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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
--------------------------- -----------------------------------------
COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates
of the registrant as of January 9, 2001 was $14,731,069.
The number of shares outstanding of the registrant's common stock as of
January 9, 2001 was 8,460,187.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement to be delivered to
shareholders in connection with the 2001 Annual Meeting of Shareholders are
incorporated by reference as set forth in Part III hereof.
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PART I
ITEM 1. BUSINESS.
GENERAL
Insteel Industries, Inc. ("Insteel" or "the Company") is one of the
nation's largest manufacturers of wire products. The Company manufactures and
markets concrete reinforcing products, industrial wire, nails, tire bead wire
and galvanized products for a broad range of construction and industrial
applications. Insteel is the parent holding company for two wholly-owned
operating subsidiaries, Insteel Wire Products Company ("IWP") and Florida Wire
and Cable, Inc. ("FWC").
Insteel's business strategy is driven off of a return on capital
framework with the primary objective of creating economic value through the
generation of returns that exceed the Company's cost of capital. The Company
seeks to achieve leadership positions in its markets and operate as the lowest
cost producer. The Company pursues expansion opportunities in existing or
related product lines sold to the same customers that leverage off of the
Company's infrastructure and core competencies in the manufacture and marketing
of wire products.
During 2000, the Company furthered this strategy with the acquisition
of FWC, a manufacturer of PC strand and galvanized products. The addition of FWC
more than tripled the size of Insteel's PC strand business, making the Company
the largest producer in North America. Insteel had entered this business in 1994
with the start-up of a new manufacturing facility and had expanded to become one
of the leading producers.
PRODUCTS
CONCRETE REINFORCING PRODUCTS (62% of 2000 consolidated net sales)
include welded wire fabric and prestressed concrete strand ("PC strand"). Welded
wire fabric is produced as both standard and specially engineered reinforcing
products for concrete pipe manufacturers, precasters, distributors and
construction companies. PC strand is a sophisticated reinforcing product sold to
precasters and posttensioning suppliers that is used for both pretensioned and
posttensioned prestressed concrete construction. The Company's concrete
reinforcing products are used in concrete pipe and box culverts, concrete
elements for bridges, buildings and other concrete structures, and other
commercial and residential construction applications.
INDUSTRIAL WIRE PRODUCTS (16% of 2000 consolidated net sales) are
primarily sold to manufacturers of springs for bedding and furniture,
appliances, display racks and a broad range of other products. Product
attributes vary with the end use and can include galvanizing for corrosion
resistance and intermediate heat-treating, in addition to stringent tolerance
requirements and mechanical properties.
BULK NAILS (8% of 2000 consolidated net sales) consist of a wide
variety of products such as common nails, finishing nails, box nails, sinkers,
duplex nails and galvanized nails sold to wholesalers and distributors primarily
for construction-related applications. In addition, the Company produces machine
quality nails that are used for industrial applications such as pallet
manufacturing.
GALVANIZED AND OTHER PRODUCTS (6% of 2000 consolidated net sales)
include guy strand, Aluminum Conductor Steel Reinforced ("ACSR") support wire
and strand, barrier strands and other ancillary products. Guy strand is a
seven-wire strand constructed from galvanized high carbon wire that is used in
the electrical distribution, telecommunication and cable television industries
to support utility poles, traffic lights and electric transmission cables. ACSR
support wire and strand are used in electric transmission lines as the load
bearing members for aluminum conductors. Barrier products and guide rail strand
are used in parking decks and other structures as a barrier medium, as well as
for separation media between traffic lanes.
TIRE BEAD WIRE (5% of consolidated net sales) is a bronze-plated steel
wire sold to tire manufacturers that is used to reinforce the inside diameter of
a tire and hold the tire to the wheel.
COLLATED NAILS (3% of 2000 consolidated net sales) are comprised of a
broad range of brite and galvanized collated nails that are used by a variety of
pneumatic nailing tools. The products are sold to distributors and original
equipment manufacturers ("OEMs") primarily for construction-related
applications.
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MARKETING AND DISTRIBUTION
Insteel markets its products through sales representatives who are
employees of the Company. The Company's sales organization is aligned with its
product lines, assigned to the specific markets served. The Company's products
are sold directly to users and through numerous wholesalers, distributors and
retailers located nationwide as well as into Canada, Mexico, and Central and
South America. Insteel delivers its products primarily by truck using common or
contract carriers.
CUSTOMERS
The Company sells its products to a broad range of customers including
OEMs, distributors, wholesalers and retailers. There were no customers that
represented 10% or more of the Company's net sales in 2000 or 1999. One customer
accounted for approximately 11% of the Company's net sales in 1998.
SEASONALITY
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.
RAW MATERIALS
The primary raw material required in the production of Insteel's wire
products is hot rolled carbon steel wire rod, which the Company purchases from
both domestic and foreign suppliers. Market conditions for wire rod were
relatively stable during 2000 following the resolution of trade actions. In
January 1999, domestic steel wire rod producers initiated a Section 201 filing
with the U.S. International Trade Commission ("ITC") alleging that rising import
levels had resulted in serious injury to the domestic industry. In response to
the ITC's report, in February 2000, President Clinton announced import relief
for the domestic industry in the form of a "tariff-rate-quota" ("TRQ"), which
will remain in place for three years. In the first year, steel wire rod from
countries subject to the TRQ will face additional duties of 10% once imports
exceed 1.58 million net tons. In the second and third years, the quantity of
imports exempt from the higher duty will increase by 2.0% a year and the level
of the surcharge will decline by 2.5% a year. The Company believes that domestic
and imported wire rod will continue to be available in quantities that are
sufficient to support the requirements of its markets.
COMPETITION
The markets in which Insteel's business is conducted are highly
competitive, including competition from companies whose revenues and financial
resources are much larger than the Company's. Some of its competitors are
integrated steelmakers that produce both wire rod and wire products and offer
multiple product lines over broad geographical areas. Other competitors are
smaller independent wire mills that offer limited competition in certain
markets. Market participants compete on the basis of price, quality and service.
Selling prices tend to ultimately move with changes in raw material costs,
although spreads can widen or narrow depending upon market conditions. Quality
and service expectations of customers have risen substantially over the years
and are key factors that impact their selection of suppliers. Technology has
become a critical factor in maintaining competitive levels of conversion costs
and quality. The Company believes that it is one of the leading low cost
producers of wire products based upon its technologically-advanced manufacturing
facilities and production capabilities. In addition, the Company believes that
it offers a broader range of products through more diverse distribution channels
than any of its competitors. The Company believes that it is well positioned to
compete favorably on the industry's critical success factors.
EMPLOYEES
As of September 30, 2000, the Company employed 1,270 people. The
Company has collective bargaining agreements with labor unions at its
Wilmington, Delaware and Jacksonville, Florida plants, which expire in November
2003 and April 2003, respectively. Approximately 201 employees were covered by
these agreements and were eligible for union membership of which 135 were union
members. The Company believes that its relations with the labor unions and its
employees are satisfactory.
