the
Option Price in effect immediately prior to the record date for the
determination of the stockholders entitled to receive such Purchase Right by a
fraction, the numerator of which shall be the number of shares of Stock then
outstanding plus the number of shares of Stock which could be purchased at the
Current Market Price for the aggregate amount which would be paid if all
Purchase Rights are exercised and the denominator of which is the number of
shares of Stock which would be outstanding if all Purchase Rights are exercised.
In addition, the number of shares subject to the Option shall be increased by
V-2
11
multiplying the number of shares then subject to the Option by a fraction which
is the inverse of the fraction used to adjust the Option Price. Notwithstanding
the foregoing, if any such Put Rights or Purchase Rights shall terminate without
being exercised, the Option Price and number of shares subject to the Option
shall be appropriately readjusted to reflect the Option Price and number of
shares subject to the Option which would have been in effect if such unexercised
Rights had never existed. Comparable adjustments shall be made in the event of
successive transactions of the character described above.
After the merger of one or more corporations into the Company, after
any consolidation of the Company and one or more corporations, or after any
other corporate transaction described in section 424(a) of the Code in which the
Company shall be the surviving corporation, each Optionee, at no additional
cost, shall be entitled to receive, upon any exercise of his Option, in lieu of
the number of shares as to which the Option shall then be so exercised, the
number and class of shares of stock or other equity securities to which the
Optionee would have been entitled pursuant to the terms of the agreement of
merger or consolidation if at the time of such merger or consolidation such
Optionee had been a holder of a number of shares of Stock equal to the number of
shares as to which the Option shall then be so exercised and, if as a result of
such merger, consolidation or other transaction, the holders of Stock are not
entitled to receive any shares of Stock pursuant to the terms thereof, each
Optionee, at no additional cost shall be entitled to receive, upon exercise of
his Option, such other assets and property, including cash to which he would
have been entitled if at the time of such merger, consolidation or other
transaction he had been the holder of the number of shares of Stock equal to the
number of shares as to which the Option shall then be so exercised. Comparable
rights shall accrue to each Optionee in the event of successive mergers or
consolidations of the character described above.
After a merger of the Company into one or more corporations, after a
consolidation of the Company and one or more corporations, or after any other
corporate transaction described in section 424(a) of the Code in which the
Company is not the surviving corporation, each Optionee shall, at no additional
cost, be entitled at the option of the surviving corporation (i) to have his
then existing Option assumed or have a new option substituted for the existing
Option by the surviving corporation to the transaction which is then employing
him, or a parent or subsidiary of such corporation, on a basis where the excess
of the aggregate fair market value of the shares subject to the Option
immediately after the substitution or assumption over the aggregate Option Price
of such option is equal to the excess of the aggregate fair market value of all
shares subject to the option immediately before such substitution or assumption
over the aggregate Option Price of such shares, provided that the shares subject
to the new option must be traded on the New York or American Stock Exchange or
quoted on the National Association of Securities Dealers Automated Quotation
System, or (ii) to receive, upon any exercise of his Option, in lieu of the
number of shares as to which the Option shall then be so exercised, the
securities, property and other assets, including cash, to which the Optionee
would have been entitled pursuant to the terms of the agreement of merger or
consolidation or the agreement giving rise to the other corporate transaction if
at the time of such merger, consolidation or other transaction such Optionee had
been the holder of the number of shares of Stock equal to the number of shares
as to which the Option shall then be so exercised.
If a corporate transaction described in section 424(a) of the Code
which involves the Company is to take place and there is to be no surviving
corporation while an Option remains in
V-3
12
whole or in part unexercised, it shall be canceled by the Board as of the
effective date of any such corporate transaction but before that date each
Optionee shall be provided with a notice of such cancellation and shall have the
right to exercise such Option in full (without regard to any vesting limitations
set forth in, or imposed pursuant to, preceding provisions of this Plan or the
Option Agreement) to the extent it is then still unexercised during a 30-day
period preceding the effective date of such corporate transaction.
For purposes of this Section, Current Market Price per share of Stock
shall mean the last reported price for the Stock in the New York Stock Exchange
- -- Composite Transaction listing on the trading day immediately preceding the
first trading day on which, as a result of the establishment of a record date or
otherwise, the trading price reflects that an acquirer of Stock in the public
market will not participate in or receive the payment of any applicable dividend
or distribution; provided, however, that if there is no closing price for the
stock as so reported on that date or if, in the discretion of the Committee,
another means of determining the fair value of the shares of stock at such date
shall be necessary or advisable, the Committee may provide for another means for
determining the Current Market Price of the Stock.
