<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------- --------
COMMISSION FILE NUMBER 1-9929
INSTEEL INDUSTRIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0674867
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1373 BOGGS DRIVE, MOUNT AIRY, NORTH CAROLINA 27030
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 336-786-2141
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 [ ]
The number of shares outstanding of the registrant's common stock as of
February 5, 1999 was 8,442,512.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSTEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
JANUARY 2, OCTOBER 3,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 565 $ 422
Accounts receivable, net 24,476 28,687
Inventories 30,710 30,566
Prepaid expenses and other 1,996 2,023
-------- --------
Total current assets 57,747 61,698
Property, plant and equipment, net 79,968 80,350
Other assets 4,849 5,083
-------- --------
Total assets $142,564 $147,131
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,044 $ 28,758
Accrued expenses 5,790 6,013
Current portion of long-term debt 620 620
-------- --------
Total current liabilities 28,454 35,391
Long-term debt 36,708 35,743
Deferred income taxes 6,113 5,726
Other liabilities 1,012 1,011
Shareholders' equity:
Common stock 16,885 16,885
Additional paid-in capital 38,232 38,232
Retained earnings 15,667 14,143
-------- --------
Total shareholders' equity 70,277 69,260
-------- --------
Total liabilities and shareholders' equity $142,564 $147,131
======== ========
</TABLE>
<PAGE> 3
INSTEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
<S> <C> <C>
Net sales $62,267 $ 59,919
Cost of sales 55,701 58,444
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Gross profit 6,566 1,475
Selling, general and administrative expense 3,554 3,080
------- --------
Operating income (loss) 3,012 (1,605)
Interest expense 593 968
Other expense 56 42
------- --------
Earnings (loss) before income taxes 2,363 (2,615)
Provision (benefit) for income taxes 839 (928)
------- --------
Net earnings (loss) $ 1,524 $ (1,687)
======= ========
Weighted average shares outstanding (basic and diluted) 8,443 8,441
======= ========
Net earnings (loss) per share (basic and diluted) $ 0.18 $ (0.20)
======= ========
Dividends paid per share $ 0.06 $ 0.06
======= ========
</TABLE>
<PAGE> 4
INSTEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Net earnings (loss) $ 1,524 $ (1,687)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,249 2,365
Loss on sale of assets 16 --
Net changes in assets and liabilities:
Accounts receivable, net 4,237 6,658
Inventories (144) (4,005)
Accounts payable and accrued expenses (6,937) (7,419)
Other changes 543 (422)
-------- --------
Total adjustments (36) (2,823)
-------- --------
Net cash provided by (used for) operating activities 1,488 (4,510)
-------- --------
CASH FLOWS FROM DISCONTINUED OPERATING ACTIVITIES:
Net cash provided by discontinued operating activities -- 21
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,831) (1,873)
Proceeds from (payments on) notes receivable 19 (28)
Proceeds from sale of property, plant and equipment 9 --
-------- --------
Net cash used for investing activities (1,803) (1,901)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 23,540 32,629
Principal payments on long-term debt (22,575) (26,706)
Proceeds from exercise of stock options -- 44
Cash dividends paid (507) (507)
-------- --------
Net cash provided by financing activities 458 5,460
-------- --------
Net increase (decrease) in cash 143 (930)
Cash and cash equivalents at beginning of period 422 1,079
-------- --------
Cash and cash equivalents at end of period $ 565 $ 149
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 648 $ 1,210
Income taxes 254 485
</TABLE>
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
(1) BASIS OF PRESENTATION
The consolidated unaudited financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These unaudited consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended October 3, 1998.
The unaudited consolidated financial statements included herein reflect
all adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of the financial position, results
of operations and cash flows for all periods presented. The results for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
(2) INVENTORIES
<TABLE>
<CAPTION>
JANUARY 2, OCTOBER 3,
1999 1998
--------- ----------
<S> <C> <C>
Raw materials $15,475 $15,514
Supplies 2,203 2,242
Work in process 1,311 1,525
Finished goods 11,721 11,285
------- -------
Total inventories $30,710 $30,566
======= =======
</TABLE>
(3) EARNINGS PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 replaces the
primary and fully diluted earnings per share ("EPS") computations with basic and
diluted EPS. Basic EPS are computed by dividing net earnings by the weighted
average number of common shares outstanding during the period. Diluted EPS are
computed by dividing net earnings by the weighted average number of common
shares and dilutive securities outstanding during the period. Securities that
have the effect of increasing EPS are considered to be antidilutive and are not
included in the computation of diluted EPS. Options to purchase 585,000 shares
and 491,000 shares for the three months ended January 2, 1999 and December 27,
1997, respectively, were antidilutive and were not included in the diluted EPS
computation.