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ENVIRONMENTAL MATTERS
The Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations. The Company has experienced
no material difficulties in complying with legislative or regulatory standards
and believes that these standards have not materially impacted its financial
position or results of operations. Compliance with future additional
environmental requirements could necessitate capital outlays. However, the
Company does not believe that these expenditures should ultimately result in a
material adverse effect on its financial position or results of operations.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position with the Company
-------------------- --- ------------------------------------
Howard O. Woltz, Jr. 75 Chairman of the Board and a Director
H.O. Woltz III 44 President, Chief Executive Officer and a
Director
Gary D. Kniskern 55 Vice President - Administration and
Secretary
Michael C. Gazmarian 41 Chief Financial Officer and Treasurer
Howard O. Woltz, Jr., has been Chairman of the Board since 1958 and has
served in various capacities for more than 45 years. He had been President of
the Company from 1958 to 1968 and from 1974 to 1989. He previously served as
Vice President, General Counsel and a director of Quality Mills, Inc., a
publicly-held manufacturer of knit apparel and fabrics, for more than 35 years
prior to its acquisition in 1988 by Russell Corporation.
H. O. Woltz III, a son of Howard O. Woltz, Jr., was elected Chief
Executive Officer in 1991 and has served in various capacities for more than 22
years. He was named President and Chief Operating Officer in 1989. He had been
Vice President of the Company since 1988 and, previously, President of
Rappahannock Wire Company, formerly a subsidiary of the Company, since 1981. Mr.
Woltz has been a director of the Company since 1986 and also serves as President
of IWP and FWC.
Gary D. Kniskern was elected Vice President - Administration in 1994
and has served in various capacities for more than 20 years. He had been
Secretary and Treasurer since 1984 and, previously, internal auditor since 1979.
Michael C. Gazmarian joined Insteel as Chief Financial Officer and was
elected Treasurer in 1994. He had been with Guardian Industries Corp., a
privately held glass manufacturer, since 1986, serving in various financial
capacities.
The executive officers listed above were elected by the Board of
Directors at its annual meeting held February 1, 2000 for a term that will
expire at the next annual meeting of the Board of Directors or until their
successors are elected and qualify. The next meeting at which officers will be
elected is scheduled for February 16, 2001.
ITEM 2. PROPERTIES.
Insteel's corporate headquarters are located in Mount Airy, North
Carolina. IWP has nine manufacturing facilities located in Andrews, South
Carolina (2 plants); Gallatin, Tennessee (2 plants); Dayton, Texas;
Fredericksburg, Virginia; Mount Airy, North Carolina; Wilmington, Delaware; and
Hickman, Kentucky. FWC has two manufacturing facilities located in Jacksonville
and Sanderson Florida.
The Company owns all of its properties with the exception of the land
at its Wilmington facility, which is leased. All of the Company's properties are
pledged as security under long-term financing agreements.
The Company considers that its properties are in good operating
condition and that its machinery and equipment have been well-maintained. The
Company's manufacturing facilities are suitable for their intended purposes and
have capacities adequate for current and projected needs for existing products.
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ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or which any of their property is a subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Company's common stock is listed on the New York Stock Exchange
under the symbol III. At December 8, 2000, the record date for the 2001 Annual
Meeting of Shareholders, there were 633 shareholders of record. Selected
quarterly financial data appears under the caption "Financial Information by
Quarter (Unaudited)" in Item 8(b) of this report.
Historically, the Company has paid a quarterly dividend ($0.06 per
share for each of the last eight quarters ending September 30, 2000). However,
as previously announced on November 10, 2000, the Company suspended its
quarterly cash dividend in connection with the terms of a covenant waiver with
its senior lenders under its credit facility. Pursuant to an amendment to the
credit facility dated January 12, 2001, the Company is prohibited from making
dividend payments (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - Debt
Facilities"). While the Company does not intend to pay cash dividends in the
foreseeable future, it will continue to evaluate the strategic and financial
rationale for the resumption of dividend payments.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
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SEPTEMBER 30,
SEPTEMBER 30, OCTOBER 2, OCTOBER 3, ------------------------
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Net sales $315,285 $270,992 $ 266,147 $ 262,325 $264,382
Earnings from continuing operations
before extraordinary loss 2,121 9,986 328 2,536 5,237
Net earnings (loss) 2,121 9,986 (80) (341) 4,243
Earnings per share from continuing
operations before extraordinary
loss (basic and diluted) 0.25 1.18 0.04 0.03 0.62
Net earnings (loss) per share
(basic and diluted) 0.25 1.18 (0.01) (0.04) 0.50
Cash dividends per share 0.24 0.24 0.24 0.24 0.24
Total assets 245,448 167,896 147,131 171,476 146,122
Total debt 105,000 46,817 36,363 52,293 32,843
Shareholders' equity 77,439 77,329 69,260 71,322 73,677
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING 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. These
forward-looking statements contain words such as "expects," "plans," "believes,"
"will," "estimates," "intends," and other words of similar meaning that do not
relate strictly to historical or current facts. 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; legal, environmental or regulatory developments
that significantly impact the Company's operating costs; continuation of good
labor relations; 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 financial impact of the acquisition of
FWC, the Hickman, Kentucky manufacturing facility and the 25% interest in SRP;
the inability of the Company to expedite the qualification process with
prospective customers for tire bead wire and increase the operating volumes of
its Fredericksburg, Virginia manufacturing facility; the failure of the Company
to receive regular and substantial orders for its new products; the Company's
ability to avoid events of default with respect to its indebtedness,
particularly under its senior secured credit facility, as amended; and the
Company's ability to refinance its current indebtedness on favorable terms.
RESULTS OF OPERATIONS
STATEMENTS OF EARNINGS - SELECTED DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
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SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 CHANGE 1999 CHANGE 1998
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<S> <C> <C> <C> <C> <C>
Net sales $315,285 16% $270,992 2% $266,147
Gross profit 32,002 (10)% 35,647 167% 13,353
Percentage of net sales 10.2% 13.2% 5.0%
Selling, general and administrative expense $ 19,368 11% $ 17,429 30% $ 13,410
Percentage of net sales 6.1% 6.4% 5.0%
Operating income (loss) 12,634 (31)% 18,218 N/M (57)
Percentage of net sales 4.0% 6.7% --
Interest expense $ 8,943 260% $ 2,482 (35)% $ 3,810
Percentage of net sales 2.8% 0.9% 1.4%
Effective income tax rate 38.2% 36.3% 35.4%
Earnings before extraordinary loss $ 2,121 (79)% $ 9,986 N/M $ 328
Percentage of net sales 0.7% 3.7% 0.1%
</TABLE>
2000 COMPARED WITH 1999
Net sales rose 16% to $315.3 million in 2000 from $271.0 million in
1999 a result of the revenues contributed by Florida Wire and Cable, Inc.
("FWC"), which was acquired in January 2000. On a comparable basis, excluding
the sales of FWC, sales decreased 7% primarily due to lower sales of industrial
wire. Industrial wire sales fell 33% for the year as a result of significant
changes in the Company's operating strategy that were executed during the first
quarter together with transition-related inefficiencies at the Andrews, South
Carolina facility. The Company completed a realignment of its industrial wire
manufacturing capacity, ceasing production at the Gallatin, Tennessee plant and
shifting the majority of its volume to the South Carolina facility. The expected
increase in the operating level of the South Carolina plant proceeded slower
than anticipated, constraining the sales of industrial wire as well as nails
through most of the year. Sales of concrete reinforcing products rose 3%
(excluding the sales of FWC) primarily due to higher shipments of welded wire
fabric at the Hickman, Kentucky facility, which was acquired in April 1999.