Except as hereinbefore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Stock then subject to
outstanding Options.
V-4
13
ARTICLE VI
VARIABLE PROVISIONS RELATING TO SPECIFIC OPTIONS
VI.1 OPTION PRICE. The price at which Stock may be purchased under an
Option shall not be less than the greater of: (a) 100 percent of the Fair Market
Value of the shares of Stock on the date the Option is granted or (b) the
aggregate par value of the shares of Stock on the date the Option is granted.
VI.2 DURATION OF OPTIONS. No Option shall be exercisable after ten
years from the date the Option is granted. An Option may terminate prior to the
normal expiration date as specified below.
(a) General Rule for Severance of Employment. Except as may be
otherwise expressly provided herein, all Options shall terminate
on the earlier of the date of the expiration of the Option or one
day less than three months after the date of the severance of the
employment relationship between the Company and all Affiliates and
the Optionee, whether with or without cause, for any reason other
than the death, Disability or, Retirement of the Optionee, during
which period the Optionee shall be entitled to exercise the Option
in respect of the number of shares that the Optionee would have
been entitled to purchase had the Optionee exercised the Option on
the date of such severance of employment. Whether authorized leave
of absence, or absence on military or government service shall
constitute severance of the employment relationship between the
Company and all Affiliates and the Optionee, shall be determined
by the Committee at the time thereof.
(b) Death, Disability or Retirement of Optionee. In the event of
the death, Disability or Retirement of an Optionee, before the
date of expiration of such Option, such Option shall continue
fully in effect, including provisions providing for subsequent
vesting of such Option, for period of not more than three years
commencing on the date of the Optionee's death, Disability or
Retirement and shall terminate on the earlier of the date of the
expiration of such-year period or the date of expiration of the
Option. After the death of the Optionee, his executors,
administrators or any person or persons to whom his Option may be
transferred by will or by the laws of descent and distribution,
shall have the right, at any time prior to the termination of the
Option to exercise the Option, in respect to the number of shares
that the Optionee would have been entitled to exercise if he were
still alive.
VI-1
14
Notwithstanding the foregoing provisions of this Section, the
Committee may provide for a different option termination date in the
Option Agreement with respect to any Option.
VI.3 AMOUNT EXERCISABLE. Each Option may be exercised from time to
time, in whole or in part, in the manner and subject to the conditions the
Committee, in its sole discretion, may provide in the Option Agreement, as long
as the Option is valid and outstanding. The usual form of agreement granting an
Option shall, subject to any limitation on exercise contained in the Agreement
which is not inconsistent with this Plan, contain the following terms of
exercise:
(a) No Option granted under this Plan may be exercised until an
Optionee has completed one year of continuous employment with the
Company or any Affiliate following the date of grant;
(b) Beginning on the day after the first anniversary of the date
of grant, an Option may be exercised up to 1/3 of the shares subject to
the Option;
(c) After the expiration of each succeeding anniversary date of
the date of grant, the Option may be exercised up to an additional 1/3
of the shares subject to the Option, so that after the expiration of
the third anniversary of the date of grant, the Option shall be
exercisable in full; and
(d) To the extent not exercised, installments shall be cumulative
and may be exercised in whole or in part until the Option expires on
the tenth anniversary of the date of the grant.
The Committee, in its discretion, may accelerate the time in which any
outstanding Option may be exercised. However, in no event shall any Option be
exercisable after the tenth anniversary of the date of the grant.
VI.4 EXERCISE OF OPTIONS. Each Option shall be exercised by the
delivery of written notice to the Committee setting forth the number of shares
of Stock with respect to which the Option is to be exercised, together with: (a)
cash, check, bank draft, or postal or express money order payable to the order
of the Company for an amount equal to the option price of the shares, or (b)
Stock at its Fair Market Value on the date of exercise, and/or any other form of
payment which is acceptable to the Committee, and specifying the address to
which the certificates for the shares are to be mailed. Subject to Article IX,
as promptly as practicable after receipt of written notification and payment,
the Company shall deliver to the Optionee certificates for the number of shares
with respect to which the Option has been exercised, issued in the Optionee's
name. If shares of Stock are used in payment of the exercise price, the
aggregate Fair Market Value of the shares of Stock tendered must be equal to or
less than the aggregate exercise price of the shares being purchased upon
exercise of the Option, and any difference must be paid by cash, check, bank
draft, or postal or express money order payable to the Company. Delivery of the
shares shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Optionee, at the address specified by the Optionee.