The reconciliation of basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
<S> <C> <C>
Net earnings (loss) $1,524 $(1,687)
====== =======
Weighted average shares outstanding:
Weighted average shares outstanding (basic) 8,443 8,441
Dilutive effect of stock options -- --
------ -------
Weighted average shares outstanding (diluted) 8,443 8,441
====== =======
Net earnings (loss) per share (basic and diluted) $ 0.18 $ (0.20)
====== =======
</TABLE>
<PAGE> 6
(4) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components. The Company has adopted SFAS No. 130 as required in its interim
financial statements for the first quarter ended January 2, 1999. The adoption
of this statement did not impact the Company's consolidated financial statements
as there were no differences between net earnings and comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected information about operating segments and related disclosures about
products and services, major customers and geographic areas. As the statement
only impacts financial statement disclosures, it will not effect the Company's
financial position or results of operations. Management is in the process of
evaluating the effects of this change on its reporting. The Company will adopt
SFAS No. 131 as required in its annual report for 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Management has not yet evaluated the effects of this change on
its financial position or results of operations. The Company will adopt SFAS No.
133 as required in its interim financial statements for the first quarter of
2000.
(5) SUBSEQUENT EVENT
In January 1999, the Company announced that it had acquired a 25%
interest in Structural Reinforcement Products, Inc. ("SRP"), a manufacturer of
welded wire fabric products for the construction industry. Under the terms of
the purchase agreement, the Company acquired 25% of the common stock in SRP for
$3.3 million. In addition, the Company provided SRP with $1.5 million of debt
financing and $1.9 million of collateral to support its existing credit facility
in order to assume a proportionate share of SRP's debt-related obligations. The
Company may be obligated to increase its investment for its equity position by
up to $1.0 million depending upon SRP's future financial performance.
The Company will account for its investment in SRP on an equity basis
and, accordingly, will include its share of SRP's earnings in its consolidated
earnings.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
STATEMENTS OF EARNINGS - SELECTED DATA
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
JANUARY 2, DECEMBER 27,
1999 CHANGE 1997
---------- ------ ------------
<S> <C> <C> <C>
Net sales $62,267 4% $ 59,919
Gross profit 6,566 345% 1,475
Percentage of net sales 10.5% 2.5%
Selling, general and administrative expense $ 3,554 15% $ 3,080
Percentage of net sales 5.7% 5.1%
Operating income (loss) $ 3,012 N/M $ (1,605)
Percentage of net sales 4.8% (2.7%)
Interest expense $ 593 (39%) $ 968
Percentage of net sales 1.0% 1.6%
Effective income tax rate 35.5% 35.5%
Net earnings (loss) $ 1,524 N/M $ (1,687)
Percentage of net sales 2.4% (2.8%)
</TABLE>
Net sales for the first quarter increased 4% to $62.3 million from
$59.9 million in the year-ago period. The sales increase was in spite of the
sale of the assets related to the Company's agricultural fencing product line in
February 1998 which reduced current year sales relative to the prior year. On a
comparable basis, sales rose 13%. Sales of concrete reinforcing products and
nails increased sharply driven by strong construction markets. Sales of tire
bead wire and welding wire rose to new highs during the quarter as the Company
continued to make significant progress towards completing the required
qualification process with its customers. Industrial wire sales declined from a
year ago primarily due to a significant increase in the proportion of wire
consumed internally to manufacture higher value products.
Gross margins for the first quarter increased to 10.5% of sales
compared with 2.5% in the prior year. The increase in margins was primarily
caused by a widening in spreads between selling values and raw material costs
for most products together with higher sales of tire bead wire and welding wire.
The Company is incurring substantially all of the manufacturing costs related to
these products while it operates at a low level of capacity utilization. As a
result, any increases in volume significantly impact the Company's
profitability. Gross margins were also favorably affected by higher shipments of
most products.
Selling, general and administrative expense ("SG&A expense") rose 15%
for the first quarter, increasing to 5.7% of sales from 5.1% in the prior year.
The increase in SG&A expense was primarily caused by higher profit-sharing and
incentive plan expenses resulting from the significant improvement in the
Company's financial results.