Although the demand for PC strand remained strong, pricing pressure continued as
a result of increased import competition together with the announcement of a new
competitor's plans to enter the business. Sales of bulk
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nails decreased 10% from a year ago due to price deterioration and lower
shipments, while collated nail sales rose 17% as a result of higher operating
volumes. Selling prices for bulk and collated nails were negatively impacted by
import competition together with the substantial consolidation that has occurred
in the Company's customer base. Sales of tire bead wire increased 26%, but fell
short of expected levels due to equipment-related constraints that resulted in
production inefficiencies as well as lower than planned orders and operating
volumes. During the third quarter, sales of tire bead wire decreased primarily
due to mechanical and electrical malfunctions on a process line. The Company
completed an extensive equipment upgrade and expansion program in the fourth
quarter that is expected to resolve these issues.
Gross profit decreased to $32.0 million, or 10.2% of sales in 2000 from
$35.6 million, or 13.2% of sales in 1999. Margins were negatively impacted by
the operating inefficiencies associated with the reconfiguration of the
industrial wire business, which resulted in unfavorable manufacturing costs as
well as reduced sales. In certain product lines, margins were also compressed by
the combination of higher raw material costs and lower selling prices. These
unfavorable factors were partially offset by the contribution of the FWC
acquisition.
Selling, general and administrative expense ("SG&A expense") rose 11%,
but decreased as a percentage of sales to 6.1% from 6.4% in the prior year. The
increase was primarily due to the incremental expenses associated with FWC that
were partially offset by lower incentive plan expenses.
Interest expense increased significantly to $8.9 million in 2000
compared with $2.5 million in 1999 due to the higher debt levels principally
related to the acquisition of FWC together with an increase in the Company's
borrowing rates under its new credit facility.
1999 COMPARED WITH 1998
Net sales rose 2% to $271.0 million in 1999 from $266.1 million in
1998. The growth in sales was in spite of the sale of 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 4% for the year. Sales of
concrete reinforcing products increased 20% for the year as a result of strong
construction markets together with the additional manufacturing capacity
provided by the Company's supply agreement with Structural Reinforcement
Products, Inc. ("SRP") and its acquisition of a competitor's concrete
reinforcing business. Sales of tire bead wire more than doubled from the prior
year as the Company continued to gain customer acceptance and further its market
penetration. Industrial wire sales declined 21% for the year primarily due to a
significant increase in the proportion of wire consumed internally by downstream
value-added processes to manufacture other products.
Gross profit increased to $35.6 million, or 13.2% of sales in 1999 from
$13.3 million, or 5.0% of sales in 1998. The margin improvement was primarily
generated by the Company's recent expansions together with strong market
conditions and widening spreads between selling values and raw material costs
for certain product lines. Gross margins were also favorably impacted by higher
operating volumes and lower per-unit manufacturing costs.
SG&A expense rose 30%, increasing to 6.4% of sales in 1999 from 5.0% in
1998. The increase in SG&A expense was primarily due to higher employee
incentive plan and profit-sharing expenses resulting from the significant
improvement in the Company's financial results together with legal fees
associated with employment-related issues.
Interest expense fell sharply in 1999 compared with 1998 due to a
decrease in average borrowing levels and lower interest rates on the Company's
revolving credit facility. The reduction in debt was primarily due to the
significant improvement in the Company's earnings relative to the year-ago loss.
During 1998, the Company sold the inventory and equipment related to
its agricultural fencing product line. The Company's 1998 financial results
reflect a pre-tax gain of $3.4 million, or 26 cents per share after-tax, on the
sale of the assets in other income, net of a provision for the estimated
transition-related costs. Under the terms of the sale, the Company agreed to
manufacture fencing products for the buyer until the equipment was relocated to
the buyer's facilities. The Company ceased the remainder of its agricultural
fencing activities in October 1998.
The Company terminated one of its pension plans during 1998,
recognizing a pre-tax gain of $1.2 million, or 7 cents per share after-tax, in
other income for the curtailment of plan benefits and settlements that had been
made to date. The Company completed the settlement of the plan in September
1999.
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Also in 1998, the Company retired its $10.0 million 8.25% senior
secured notes, funding the prepayment under its revolving credit facility. The
Company's financial results reflect an extraordinary loss of $408,000 after
income taxes, or approximately 5 cents per share, related to the early
extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
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<S> <C> <C> <C>
Net cash provided by continuing operating activities $ 24,515 $ 13,708 $ 14,517
Net cash provided by (used for) investing activities (74,088) (21,840) 2,372
Net cash provided by (used for) financing activities 51,976 8,537 (17,912)
Working capital 38,336 35,633 26,307
Total debt $ 105,000 $ 46,817 $ 36,363
Percentage of total capitalization 58% 38% 34%
Shareholders' equity $ 77,439 $ 77,329 $ 69,260
Percentage of total capitalization 42% 62% 66%
Total capital $ 182,439 $ 124,146 $ 105,623
</TABLE>
CASH FLOW ANALYSIS
Continuing operating activities generated $24.5 million of cash in 2000
compared with $13.7 million and $14.5 million in 1999 and 1998, respectively.
The increase in 2000 was primarily the result of reductions in inventories and
receivables in relation to the prior year (excluding the FWC-related additions)
which offset the decline in net earnings. The inventory decrease was primarily
related to a reduction in FWC's inventories from the levels as of the
acquisition date. The decrease in receivables was due to lower days sales
outstanding on a comparable basis. Depreciation and amortization rose by $2.3
million, or 26%, in 2000 due to goodwill amortization associated with the FWC
acquisition together with the amortization of capitalized financing costs
related to the Company's new senior secured credit facility. In 1999, the higher
earnings level was partially offset by a planned build in inventories in
anticipation of rising raw material prices and the potential unfavorable impact
of trade actions filed by domestic rod producers. In 1998, inventories decreased
due to a substantial reduction in raw material inventories together with the
sale of finished goods inventories associated with the agricultural fencing
product line. Cash generated from the inventory reduction was partially offset
by a decline in accounts payable related to lower raw material purchases.
Investing activities used $74.1 million and $21.8 million of cash in
2000 and 1999, respectively, while providing $2.4 million in 1998. The increase
in 2000 was principally related to the acquisition of FWC. The Company also
executed a sale-leaseback transaction that generated $2.8 million of cash, which
was used to pay down the term loan balance outstanding on its credit facility.
In 1999, investing activities include a total of $6.6 million related to the
investment in SRP and $8.4 million for the acquisition of a concrete reinforcing
business. Capital expenditures amounted to $9.2 million, $7.3 million and $6.7
million in 2000, 1999 and 1998, respectively, principally related to the tire
bead wire expansion. In 1998, proceeds primarily generated from the sale of the
Company's agricultural fencing equipment exceeded capital expenditures.