VI-2
15
Whenever an Option is exercised by exchanging shares of Stock owned by
the Optionee, the Optionee shall deliver to the Company certificates registered
in the name of the Optionee representing a number of shares of Stock legally and
beneficially owned by the Optionee, free of all liens, claims, and encumbrances
of every kind, accompanied by stock powers duly endorsed in blank by the record
holder of the shares represented by the certificates, (with signature guaranteed
by a commercial bank or trust company or by a brokerage firm having a membership
on a registered national stock exchange). The delivery of certificates upon the
exercise of Option is subject to the condition that the person exercising the
Option provide the Company with the information the Company might reasonably
request pertaining to exercise, sale or other disposition of an Option.
VI.5 SUBSTITUTION OPTIONS. Options may be granted under this Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become employees of or affiliated with the Company
or any Affiliate as the result of a merger or consolidation of the employing
corporation with the Company or any Affiliate, or the acquisition by the Company
or any Affiliate of the assets of the employing corporation, or the acquisition
by the Company or any Affiliate of stock of the employing corporation as the
result of which it becomes an Affiliate of the Company. The terms and conditions
of the substitute Options granted may vary from the terms and conditions set out
in this Plan to the extent the Committee, at the time of grant, may deem
appropriate to conform, in whole or in part, to the provisions of the stock
options in substitution for which they are granted.
VI-3
16
ARTICLE VII
GENERAL PROVISIONS RELATING TO ALL RESTRICTED STOCK AWARDS
VII.1 AUTHORITY TO GRANT AWARDS. The Committee may make an Award of
Restricted Stock to selected eligible Employees. The amount of each Restricted
Stock Award and the respective terms and conditions of each Award (which terms
and conditions need not be the same in each case) shall be determined by the
Committee in its sole discretion. However, the terms and conditions of an Award
shall not be inconsistent with the terms of the Plan.
VII.2 TRANSFERABILITY AND RIGHTS WITH RESPECT TO RESTRICTED STOCK.
Except as provided herein, Restricted Stock may not be sold, assigned,
transferred, pledged, or otherwise encumbered during a Restricted Period. Any
attempted sale, assignment, transfer, pledge or encumbrance of Restricted Stock
in violation of this Plan shall be void and the Company shall not be bound
thereby.
During the Restricted Period, certificates representing the Restricted
Stock and any Retained Distributions shall be registered in the recipient's name
and bear a restrictive legend to the effect that ownership of such Restricted
Stock (and any such Retained Distributions), and the enjoyment of all rights
appurtenant thereto are subject to the restrictions, terms, and conditions
provided in this Plan and the applicable Agreement. Such certificates shall be
deposited by the recipient with the Company, together with stock powers or other
instruments of assignment, each endorsed in blank, which will permit transfer to
the Company of all or any portion of the Restricted Stock and any securities
constituting Retained Distributions which shall be forfeited in accordance with
this Plan and the applicable Agreement. Restricted Stock shall constitute issued
and outstanding shares of Common Stock for all corporate purposes.
Subject to the terms of this Plan and the Agreement with respect to the
Award, the recipient shall have the right to vote the Restricted Stock awarded
to such recipient and to receive and retain all regular cash dividends, and to
exercise all other rights, powers and privileges of a holder of Common Stock,
with respect to such Restricted Stock, with the exception that (i) the recipient
shall not be entitled to delivery of the stock certificate or certificates
representing such Restricted Stock until the restrictions applicable thereto
shall have expired, (ii) the Company shall retain custody of all Retained
Distributions made or declared with respect to the Restricted Stock (and such
Retained Distributions shall be subject to the same restrictions, terms and
conditions as are applicable to the Restricted Stock) until such time, if ever,
as the Restricted Stock with respect to which such Retained Distributions shall
have been made, paid, or declared shall have become vested, and such Retained
Distributions shall not bear interest or be segregated in separate accounts and
(iii) the recipient may not sell, assign, transfer, pledge, exchange, encumber,
or dispose of the Restricted Stock or any Retained Distributions during the
Restricted Period. Nothing in this Section shall prevent transfers by will or by
the applicable laws of descent and distribution.