Interest expense fell sharply for the first quarter compared with a
year ago due to lower borrowing levels on the Company's revolving credit
facility. The reduction in debt was primarily related to lower inventories and
the improvement in the Company's earnings relative to the year-ago loss.
<PAGE> 8
FINANCIAL CONDITION
SELECTED FINANCIAL DATA
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
<S> <C> <C>
Net cash provided by (used for) continuing operating activities $ 1,488 $ (4,510)
Net cash used for investing activities (1,803) (1,901)
Net cash provided by financing activities 458 5,460
Total debt 37,328 58,206
Percentage of total capital 35% 46%
Shareholders' equity $ 70,277 $ 69,172
Percentage of total capital 65% 54%
Total capital (total debt + shareholders' equity) $ 107,605 $ 127,378
</TABLE>
Operating activities generated $1.5 million of cash for first quarter
while using $4.5 million a year ago. The year-to-year change was principally
related to a sharp reduction in the typical seasonal increase in inventories and
the significant improvement in the Company's financial results. The increase in
inventory levels during the current year was less pronounced as a result of
unseasonable strong demand for construction-related products. During the prior
year quarter, the Company had increased inventories in anticipation of potential
supply disruptions resulting from the expiration of a labor agreement and
scheduled downtime for maintenance at a primary raw material supplier.
Investing activities used $1.8 million of cash for the first quarter
compared with $1.9 million a year ago. Capital expenditures were primarily for
recurring equipment maintenance and upgrades together with the tire bead wire
and welding wire expansion.
Financing activities provided $458,000 of cash for the first quarter
compared with $5.5 million a year ago. The decrease in financing requirements
resulted from the reduction in the seasonal inventory build and the improved
financial performance relative to the prior year.
The Company's debt to capital ratio decreased to 35% at January 2, 1999
compared with 46% at December 27, 1997. During 1998, the Company's revolving
credit facility was amended, increasing the maximum availability to $60.0
million through October 3, 1998, declining to $57.5 million on October 4, 1998
and $55.0 million on January 3, 1999 and thereafter. At January 2, 1999,
approximately $24.4 million was available under the facility. The Company
currently expects to fund its capital expenditure requirements and liquidity
needs from a combination of internally generated funds, the revolving credit
facility and additional long-term sources of financing.
YEAR 2000
The "Year 2000" issue refers to older computer systems and other
equipment operating on software that uses only two digits to represent the year,
rather than four digits. As a result, these older systems and equipment may not
process information or otherwise function properly when using the year "2000",
since that year will be indistinguishable from the year "1900".
The Company has initiated a Year 2000 program to assess and develop
plans to resolve the issue both internally and externally. During 1996, the
Company began developing a plan to upgrade its business and operating systems to
Year 2000 compliant software. In addition to addressing the Year 2000 issue, the
systems upgrade is expected to enhance the performance of the Company's customer
service, manufacturing and administrative processes. Implementation of the
upgrade began in 1997 with the initial testing of the system on a limited basis
prior to converting all of the Company's locations. As of January 2, 1999, the
implementation had been completed at 25% of the Company's facilities with the
pace of the conversion expected to accelerate for the remaining locations. The
Company expects to complete the project by September 1999.
In order to identify potential Year 2000 problems at key suppliers and
customers, the Company has initiated external surveys to assess their level of
compliance. The Company expects to complete its assessment of outside parties
and develop the appropriate actions to be taken by April 1999.
<PAGE> 9
The Company also is in the process of reviewing embedded software in
its equipment and facilities to identify potential Year 2000 issues. Equipment
manufacturers are being requested to certify their compliance and assist the
Company in developing solutions where they are currently non-compliant. The
Company expects to complete the assessment and testing process by September
1999.
While reasonable actions have been taken to address the Year 2000
problem and will continue to be taken in the future to mitigate such disruption,
the magnitude of all Year 2000 disturbances cannot be predicted. Failure to
complete these programs as planned could result in the corruption of data,
hardware or equipment failures or the inability to manufacture products or
conduct other business activities, all of which could have a material impact on
the Company's business, consolidated financial position or results of
operations. Management believes that past or expected future capital
requirements related to Year 2000 compliance issues will not have a material
impact on its consolidated financial position or results of operations.
The Company does not, at this time, have an overall contingency plan to
address Year 2000 disturbances. Its efforts to date have been concentrated on
mitigating such disturbances. As the Company proceeds forward with its
assessment programs and evaluates the reasonable potential risks, it will
determine the extent of contingency planning and resources that are appropriate.