Financing activities provided $52.0 million and $8.5 million of cash in
2000 and 1999, respectively, while using $17.9 million in 1998. In January 2000,
the Company entered into a $140.0 million senior secured credit facility with a
group of banks, consisting of a $60.0 million revolving credit loan and a $80.0
million term loan. Borrowings under the new credit facility were used to fund
the acquisition of FWC and pay off the balances outstanding on the Company's
previous $60.0 million unsecured revolving credit facility. In 1999, the
increase in financing requirements was primarily related to the investment in
SRP and the acquisition of a concrete reinforcing business. During 1998, cash
generated from the reduction in inventories and the sale of agricultural fencing
assets was used to pay down debt.
In April 2000, the Company entered into interest rate swap agreements
to reduce the financial impact of future interest rate fluctuations on its
earnings and cash flows. These agreements effectively converted $50.0 million of
the Company's floating rate debt to a fixed rate of 10.58% based upon the
interest rate margin that was applicable at September 30, 2000. Interest rate
differentials paid or received under these swap agreements are recognized in
income over the life of the agreements as
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adjustments to interest expense. As of September 30, 2000, the fair value of
these swap agreements was ($978).
The Company's total debt to capital ratio increased to 58% at September
30, 2000 compared with 38% and 34% at October 2, 1999 and October 3, 1998,
respectively. The increase in the debt level was primarily related to the
acquisition of FWC in January 2000.
DEBT FACILITIES
At September 30, 2000, the Company was not in compliance with certain
financial covenants of its senior secured credit facility, which constitutes an
event of default. Pursuant to a waiver agreement, the default was waived through
January 15, 2001. On January 12, 2001, the Company and its senior lenders agreed
to an amendment to the credit agreement that modified these financial covenants,
curing the event of default. Under the terms of the amendment, the maturity date
of the credit facility was accelerated from January 31, 2005 to January 15,
2002. Additionally, the Company is subject to certain terms and conditions
during fiscal 2001, including: (1) that it will maintain earnings before
interest, taxes, depreciation and amortization ("EBITDA") at certain required
levels; (2) that it will not make dividend payments or repurchase shares of the
Company's common stock; and (3) that it will not allow capital expenditures to
exceed $4.5 million. The Company has also agreed to permanent reductions in the
revolving credit facility from $60.0 million to $50.0 million at January 12,
2001; to $45.0 million at October 1, 2001, and to $40.0 million at December 31,
2001. The amendment is expected to increase the Company's interest expense as a
result of: (1) an increase in the applicable interest rates (from 9.62% as of
September 30, 2000 to 10.75% as of January 12, 2001); (2) additional graduated
fees payable to the lenders on certain dates if a refinancing of the credit
facility is not completed prior to such dates, and (3) higher amortization
expense related to capitalized financing costs due to the acceleration of the
maturity date.
The Company intends to refinance the senior secured credit facility
prior to its amended maturity date of January 15, 2002. In the event that such
efforts are unsuccessful, the Company would likely experience a material adverse
impact on its financial condition, liquidity and results of operation.
OUTLOOK
In view of the Company's recent financial performance, it is pursuing a
range of initiatives to reduce operating costs and debt. During the first and
second quarters of 2001, the Company expects to complete the reconfiguration of
certain of its manufacturing facilities and business operations in order to
boost productivity levels and reduce operating costs. The Company anticipates
that the suspension of its cash dividend, curtailment of capital outlays and
improved management of working capital will facilitate reductions in its debt.
Although there can be no assurances, the Company believes that these actions
will have a favorable impact on its financial performance in 2001 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Note Regarding Forward-Looking Statements").
9
<PAGE> 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(A) FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of September 30, 2000 and October 2, 1999 11
Consolidated Statements of Earnings for the three years ended September
30, 2000, October 2, 1999 and October 3, 1998 12
Consolidated Statements of Shareholders' Equity for the three years
ended September 30, 2000, October 2, 1999 and October 3, 1998 13
Consolidated Statements of Cash Flows for the three years ended
September 30, 2000, October 2, 1999 and October 3, 1998 14
Notes to Consolidated Financial Statements 15
Report of Management 26
Report of Independent Public Accountants 27
Schedule II - Valuation and Qualifying Accounts for the three years
ended September 30, 2000, October 2, 1999 and October 3, 1998 28
Report of Independent Public Accountants on Schedule 29
</TABLE>
(B) SUPPLEMENTARY DATA
Selected quarterly financial data is as follows:
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AND PRICE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
JANUARY 1 APRIL 1 JULY 1 SEPTEMBER 30
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
2000
OPERATING RESULTS
Net sales $ 58,571 $ 78,822 $ 90,922 $ 86,970
Gross profit 6,117 9,294 10,793 5,798
Net earnings (loss) 850 898 1,454 (1,081)
PER SHARE DATA
Net earnings (loss) (basic and diluted) 0.10 0.11 0.17 (0.13)
Cash dividends 0.06 0.06 0.06 0.06
Stock prices
High 9.34 8.91 6.79 6.61
Low 6.51 4.83 5.14 3.75
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
JANUARY 2 APRIL 3 JULY 3 OCTOBER 2
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999
OPERATING RESULTS
Net sales $ 62,267 $ 66,162 $ 72,676 $ 69,887
Gross profit 6,566 9,204 10,729 9,148
Net earnings 1,524 2,517 3,388 2,557
PER SHARE DATA
Net earnings (basic and diluted) 0.18 0.30 0.40 0.30
Cash dividends 0.06 0.06 0.06 0.06
Stock prices
High 6.38 7.13 9.63 9.88
Low 3.88 4.88 5.75 8.38
</TABLE>
10
<PAGE> 11
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,230 $ 827
Accounts receivable, net 42,614 31,054
Inventories 48,475 36,360
Prepaid expenses and other 7,179 3,012
-------- --------
Total current assets 101,498 71,253
Property, plant and equipment, net 110,191 85,529
Other assets 33,759 11,114
-------- --------
Total assets $245,448 $167,896
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 43,466 $ 25,035
Accrued expenses 9,576 9,965
Current portion of long-term debt 10,120 620
-------- --------
Total current liabilities 63,162 35,620
Long-term debt 94,880 46,197
Deferred income taxes 8,934 7,734
Other liabilities 1,033 1,016
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value
Authorized shares: 1,000
None issued -- --
Common stock, $2 stated value
Authorized shares: 20,000
Issued and outstanding shares: 2000, 8,460; 1999, 8,457 16,920 16,914
Additional paid-in capital 38,327 38,314
Retained earnings 22,192 22,101
-------- --------
Total shareholders' equity 77,439 77,329
-------- --------
Total liabilities and shareholders' equity $245,448 $167,896
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 12
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Net sales $315,285 $270,992 $ 266,147
Cost of sales 283,283 235,345 252,794
-------- -------- ---------
Gross profit 32,002 35,647 13,353
Selling, general and administrative expense 19,368 17,429 13,410
-------- -------- ---------
Operating income (loss) 12,634 18,218 (57)
Interest expense 8,943 2,482 3,810
Other expense (income) 258 59 (4,375)
-------- -------- ---------
Earnings before income taxes and extraordinary loss 3,433 15,677 508
Provision for income taxes 1,312 5,691 180
-------- -------- ---------
Earnings before extraordinary loss 2,121 9,986 328