VII.3 WITHHOLDING TAX. The Company shall meet its tax withholding
obligations under the Code and applicable state or local law arising upon the
vesting of Restricted Stock by delivering to the Restricted Stock recipient (or
his estate, if applicable) a reduced number of shares of Common Stock in the
manner specified herein. At the time of vesting of shares of Restricted Stock,
the
VII-1
17
Company shall (i) calculate the amount of withholding tax due on the assumption
that all such vested shares of Restricted Stock are made available for delivery,
(ii) reduce the number of such shares made available for delivery so that the
Fair Market Value of the shares withheld on the vesting date approximates the
amount of tax the Company is obliged to withhold and (iii) in lieu of the
withheld shares, remit cash to the United States Treasury and other applicable
governmental authorities, on behalf of the participant, in the amount of the
withholding tax due.
The Company shall withhold only whole shares of Common Stock to satisfy
its withholding obligation. Where the Fair Market Value of the withheld shares
does not equal Company's withholding tax obligation, the Company shall withhold
shares with a Fair Market Value slightly in excess of the amount of its
withholding obligation and shall remit the excess cash to the Restricted Stock
Award recipient (or his estate, if applicable) with the shares of Common Stock
made available for delivery.
The withheld shares of Restricted Stock not made available for delivery
by the Company shall be retained as treasury stock or will be cancelled and, in
either case, the recipient's right, title and interest in such Restricted Stock
shall terminate.
VII.4 CHANGES IN COMPANY'S CAPITAL STRUCTURE. In the event that the
outstanding shares of Common Stock of the Company are changed into or exchanged
for a different number or kind of shares or other securities of the Company, or
of another corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, or combination
of shares, appropriate adjustments shall be made by the Committee in the
aggregate number and kind of shares which may be issued or granted as Awards. If
any adjustment shall result in a fractional share, the fraction shall be
disregarded.
VII-2
18
ARTICLE VIII
VARIABLE PROVISIONS RELATING TO SPECIFIC RESTRICTED STOCK AWARDS
VIII.1 VESTING OF RESTRICTED STOCK. Restricted Stock Awards shall be
subject to such vesting restrictions, if any, as the Committee shall determine
in its sole discretion.
VIII.2 CONSEQUENCE OF VESTING. Subject to Article IX, when shares of
Restricted Stock become vested, the Restricted Period shall be terminated as to
those shares, and the Company shall deliver to the Restricted Stock Award
recipient (or his estate, if applicable) a Common Stock certificate representing
those shares and all Retained Distributions made or declared with respect to
those shares, reduced as necessary to satisfy the Company's tax withholding
obligation.
VIII-1
19
ARTICLE IX
REQUIREMENTS OF LAW
The Company shall not be required to sell, issue or deliver any shares
of Common Stock under any Award if such sale, issuance or delivery shall
constitute a violation by the Award recipient or the Company of any provisions
of any law or regulation of any governmental authority. Each Award granted under
this Plan shall be subject to the requirements that, if at any time the Board or
the Committee shall determine that the listing, registration or qualification of
the shares upon any securities exchange or under any state or federal law of the
United States or of any other country or governmental subdivision, or the
consent or approval of any governmental regulatory body, or investment or other
representations, are necessary or desirable in connection with the issue, or
purchase or delivery of shares subject to an Award, that Award shall not be
exercised in whole or in part and no shares shall be delivered pursuant to an
Award unless the listing, registration, qualification, consent, approval or
representations shall have been effected or obtained free of any conditions not
acceptable to the Committee. Any determination in this connection by the
Committee shall be final. In the event the shares issuable or deliverable on
exercise or vesting of an Award are not registered under the Securities Act of
1933, the Company may imprint on the certificate for those shares the following
legend or any other legend which counsel for the Company considers necessary or
advisable to comply with the Securities Act of 1933:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities
laws of any state and may not be sold or transferred except upon
registration or upon receipt by the Corporation of an opinion of
counsel satisfactory to the Corporation, in form and substance
satisfactory to the Corporation, that registration is not required for
a sale or transfer."