Any such contingency actions and resources would be planned to be in place in
sufficient time for the Year 2000.
OUTLOOK
The Company's operating results are impacted by seasonal factors,
particularly in the first quarter of the fiscal year, which has historically
represented the lowest quarterly sales volume. Shipments typically increase in
the second quarter and reach a high point in the third or fourth quarter,
reflecting the buying patterns of the Company's customers.
Market conditions for hot-rolled wire rod, the Company's primary raw
material, continue to be favorable. Recent expansions in domestic production
capacity together with changes in the global market environment have
significantly increased supplier competition. In December 1998, domestic wire
rod producers initiated a Section 201 filing with the U.S. International Trade
Commission alleging that rising import levels had resulted in serious injury.
The domestic producers are pursuing trade relief on a worldwide basis against
all countries other than NAFTA nations through duties, quotas or other measures
intended to reduce import competition. Although the impact of such actions on
the Company's financial results is difficult to predict, the Company believes
that rod market conditions will remain competitive in ensuing quarters until the
trade actions are resolved.
The Company's business strategy continues to be focused on (1) further
expansion into higher value products that offer the potential to generate
returns that exceed the Company's cost of capital and (2) improving the
financial performance of the Company's traditional businesses to acceptable
levels. During 1994 - 1997, the Company built two new production facilities and
reconfigured an existing operation in order to develop the manufacturing
capabilities required to enter the markets for PC strand, collated fasteners,
tire bead wire and welding wire. Sales of these new products are expected to
increase from $39.6 million in 1998 to $100.0 million when fully operational.
The Company expects that the recently enacted federal highway spending
legislation ("TEA-21") will have a favorable impact on the demand for its
concrete reinforcing products. As customer requirements rise, the Company
expects to gradually increase the operating volumes of its recently expanded PC
strand manufacturing facility to its full design capacity. During the first
quarter, sales of the Company's most recent product additions, tire bead wire
and welding wire, rose to new highs as the Company made significant progress
towards completing the qualification process and establishing itself as a
credible supplier. As the Company is currently incurring substantially all of
the anticipated operating costs required to support its new businesses, the
incremental impact of projected increases in sales is expected to have a
significant favorable impact on its financial performance.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect
management's current assumptions and estimates of future performance and
economic conditions. Such statements are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those projected, stated or
implied by the statements. Such risks and uncertainties include, but are not
limited to, general economic conditions in the markets in which the Company
operates; unanticipated changes in customer demand, order patterns and inventory
levels; fluctuations in the cost and availability of the Company's primary raw
material, hot rolled steel wire rod; the Company's ability to raise selling
prices in order to recover increases in wire rod prices; the impact of the
resolution of the Section 201 filing with the U.S International Trade Commission
on the cost and availability of wire rod; legal, environmental or regulatory
developments that significantly
<PAGE> 10
impact the Company's operating costs; increased demand for the Company's
concrete reinforcing products resulting from increased federal funding levels
provided for in the TEA-21 highway spending legislation; the success of the
Company's new product initiatives, including the PC strand, collated fastener,
tire bead wire and welding wire expansions; the inability of the Company to
expedite the qualification process with prospective customers for tire bead wire
and welding wire; and the failure of the Company to receive regular and
substantial orders for its new products.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10 - MATERIAL CONTRACTS
------------------
10.31 Trust Under Insteel Industries, Inc., Directors
Compensation Plan/Return on Capital Plan
27 - Financial Data Schedule (for SEC use only).
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended January 2, 1999.
<PAGE> 11
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.
INSTEEL INDUSTRIES, INC.
------------------------
Registrant
Date: February 5, 1999 By /s/ H.O. Woltz III
--------------------------------------
H.O. Woltz III
President and Chief Executive Officer
Date: February 5, 1999 By /s/ Michael C. Gazmarian
--------------------------------------
Michael C. Gazmarian
Chief Financial Officer and Treasurer
<PAGE> 1
EXHIBIT 10.31
TRUST UNDER INSTEEL INDUSTRIES, INC., DIRECTORS COMPENSATION PLAN/
RETURN ON CAPITAL PLAN
(a) This Agreement made this 13th day of January, 1999, by and
between INSTEEL INDUSTRIES, INC. (Company) and EDWIN MOORE WOLTZ (Trustee);
(b) WHEREAS, Company has adopted the nonqualified deferred
compensation Plans as listed in Appendix A and B;
(c) WHEREAS, Company has incurred or expects to incur liability
under the terms of such Plans with respect to the individuals participating in
such Plans;
(d) WHEREAS, Company wishes to establish a trust (hereinafter
called "Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of Company's creditors in the event of Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plans;
(e) WHEREAS, it is the intention of the parties that this Trust
shall constitute an unfunded arrangement;
(f) WHEREAS, it is the intention of Company to make contributions
to the Trust to provide itself with a source of funds to assist it in the
meeting of its liabilities under the Plans;
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a) Company hereby deposits with Trustee in trust $______, which
shall become the principal of the Trust to be held, administered and disposed of
by Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be revocable by Company.