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $224) -- -- (408)
-------- -------- ---------
Net earnings (loss) $ 2,121 $ 9,986 $ (80)
======== ======== =========
Per share (basic and diluted):
Earnings before extraordinary loss $ 0.25 $ 1.18 $ 0.04
Extraordinary loss -- -- (0.05)
-------- -------- ---------
Net earnings (loss) $ 0.25 $ 1.18 $ (0.01)
======== ======== =========
Cash dividends per share $ 0.24 $ 0.24 $ 0.24
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Common stock:
Balance, beginning of year $ 16,914 $ 16,885 $ 16,873
Stock options exercised 6 29 12
-------- -------- --------
Balance, end of year $ 16,920 $ 16,914 $ 16,885
======== ======== ========
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 38,314 $ 38,232 $ 38,200
Stock options exercised 13 82 32
-------- -------- --------
Balance, end of year $ 38,327 $ 38,314 $ 38,232
======== ======== ========
RETAINED EARNINGS:
Balance, beginning of year $ 22,101 $ 14,143 $ 16,249
Cash dividends declared (2,030) (2,028) (2,026)
Net earnings (loss) 2,121 9,986 (80)
-------- -------- --------
Balance, end of year $ 22,192 $ 22,101 $ 14,143
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss) $ 2,121 $ 9,986 $ (80)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities (net of effect of acquisitions):
Depreciation and amortization 11,203 8,908 8,738
Extraordinary loss -- -- 408
Loss (gain) on sale of assets 774 (75) (4,575)
Deferred income taxes 1,139 1,732 (188)
Net changes in assets and liabilities:
Accounts receivable, net 3,862 (2,338) 2,365
Inventories 8,371 (4,168) 13,898
Accounts payable and accrued expenses (717) 217 (6,083)
Other changes (2,238) (554) 34
--------- --------- ----------
Total adjustments 22,394 3,722 14,597
--------- --------- ----------
Net cash provided by operating activities 24,515 13,708 14,517
--------- --------- ----------
CASH FLOWS FROM DISCONTINUED OPERATING ACTIVITIES:
Net cash provided by discontinued operating activities -- -- 366
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,230) (7,344) (6,708)
Acquisition of businesses and investments (66,594) (11,647) --
Payment of acquisition-related costs (1,453) -- --
Purchases of short-term investments -- (1,875) --
Proceeds from (issuance of) notes receivable 173 (1,290) 222
Proceeds from sale of property, plant and equipment 3,016 316 8,858
--------- --------- ----------
Net cash provided by (used for) investing activities (74,088) (21,840) 2,372
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 197,458 106,435 107,132
Principal payments on long-term debt (139,275) (95,981) (123,062)
Payment of debt issuance costs (4,196) -- --
Proceeds from exercise of stock options 19 111 44
Cash dividends paid (2,030) (2,028) (2,026)
--------- --------- ----------
Net cash provided by (used for) financing activities 51,976 8,537 (17,912)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents 2,403 405 (657)
Cash and cash equivalents at beginning of period 827 422 1,079
--------- --------- ----------
Cash and cash equivalents at end of period $ 3,230 $ 827 $ 422
========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,363 $ 1,947 $ 4,843
Income taxes 2,261 3,723 596
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Amounts in thousands, except for per share data)
(1) DESCRIPTION OF BUSINESS
Insteel Industries, Inc. ("Insteel" or "the Company") is one of the
nation's largest manufacturers of wire products. The Company manufactures and
markets concrete reinforcing products, industrial wire, nails, tire bead wire
and galvanized products for a broad range of construction and industrial
applications. Insteel is the parent holding company for two wholly-owned
operating subsidiaries, Insteel Wire Products Company ("IWP") and Florida Wire
and Cable, Inc. ("FWC").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR. Effective October 1, 1997, the Company adopted a 52 or
53-week fiscal year ending on the Saturday closest to September 30. Fiscal years
2000, 1999 and 1998 were 52-week fiscal years. All references to years relate to
fiscal years rather than calendar years.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
REVENUE RECOGNITION. Revenue is recognized when the related products
are shipped.
INVENTORIES. Inventories are valued at the lower of average cost (which
approximates computation on a first-in, first-out basis) or market (net
realizable value or replacement cost).
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated
at cost. Depreciation is computed for financial reporting purposes principally
by use of the straight-line method over the following estimated useful lives:
machinery and equipment, 3 - 15 years; buildings, 10 - 30 years; land
improvements, 5 - 15 years. Capitalized software is amortized over the shorter
of the estimated useful life or 5 years. No interest costs were capitalized in
2000, 1999 or 1998.
OTHER ASSETS. Other assets consist principally of goodwill, capitalized
financing costs, investments in affiliated companies, long-term notes
receivable, the cash surrender value of life insurance policies and various
intangible assets. Investments in affiliated companies are accounted for using
the equity method. Goodwill and other intangible assets are carried at cost less
accumulated amortization. Amortization is computed using the straight-line basis
over the economic lives of the respective assets.
LONG-LIVED ASSETS. Long-lived assets include property, plant and
equipment, identifiable intangible assets and goodwill. Long-lived assets are
periodically reviewed for impairment by comparing the carrying value of the
assets with their estimated future undiscounted cash flows. If it is determined
that an impairment loss has occurred, the loss is recognized during the period
incurred. An impairment loss is calculated as the difference between the
carrying value and the present value of estimated future net cash flows or
comparable market values.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts for cash and
cash equivalents, accounts and notes receivable, accounts payable and other
accrued liabilities approximate fair value because of their short maturities.
The estimated fair value of long-term debt is primarily based upon quoted market
prices as well as borrowing rates currently available to the Company for bank
loans with similar terms and maturities. The carrying amount of long-term debt
approximates its estimated fair value under the amended terms of the Company's
senior secured credit facility (see Note 7 - Debt Facilities).
15
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
INCOME TAXES. Income tax expense is based on pretax financial
accounting income. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts.
EARNINGS PER SHARE. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share" in 1998. 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 other dilutive equity 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.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
on the balance sheet and measure those instruments at fair value. The Company
adopted SFAS 133 in the first quarter of fiscal 2001 and the initial adoption of
the pronouncement did not have a material impact on its results of operations or
financial position.
(3) EXTRAORDINARY LOSS - EARLY EXTINGUISHMENT OF DEBT
In 1998, the Company retired its $10.0 million 8.25% senior secured
notes due 2002, funding the prepayment under its revolving credit facility. The
Company recorded an extraordinary loss of $408 after income taxes, or
approximately 5 cents per share, related to the redemption premium and write-off
of deferred financing costs.
(4) INVESTMENT IN STRUCTURAL REINFORCEMENT PRODUCTS
In January 1999, the Company 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 assuming 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 $500
depending upon SRP's future performance.
The Company is accounting for its investment in SRP on an equity basis
and, accordingly, is including its share of SRP's earnings in its consolidated
earnings. The Company recorded equity income of $140 in 2000 and an equity loss
of $149 in 1999 in other expense on its consolidated statement of earnings.