The Company may, but shall in no event be obligated to, register any securities
covered by this Plan under the Securities Act of 1933 (as now in effect or as
later amended) and, in the event any shares are registered, the Company may
remove any legend on certificates representing those shares. The Company shall
not be obligated to take any other affirmative action in order to cause the
exercise of an Award or the issuance or delivery of shares under the Award to
comply with any law or regulation or any governmental authority.
IX-1
20
ARTICLE X
ADMINISTRATION
This Plan shall be administered by the Committee. All questions of
interpretation and application of this Plan and Awards shall be subject to the
determination of the Committee. A majority of the members of the Committee shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by a majority of the members shall be as effective as if it had been made
by a majority vote at a meeting properly called and held. In carrying out its
authority under this Plan, the Committee shall have full and final authority and
discretion, including but not limited to the following rights, powers and
authorities, to:
(a) determine the persons to whom and the time or times at which
Awards will be made,
(b) determine the number of shares of Stock covered in each Award,
subject to the terms of the Plan,
(c) determine the purchase price of Stock covered in each Option,
subject to the terms of the Plan,
(d) determine the terms, provisions and conditions of each Award,
which need not be identical,
(e) accelerate the time at which any outstanding Option may be
exercised,
(f) accelerate the time at which any outstanding Restricted Stock
Award may vest,
(g) define the effect, if any, on an Award of the death,
Disability, or Retirement of the Award recipient,
(h) prescribe, amend and rescind rules and regulations relating to
administration of this Plan, and
(i) make all other determinations and take all other actions
deemed necessary, appropriate, or advisable for the proper
administration of this Plan.
The actions of the Committee in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of this Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive and
binding on all parties. The Committee's decision shall never be subject to de
novo review.
X-1
21
ARTICLE XI
AMENDMENT OR TERMINATION OF PLAN
The Board of the Company may amend, terminate or suspend this Plan at
any time, in its sole and absolute discretion.
XI-1
22
ARTICLE XII
MISCELLANEOUS
XII.1 NO EMPLOYMENT OBLIGATION. The granting of any Award shall not
constitute an employment contract, express or implied, nor impose upon the
Company or any Affiliate any obligation to employ or continue to employ any
Award recipient. The right of the Company or any Affiliate to terminate the
employment of any person shall not be diminished or affected by reason of the
fact that an Award has been granted to him.
XII.2 FORFEITURE FOR CAUSE. Notwithstanding any other provision of this
Plan, if the Committee finds by a majority vote, that the Award recipient,
before or after termination of his employment with the Company or any Affiliate
(a) committed a fraud, embezzlement, theft, felony or an act of dishonesty in
the course of his employment by the Company which conduct damaged the Company or
(b) disclosed trade secrets of the Company, then any outstanding options which
have not been exercised by the individual and any Awards which have not yet
vested will be forfeited. The decision of the Committee as to the cause of an
Award recipient's discharge, the damage done to the Company and the extent of
the individual's competitive activity will be final. No decision of the
Committee, however, will affect the finality of the discharge of the individual
by the Company.
XII.3 WRITTEN AGREEMENT. Each Award granted under the Plan shall be
embodied in a written Agreement which shall be subject to the terms and
conditions of the Plan and shall be signed by the Award recipient and by a
member of the Committee on behalf of the Committee and the Company. Each Option
Agreement shall state that the Option embodied therein is not intended to
satisfy the requirements of section 422 of the Code. The Agreement may contain
any other provisions that the Committee in its discretion shall deem advisable
which are not inconsistent with the terms of this Plan.
XII.4 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD. With respect to
administration of this Plan, the Company shall indemnify each present and future
member of the Committee and the Board against, and each member of the Committee
and the Board shall be entitled without further act on his part to indemnity
from the Company for, all expenses (including attorney's fees, the amount of
judgments and the amount of approved settlements made with a view to the
curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of any
action, suit, or proceeding in which he may be involved by reason of his being
or having been a member of the Committee and/or the Board, whether or not he
continues to be a member of the Committee and/or the Board at the time of
incurring the expenses--including, without limitation, matters as to which he
shall be finally adjudged in any action, suit or proceeding to have been found
to have been negligent in the performance of his duty as a member of the
Committee or of the Board. However, this indemnity shall not include any
expenses incurred by any member of the Committee and/or the Board in respect of
matters as to which he shall be finally adjudged in any action, suit or
proceeding to have been guilty of gross negligence or willful misconduct in the
performance of his duty as a member of the Committee or the Board. In addition,
no right of indemnification under this Plan shall be available to or enforceable
by any member of the Committee or the Board unless, within 60 days after
institution
XII-1
23
of any action, suit or proceeding, he shall have offered the Company, in
writing, the opportunity to handle and defend same at its own expense. This
right of indemnification shall inure to the benefit of the heirs, executors or
administrators of each member of the Committee and the Board and shall be in
addition to all other rights to which a member of the Committee and the Board
may be entitled as a matter of law, contract, or otherwise.