(c) The Trust is intended to be a grantor trust of which Company
is the grantor, within the meaning of subpart E, part I, subchapter J, chapter
I, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust and any earning thereon shall be
held separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes of Plan participants and general creditors
as herein set forth. Plan participants and their beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any assets of the
Trust. Any rights created under the Plans and this Trust Agreement shall be mere
unsecured contractual rights of Plan participants and their beneficiaries
against Company. Any assets held by the Trust will be subject to the claims of
Company's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3 (a) herein.
<PAGE> 2
(e) Company, in its sole discretion, may at any time, or from time
to time, make additional deposits of cash or other property in trust with
Trustee to augment the principal to be held, administered and disposed of by
Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan
participant or beneficiary shall have any right to compel such additional
deposits.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) Company shall deliver to Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or other
instructions acceptable to Trustee for determining the amounts so, payable, the
form in which such amount is to be paid (as provided for or available under the
Plans), and the time of commencement for payment of such amounts. Except as
otherwise provided herein, Trustee shall make payments to the Plan participants
and their beneficiaries in accordance with such Payment Schedule. The Trustee
shall make provision for the reporting and withholding of any federal, state or
local taxes that may be required to be withheld with respect to the payment of
benefits pursuant to the terms of the Plans and shall pay amounts withheld to
the appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by Company.
(b) The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plans shall be determined by Company or such
party as it shall designate under the Plans, and any claim for such benefits
shall be considered and reviewed under the procedures set out in the Plans.
(c) Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plans. Company shall notify Trustee of its decision to make payment of benefits
directly prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Plans, Company shall make the balance of each such payment as it
falls due. Trustee shall notify Company where principal and earnings are not
sufficient.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary When Company Is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants
and their beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay
its debts as they become due, or (ii) Company is subject to a pending proceeding
as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided
in Section 1 (d) hereof, the principal and income of the Trust shall be subject
to claims of general creditors of Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges in writing
to Trustee that Company has become Insolvent, Trustee shall determine whether
Company is Insolvent and, pending such determination, Trustee shall discontinue
payment of benefits to Plan participants or their beneficiaries.
2
<PAGE> 3
(2) Unless Trustee has actual knowledge of Company's Insolvency,
or has received notice from Company or a person claiming to be a creditor
alleging that Company is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events rely on such evidence
concerning Company's solvency as may be furnished to Trustee and that provides
Trustee with a reasonable basis for making a determination concerning Company's
solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Plan participants or their
beneficiaries and shall hold the assets of the Trust for the benefit of
Company's general creditors. Nothing in this Trust Agreement shall in any way
diminish any rights of Plan participants or their beneficiaries to purse their
rights as general creditors of Company with respect to benefits due under the
Plans or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that Company is no longer Insolvent.
(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(a)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plans for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by Company in lieu of the payments provided
for hereunder during any such period of discontinuance.
Section 4. Investment Authority.
(a) Trustee may invest in securities (including stock or rights to
acquire stock) or obligations issued by Company. All rights associated with
assets of the Trust shall be exercised by Trustee or the person designated by
Trustee, and shall in no event be exercisable by or rest with Plan participants.
(b) Company shall have the right at any time, and from time to
time in its sole discretion, to substitute assets of equal fair market value
for any asset held by the Trust.
Section 5. Disposition of Income.
(a) During the term of this Trust all income received by the
Trust, net of expenses and taxes, shall be accumulated and reinvested.
Section 6. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within 60 days following the close of each calendar year
and within 60 days after the removal or resignation of Trustee, Trustee shall
deliver to Company a written account of its administration of the Trust during
such year or during the period from the close of the last preceding year to the
date of such removal or resignation, setting forth all investments, receipts,
disbursements and other transactions effected by it, including a description of
all securities and investments purchased and sold with the cost or net proceeds
of such purchases or sales (accrued interest paid or receivable being shown
3
<PAGE> 4
separately), and showing all cash, securities and other property held in the
Trust at the end of such year or as of the date of such removal or resignation,
as the case may be.