(5) ACQUISITION OF FLORIDA WIRE AND CABLE, INC.
In January 2000, the Company acquired Florida Wire and Cable, Inc.
("FWC"), a manufacturer of PC strand and galvanized products. Under the terms of
the purchase agreement, the Company acquired all of the outstanding stock of FWC
for $66.6 million from GS Technologies Operating Co., Inc. ("GSTOC"), a
subsidiary of GS Industries, Inc. ("GSI"). In addition, the Company entered into
a five-year agreement with GSI under which GSI will supply FWC with a portion of
its raw material requirements.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the results of operations of FWC have been included
in the consolidated financial statements since the date of the acquisition,
January 31, 2000. The excess of cost over the estimated fair value of net assets
acquired has been recorded as goodwill and is being amortized on a straight-line
basis over 20 years.
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
A summary of the purchase price and the preliminary purchase price
allocation based on the net assets as of January 31, 2000 is as follows:
<TABLE>
<CAPTION>
<S> <C>
PURCHASE PRICE
Cash paid to GSTOC $ 66,600
Financial advisors, accounting, legal and other direct acquisition costs 1,453
--------
Total purchase price $ 68,053
========
PRELIMINARY ALLOCATION OF PURCHASE PRICE
Total purchase price $ 68,053
Less: net book value of tangible net assets acquired (34,368)
--------
Excess of cost over net book value of tangible net assets acquired 33,685
Adjustments to record assets and liabilities at fair market value:
Inventories 1,021
Property, plant and equipment (14,830)
Deferred tax assets (2,446)
Accrued expenses 2,404
Other 11
--------
Total adjustments (13,840)
Goodwill $ 19,845
========
</TABLE>
In connection with the acquisition of FWC, on January 31, 2000 the
Company began the execution of its plans to relocate certain FWC administrative
activities to the Company's headquarters, to terminate certain management and
administrative support employees of FWC, and to exit certain facility leases.
Additional purchase price liabilities have been recorded for approximately
$1,999 for severance and other exit costs related to these plans. As of
September 30, 2000, 58 employees have been terminated. The Company expects to
finalize its plans for the termination of employees and reconfiguration of
facilities within one year from the date of the FWC acquisition. Additional
liabilities for severance, relocation, and other facility-related costs may
result in an adjustment to purchase accounting.
A reconciliation of activity with respect to these liabilities, which
are included in accrued expenses on the consolidated balance sheet as of
September 30, 2000, is as follows:
<TABLE>
<CAPTION>
OTHER EXIT
SEVERANCE COSTS TOTAL
--------- ---------- -------
<S> <C> <C> <C>
Recognized as liabilities assumed
and included in purchase price allocation $ 1,857 $ 142 $ 1,999
Payments made/reserve utilized (1,117) (140) (1,257)
------- ---------- -------
Balance, end of year $ 740 $ 2 $ 742
======= ========== =======
</TABLE>
The following unaudited pro forma information has been prepared as if
the acquisition had occurred as of the beginning of fiscal 1999:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
Net sales $346,636 $376,211
Net earnings 1,802 7,662
Earnings per share (basic and diluted) 0.21 0.91
</TABLE>
17
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
The foregoing unaudited pro forma information is provided for
illustrative purposes only and does not purport to be indicative of results that
actually would have been achieved had the acquisition been consummated at the
beginning of fiscal 1999, nor is it intended to be indicative of future results.
(6) ACQUISITION OF CONCRETE REINFORCING BUSINESS
In April 1999, the Company acquired the assets of the concrete
reinforcing business of Northwestern Steel and Wire Company ("Northwestern").
Under the terms of the purchase agreement, the Company acquired the inventory,
property, plant and equipment of Northwestern's Hickman, Kentucky facility for
approximately $8.4 million. In addition, the companies entered into a three-year
agreement under which Northwestern will supply Insteel with a portion of its raw
material requirements.
(7) DEBT FACILITIES
In January 2000, the Company entered into a $140.0 million senior
secured credit facility with a group of banks, consisting of a $60.0 million
revolving credit loan and a $80.0 million term loan. Borrowings under the new
credit facility were used to fund the acquisition of FWC and pay off the
balances outstanding on the Company's previous $60.0 million unsecured revolving
credit facility.
At September 30, 2000, the Company was not in compliance with certain
financial covenants of its senior secured credit facility, which constitutes an
event of default. Pursuant to a waiver agreement, the default was waived through
January 15, 2001. On January 12, 2001, the Company and its senior lenders agreed
to an amendment to the credit agreement that modified these financial covenants,
curing the event of default. Under the terms of the amendment, the maturity date
of the credit facility was accelerated from January 31, 2005 to January 15,
2002. Additionally, the Company is subject to certain terms and conditions
during fiscal 2001, including: (1) that it will maintain earnings before
interest, taxes, depreciation and amortization ("EBITDA") at certain required
levels; (2) that it will not make dividend payments or repurchase shares of the
Company's common stock; and (3) that it will not allow capital expenditures to
exceed $4.5 million. The Company has also agreed to permanent reductions in the
revolving credit facility from $60.0 million to $50.0 million at January 12,
2001; to $45.0 million at October 1, 2001, and to $40.0 million at December 31,
2001. The amendment is expected to increase the Company's interest expense as a
result of: (1) an increase in the applicable interest rates (from 9.62% as of
September 30, 2000 to 10.75% as of January 12, 2001); (2) additional graduated
fees payable to the lenders on certain dates if a refinancing of the credit
facility is not completed prior to such dates, and (3) higher amortization
expense related to capitalized financing costs due to the acceleration of the
maturity date.
The Company intends to refinance the senior secured credit facility
prior to its amended maturity date of January 15, 2002. In the event that such
efforts are unsuccessful, the Company would likely experience a material adverse
impact on its financial condition, liquidity and results of operation.
Scheduled maturity dates and interest rates (as of September 30, 2000
and October 2, 1999) related to the Company's debt are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
INTEREST RATE MATURITY 2000 1999
------------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Term loan 9.62% 2002 $ 69,000 $ --
Revolving credit facility 8.88% - 9.62% 2002 32,700 42,897
Industrial revenue refunding bonds 7.20% - 7.75% 2005 1,680 1,960
Industrial development revenue refunding bonds 4.30% 2003 1,020 1,360
Mortgage note 600 600
---------- --------
Total long-term debt 105,000 46,817
Less current maturities 10,120 620
---------- --------
Long-term debt, excluding current maturities $ 94,880 $ 46,197
========== ========
</TABLE>
Under the amended terms of the credit agreement, interest rates are
determined based upon a base rate that is established at the higher of the prime
rate or 0.5% plus the federal funds rate, plus an applicable interest rate
margin. In addition,
18
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
a commitment fee is payable on the unused portion of the revolving credit
facility. Advances under the revolving credit facility are limited to the lesser
of the revolving credit commitment or a borrowing base amount that is calculated
based upon a percentage of eligible receivables and inventories. At September
30, 2000, approximately $9.2 million was available on the facility and $69.0
million was outstanding on the term loan. The senior secured facility is
collateralized by all of the Company's assets.