XII.5 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation or benefit plans
in effect for the Company or any Affiliate, nor shall this Plan preclude the
Company from establishing any other forms of incentive or other compensation for
employees of the Company or any Affiliate.
XII.6 OTHER AWARDS. The grant of an Award shall not confer upon an
Award recipient the right to receive any future or other Awards under this Plan,
whether or not Awards may be granted to similarly situated Award recipients, or
the right to receive future Awards upon the same terms or conditions as
previously granted.
XII.7 SECTION 83(b) ELECTIONS. No Employee shall exercise the election
permitted under section 83(b) of the Code with respect to an Award without
written approval of the Committee. If the Committee permits such an election
with respect to any Award, the Company shall require the Award recipient to pay
the Company an amount necessary to satisfy the Company's tax withholding
obligation.
XII.8 ARBITRATION OF DISPUTES. Any controversy arising out of or
relating to the Plan or an Agreement shall be resolved by arbitration conducted
pursuant to the arbitration rules of the American Arbitration Association. The
arbitration shall be final and binding on the parties.
XII.9 GENDER. If the context requires, words of one gender when used in
this Plan shall include the others and words used in the singular or plural
shall include the other.
XII.10 HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of this Plan and shall
not be used in construing the terms of this Plan.
XII.11 GOVERNING LAW. The provisions of this Plan shall be construed,
administered, and governed under the laws of the State of Texas.
XII-2
1
EXHIBIT 10.2
AMENDMENT TO
THE QUANEX CORPORATION
1997 KEY EMPLOYEE STOCK OPTION PLAN
THIS AGREEMENT by Quanex Corporation (the "Company"),
WITNESSETH:
WHEREAS, the Board of Directors of the Company previously adopted the
plan agreement known as the "Quanex Corporation 1997 Key Employee Stock Option
Plan" (the "Plan"); and
WHEREAS, the Board of Directors of the Company retained the right in
Article XI of the Plan to amend the Plan from time to time; and
WHEREAS, the Board of Directors of the Company has approved the
following amendment to the Plan;
NOW, THEREFORE, effective January 1, 2000, the Board of Directors of
the Company agrees that Section 6.2 of the Plan is hereby amended, effective
with respect to all Options issued in the future under this Plan, as follows:
6.2 DURATION OF OPTIONS. No Option shall be exercisable after ten years
from the date the Option is granted. An Option may terminate prior to
the normal expiration date as specified below.
(a) General Rule for Severance of Employment. Except as may be
otherwise expressly provided herein, all Options shall
terminate on the earlier of the date of the expiration of the
Option or one day less than three months after the date of the
severance of the employment relationship between the Company
and all Affiliates and the Optionee, whether with or without
cause, for any reason other than the death, Disability or,
Retirement of the Optionee, during which period the Optionee
shall be entitled to exercise the Option in respect of the
number of shares that the Optionee would have been entitled to
purchase had the Optionee exercised the Option on the date of
such severance of employment. Whether authorized leave of
absence, or absence on military or government service shall
constitute severance of the employment relationship between
the Company and all Affiliates and the Optionee, shall be
determined by the Committee at the time thereof.
2
(b) Death, Disability or Retirement of Optionee. In the event
of the death, Disability or Retirement of an Optionee, before
the date of expiration of such Option, such Option shall
continue fully in effect, including provisions providing for
subsequent vesting of such Option, for period of not more than
three years commencing on the date of the Optionee's death,
Disability or Retirement and shall terminate on the earlier of
the date of the expiration of such-year period or the date of
expiration of the Option. After the death of the Optionee, his
executors, administrators or any person or persons to whom his
Option may be transferred by will or by the laws of descent
and distribution, shall have the right, at any time prior to
the termination of the Option to exercise the Option, in
respect to the number of shares that the Optionee would have
been entitled to exercise if he were still alive.