Section 7. Responsibility of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by Company which is contemplated by, and
in conformity with, the terms of the Plans or this Trust and is given in writing
by Company. In the event of a dispute between Company and a party, Trustee may
apply to a court of competent jurisdiction to resolve the dispute.
(b) Trustee may consult with legal counsel (who may also be
counsel for Company generally) with respect to any of its duties or obligations
hereunder.
(c) Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(d) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
Trustee shall have no power to name a beneficiary of the policy other than the
Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(e) Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
Section 8. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses.
If not so paid, the fees and expenses shall be paid from the Trust
Section 9. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company,
which shall be effective 60 days after receipt of such notice unless Company and
Trustee agree otherwise.
(b) Trustee may be removed by Company on 30 days notice or upon
shorter notice accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within 30 days after receipt of notice
of resignation, removal or transfer, unless Company extends the time limit.
4
<PAGE> 5
(d) If Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 10 hereof, by the effective date of
resignation or removal under paragraph(s) (a) or (b) of this section. If no such
appointment has been made, Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses of
Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
Section 10. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 9
hereof, Company may appoint any third party a successor to replace Trustee upon
resignation or removal. The appointment shall be effective when accepted in
writing by the new Trustee, who shall have all of the rights and powers of the
former Trustee, including ownership rights in the Trust assets. The former
Trustee shall execute any instrument necessary or reasonably requested by
Company or the successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 9 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
Section 11. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and Company.
(b) The Trust shall not terminate until the date on which Plan
Participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plans, unless sooner revoked in accordance with Section 1(b)
hereof. Upon termination of the Trust any assets remaining in the Trust shall be
returned to Company.
Section 12. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall
be ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of North Carolina.
Section 13. Effective Date.
The effective date of this Trust Agreement shall be January 1, 1999.
5
<PAGE> 6
INSTEEL INDUSTRIES, INC., GRANTOR
BY: H.O. WOLTZ III
---------------------------------
ATTEST: [SEAL]
Gary D. Kniskern
- -------------------------------
SECRETARY
NORTH CAROLINA,
SURRY COUNTY.
I, Deborah A. Lowe, Notary Public for said County and State, certify that
Gary D. Kniskern personally came before me this day and acknowledged that he/she
is Secretary of INSTEEL INDUSTRIES, INC., a corporation, and that by authority
duly given and as the act of the corporation the foregoing instrument was signed
in its name by its President/CEO, sealed with its corporate seal, and attested
by him/herself as its SECRETARY.
Witness my hand and official seal, this the 13th day of January, 1999.
Deborah A. Lowe
----------------------
Notary Public
My Commission Expires:
9-22-99
- -----------------------
(SEAL)
6
<PAGE> 7
Edwin M. Woltz, Trustee
BY: Edwin M. Woltz
----------------------------------
NORTH CAROLINA,
SURRY COUNTY.
I, Rhonda B. Easter, Notary Public for said County and State, certify that
Edwin M. Woltz personally came before me this day and acknowledged that he/she
is Edwin M. Woltz and he/she did sign the foregoing instrument in his/her name
as trustee.
Witness my hand and official seal, this the 15th day of January, 1999.
Rhonda B. Easter
--------------------------------------
Notary Public
My Commission Expires:
7-2-2003
- ----------------------
(SEAL)
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INSTEEL INDUSTRIES INC. FOR THE THREE MONTHS ENDED
JANUARY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 565
<SECURITIES> 0
<RECEIVABLES> 24,476
<ALLOWANCES> 0
<INVENTORY> 30,710
<CURRENT-ASSETS> 57,747
<PP&E> 79,968
<DEPRECIATION> 0
<TOTAL-ASSETS> 142,564
<CURRENT-LIABILITIES> 28,454
<BONDS> 0
0
0
<COMMON> 16,885
<OTHER-SE> 53,899
<TOTAL-LIABILITY-AND-EQUITY> 142,564
<SALES> 62,267
<TOTAL-REVENUES> 62,267
<CGS> 55,701
<TOTAL-COSTS> 55,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 593
<INCOME-PRETAX> 2,363
<INCOME-TAX> 839
<INCOME-CONTINUING> 1,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,524
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