In April 2000, the Company entered into interest rate swap agreements
to reduce the financial impact of future interest rate fluctuations on its
earnings and cash flows. These agreements effectively converted $50.0 million of
the Company's floating rate debt to a fixed rate of 10.58% based upon the
interest rate margin that was applicable at September 30, 2000. Interest rate
differentials paid or received under these swap agreements are recognized in
income over the life of the agreements as adjustments to interest expense. As of
September 30, 2000, the fair value of these swap agreements was ($978).
Aggregate scheduled maturities of long-term debt (reflecting the
amended terms of the senior secured credit facility) for the next five years are
as follows: 2001, $10,120; 2002, $92,820; 2003, $620; 2004, $280; 2005, $280.
Capitalized financing costs associated with the senior secured facility were
$4.3 million and are being amortized on a straight-line basis over the remaining
term of the facility.
(8) SHAREHOLDERS' EQUITY
Shares of common stock outstanding are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year 8,457 8,443 8,437
Stock options exercised 3 14 6
------ ------ ------
Balance, end of year 8,460 8,457 8,443
====== ====== ======
</TABLE>
(9) STOCK OPTION PLANS
The Company has stock option plans under which employees and directors
may be granted options to purchase shares of common stock at the fair market
value on the date of the grant. Options granted under the 1985 employee and 1990
director stock option plans vest over five years and expire five years from the
date of the grant. By action of the Board of Directors in 1994, no further
options may be granted under these plans. Options granted under the 1994
employee and director stock option plans vest over five years and expire ten
years from the date of the grant.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
EXERCISE PRICE PER SHARE
-------------------------------
OPTIONS WEIGHTED
OUTSTANDING RANGE AVERAGE
----------- ------------------ --------
<S> <C> <C> <C>
Balance, September 30, 1997 504 $ 6.88 - $ 10.68 $ 8.71
Granted 232 4.69 - 7.31 5.49
Exercised (6) 7.00 - 7.88 7.43
Cancelled (104) 6.38 - 10.68 9.41
-----
Balance, October 3, 1998 626 4.69 - 10.44 7.41
Granted 229 4.75 - 9.19 7.61
Exercised (14) 4.69 - 8.94 7.58
Cancelled (217) 4.69 - 10.44 8.85
-----
Balance, October 2, 1999 624 4.69 - 9.19 6.98
Granted 225 5.25 - 8.38 6.52
Exercised (3) 4.69 - 8.63 6.36
-----
Balance, September 30, 2000 846 4.69 - 9.19 6.86
=====
</TABLE>
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
The weighted average characteristics of outstanding stock options at
September 30, 2000 for various price ranges are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------- -------------------
WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
------------------------ ------ ------------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 4.69 - $ 5.25 240 9.0 $ 5.00 91 $ 4.85
5.38 - 6.56 184 7.9 6.35 112 6.26
7.00 - 7.56 150 5.6 7.31 136 7.29
7.88 - 8.38 144 7.4 8.19 82 8.05
8.50 - 9.19 128 7.4 9.03 78 8.97
</TABLE>
At September 30, 2000, 860 shares were available for future grants
under the plans. Options exercisable were 499 at September 30, 2000 and 348 at
October 2, 1999. The weighted average exercise price for these shares was $7.00
for 2000 and $7.12 for 1999.
The Company has elected to follow APB No. 25, "Accounting for Stock
Issued to Employees" in accounting for its stock option plans. APB No. 25
specifies that no compensation expense is recognized when the exercise price of
the stock options equals the market value of the underlying stock at the grant
date, as in the case of options granted under the Company's plans. SFAS No. 123,
"Accounting for Stock-Based Compensation," specifies the use of certain option
valuation models to calculate estimated compensation expense to be reflected in
pro forma net earnings and net earnings per share. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss) - as reported $ 2,121 $ 9,986 $ (80)
Net earnings (loss) - pro forma 1,823 9,763 (224)
Basic net earnings (loss) per share - as reported 0.25 1.18 (0.01)
Basic net earnings (loss) per share - pro forma 0.22 1.16 (0.03)
Diluted net earnings (loss) per share - as reported 0.25 1.18 (0.01)
Diluted net earnings (loss) per share - pro forma 0.21 1.15 (0.03)
</TABLE>
The fair value of the options at the date of grant were estimated using
the Black-Scholes option-pricing model based on the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Expected life (in years) 5.0 5.0 5.0
Risk-free interest rate 6.3% 5.4% 5.5%
Expected volatility 0.50 0.40 0.30
Expected dividend yield 3.0% 3.0% 3.0%
</TABLE>
The weighted average estimated fair values of options granted during
2000, 1999 and 1998 were $2.85, $2.75 and $1.61 per share, respectively.
The above pro forma disclosures of applying SFAS No. 123 are not likely
to be representative of the effects on net earnings and net earnings per share
in future years, because they do not take into consideration pro forma
compensation expense related to grants made prior to 1996.
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
(10) INCOME TAXES
The provision for income taxes for continuing operations consists of:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 60 $ 3,488 $ 373
State 113 471 (5)
-------- -------- --------
173 3,959 368
Deferred:
Federal 967 1,569 10
State 172 163 (198)
-------- -------- --------
1,139 1,732 (188)
-------- -------- --------
Provision for income taxes $ 1,312 $ 5,691 $ 180
======== ======== ========
</TABLE>
The provision for income taxes for continuing operations differs from
the amount computed by applying the federal statutory rate to the Company's
earnings from continuing operations before taxes as a result of the following
differences:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes at federal statutory rate $ 1,167 $ 5,409 $ 173
State income taxes, net of federal income tax benefit 74 308 (3)
Other, net 71 (26) 10
------- ------- -----
Provision for income taxes $ 1,312 $ 5,691 $ 180
======= ======= =====
</TABLE>
Deferred tax assets and liabilities are recognized for the differences
between the tax basis of assets and liabilities and their reported financial
statement amounts. Significant components of deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued expenses or asset reserves for financial statements not
yet deductible for tax purposes $ 6,158 $ 3,493
Alternative minimum tax credit carryforwards 400 516
--------- --------
Gross deferred tax assets 6,558 4,009
DEFERRED TAX LIABILITIES:
Plant and equipment principally due to differences in
depreciation and capitalized interest (10,844) (9,426)
Other reserves (11) (399)
Prepaid expenses for financial statements that were deducted for
tax purposes (361) (149)
Gross deferred tax liabilities (11,216) (9,974)
--------- --------
Net deferred tax liability $ (4,658) $ (5,965)
========= ========
</TABLE>
The Company has recorded a current deferred tax asset of $4,276 at
September 30, 2000 and $1,769 at October 2, 1999 in prepaid expenses and other
on its consolidated balance sheet.
(11) EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS. The Company has one defined benefit pension plan, the
Insteel Wire Products Company Retirement Income Plan for Hourly Employees,
Wilmington, Delaware, ("the Delaware Plan"). The Delaware Plan provides benefits
for eligible employees based primarily upon years of service and compensation
levels. The Company's funding policy is to
21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
contribute amounts at least equal to those required by law.