Notwithstanding the foregoing provisions of this Section, the
Committee may provide for a different option termination date in the
Option Agreement with respect to any Option.
Dated: December 9, 1999.
-2-
1
EXHIBIT 10.3
AMENDMENT TO
THE QUANEX CORPORATION
1997 KEY EMPLOYEE STOCK PLAN
THIS AGREEMENT by Quanex Corporation (the "Company"),
WITNESSETH:
WHEREAS, the Board of Directors of the Company previously adopted the
plan agreement known as the "Quanex Corporation 1997 Key Employee Stock Plan"
(the "Plan");
WHEREAS, the Board of Directors of the Company retained the right in
Article XI of the Plan to amend the Plan from time to time; and
WHEREAS, the Board of Directors of the Company has approved the
following amendment to the Plan;
NOW, THEREFORE, effective July 1, 2000, the Plan is hereby amended,
effective with respect to both awards of restricted stock outstanding on the
date of the adoption of this amendment and all restricted stock granted under
the Plan in the future, as follows:
(1) Section 7.3 is hereby amended and restated in its entirety as
follows:
7.3 WITHHOLDING OF TAXES. When shares of Restricted Stock
become vested, the Restricted Stock Award recipient shall (i) pay the
Company an amount of money necessary to satisfy the Company's tax
withholding obligations under the Code and applicable state or local
law arising from the vesting of such Restricted Stock or, (ii) elect to
receive a reduced number of shares of Common Stock to satisfy the
Company's tax withholding obligations.
At the time a Restricted Stock Award recipient's shares of
Restricted Stock become vested, the Company shall calculate the amount
of the Company's tax withholding obligations on the assumption that all
such vested shares of Restricted Stock are made available for delivery.
The Restricted Stock Award recipient may pay the Company the amount of
the Company's tax withholding obligations by cashier's check drawn on a
national banking association and payable to the order of the Company in
United States dollars. Such payment, if any, shall be delivered to the
Company within three days after the date of the lapse of restrictions.
If the Restricted
2
Stock Award recipient does not timely pay the Company an amount
necessary to satisfy the Company's withholding obligation, he shall be
deemed to have elected to have the Company withhold shares of the
Restricted stock to satisfy the Company's withholding obligation. In
the event that a Restricted Stock Recipient is deemed to have made such
an election, the Company shall (i) reduce the number of vested shares
of Restricted Stock made available for delivery so that the Fair Market
Value of the shares withheld on the vesting date approximates the
amount of tax the Company is obliged to withhold and (ii) in lieu of
the withheld shares, remit cash to the United States Treasury and other
applicable governmental authorities, on behalf of the Restricted Stock
Award recipient, in the amount of the withholding tax due.
If the Restricted Stock Award recipient is deemed to have
elected to receive a reduced number of shares of Common Stock to
satisfy the Company's tax withholding obligations, the Company shall
withhold only the number of whole shares of Common Stock necessary to
satisfy its minimum statutory withholding obligation, which shall be
based on minimum statutory withholding rates for federal and state tax
purposes, including payroll taxes, that are applicable to the
Restricted Stock Award recipient's taxable income arising from the
vesting of his Restricted Stock. If the Fair Market Value of the
withheld shares does not equal Company's minimum statutory withholding
amount due, the Company shall withhold whole shares with a Fair Market
Value slightly less than the minimum statutory withholding amount due.
The Restricted Stock Award recipient shall pay to the Company the
remaining balance of the minimum statutory withholding amount due by
cashier's check drawn on a national banking association and payable to
the order of the Company in United States dollars.
The withheld shares of Restricted Stock not made available for
delivery by the Company shall be retained as treasury stock or will be
canceled and, in either case, the recipient's right, title and interest
in such Restricted Stock shall terminate.
All references to the Restricted Stock recipient in this
Section 7.3 shall be deemed to be references to the estate of the
Restricted Stock recipient, if applicable.
(2) Section 8.2 is hereby amended and restated in its entirety as
follows:
8.2 CONSEQUENCE OF VESTING. Subject to Article IX, when shares
of Restricted Stock become vested, the Restricted Period shall be
terminated as to those shares, and, upon satisfaction of the Company's
required tax withholding obligation in the manner specified in Section
7.3, the Company shall deliver to the Restricted Stock Award recipient
(or his estate, if applicable) a Common Stock certificate representing
those shares and all Retained Distributions made or declared with
respect to those shares.