Prior to September 1999, the Company had another defined benefit
pension plan, the Pension Plan of Insteel Industries, Inc. ("the Insteel Plan").
In October 1997, the Company froze all benefit accruals for additional years of
credited service for plan participants. In August 1998, the Company terminated
the plan, recognizing a gain based upon the curtailment of plan benefits and
settlements that had been made to date. The Company recorded a $1.2 million gain
in other income relating to the plan termination. The settlement of the plan was
completed in September 1999 and $401 was recorded as a settlement loss.
The following table provides a reconciliation of the projected benefit
obligation, a reconciliation of plan assets, the funded status of the plans, and
the amounts recognized in the Company's consolidated balance sheets at September
30, 2000 and October 2, 1999:
<TABLE>
<CAPTION>
INSTEEL PLAN DELAWARE PLAN
YEAR ENDED YEAR ENDED
------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ -- $ (4,960) $ (3,939) $ (3,728)
Service cost -- -- (58) (97)
Interest cost -- (316) (250) (240)
Amendments -- -- (6) --
Actuarial gain (loss) -- (52) 273 (30)
Effect of settlement -- 5,328 -- --
Benefits paid -- -- 184 156
--------- --------- --------- ---------
Benefit obligation at end of year $ -- $ -- $ (3,796) $ (3,939)
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year -- $ 5,168 $ 3,080 $ 2,806
Change in assets from disclosure to beginning of year -- (216) -- --
Actual return on plan assets -- 312 743 398
Employer contributions -- 64 33 32
Effect of settlement -- (5,328) -- --
Benefits paid -- -- (184) (156)
--------- --------- --------- ---------
Fair value of plan assets at end of year $ -- $ -- $ 3,672 $ 3,080
========= ========= ========= =========
RECONCILIATION OF FUNDED STATUS TO NET AMOUNT RECOGNIZED:
Funded status $ -- $ -- $ (124) $ (859)
Unrecognized net loss -- -- (171) (30)
Unrecognized prior service cost -- -- 15 12
Unrecognized transition obligation -- -- 6 18
--------- --------- --------- ---------
Net amount recognized $ -- $ -- $ (274) $ (859)
========= ========= ========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF:
Accrued benefit liability $ -- $ -- $ (274) $ (859)
--------- --------- --------- ---------
Net amount recognized $ -- $ -- $ (274) $ (859)
========= ========= ========= =========
</TABLE>
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
INSTEEL PLAN DELAWARE PLAN
YEAR ENDED YEAR ENDED
-------------------------------------- ----------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3, SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998 2000 1999 1998
------------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic pension cost:
Service cost $ -- $ -- $ -- $ 58 $ 97 $ 93
Interest cost -- 316 722 250 240 225
Actual return on plan assets -- (312) (776) (743) (398) 445
Deferred asset loss (gain) -- (94) (6) 508 178 (708)
Amortization of prior service cost -- -- 25 3 3 3
Amortization of transition asset -- (49) (79) 12 12 11
Recognized net actuarial loss (gain) -- 10 (103) 3 52 (2)
Curtailment gain -- -- (1,200) -- -- --
Settlement loss -- 401 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net periodic pension cost $ -- $ 272 $ (1,417) $ 91 $ 184 $ 67
========= ========= ========= ========= ========= =========
</TABLE>
The assumptions used for the calculations for both plans are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Assumptions at year-end:
Discount rate 7.0% 5.9% - 6.5% 5.9% - 6.5%
Rate of increase in compensation levels N/A N/A 5.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
PROFIT-SHARING AND INCENTIVE PLANS. The Company has a profit-sharing
plan and various incentive plans covering substantially all hourly and salary
employees. Profit-sharing and incentive plan expense was $2,775 in 2000, $3,955
in 1999 and $826 in 1998.
RETIREMENT SAVINGS PLAN. In 1996, the Company adopted the Retirement
Savings Plan of Insteel Industries, Inc. ("the Plan") to provide retirement
benefits and stock ownership for its employees. The Plan is an amendment and
restatement of the Company's Employee Stock Ownership Plan ("ESOP"). As allowed
under Sections 401(a) and 401(k) of the Internal Revenue Code, the Plan provides
for tax-deferred salary deductions for eligible employees.
Employees may contribute up to 15% of their annual compensation to the
Plan, limited to a maximum annual amount as set periodically by the Internal
Revenue Code. For 2000, the Company provided a matching contribution of 50% of
the first 5% of employee compensation paid to the Plan. In addition, the Plan
allows for discretionary contributions to be made by the Company as determined
by the Board of Directors. Such contributions to the Plan are allocated among
eligible participants in the proportion of their compensation to the total
compensation of all participants. Company contributions to the Plan were $400 in
2000, $405 in 1999 and $496 in 1998.
SUPPLEMENTAL RETIREMENT PLAN. The Company has a supplemental retirement
plan for certain employees. Under the plan, participants are entitled to cash
benefits upon retirement at age 65, payable annually for 15 years. The plan is
funded by life insurance policies on the participants purchased by the Company.
Supplemental retirement plan expense was $66 in 2000, $52 in 1999 and $37 in
1998.
VEBA. The Company has a Voluntary Employee Beneficiary Association
("VEBA"). Under the plan, both employees and the Company may make contributions
to pay for medical benefits. Company contributions to the VEBA were $1,000 in
2000, $410 in 1999 and $0 in 1998.
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
(12) COMMITMENTS AND CONTINGENCIES
LEASES. The Company leases a portion of its property, plant and
equipment under operating leases that expire at various dates through 2026.
Under most lease agreements, the Company pays insurance, taxes and maintenance.
Rental expense for operating leases was $1,330 in 2000, $643 in 1999 and $932 in
1998. Minimum rental commitments under all non-cancelable leases with an initial
term in excess of one year are payable as follows: 2001, $1,362; 2002, $829;
2003, $642; 2004, $405; 2005, $380; beyond, $2,153.
LEGAL PROCEEDINGS. The Company is involved in lawsuits, claims,
investigations and proceedings, including commercial, environmental and
employment matters, which arise in the ordinary course of business. Management
does not expect that the ultimate costs to resolve these matters will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
(13) EARNINGS PER SHARE
The reconciliation of basic and diluted EPS as required under SFAS No.
128 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Earnings before extraordinary loss $ 2,121 $ 9,986 $ 328
Extraordinary loss -- -- (408)
--------- --------- ---------
Net earnings (loss) $ 2,121 $ 9,986 $ (80)
========= ========= =========
Weighted average shares outstanding:
Weighted average shares outstanding (basic) 8,460 8,449 8,442
Dilutive effect of stock options 49 38 --
--------- --------- ---------
Weighted average shares outstanding (diluted) 8,509 8,487 8,442
========= ========= =========
Earnings (loss) per share (basic and diluted):
Earnings before extraordinary loss $ 0.25 $ 1.18 $ 0.04
Extraordinary loss -- -- (0.05)
--------- --------- ---------
Net earnings (loss) $ 0.25 $ 1.18 $ (0.01)
========= ========= =========
</TABLE>
Options to purchase 391 shares in 2000, 273 shares in 1999 and 523
shares in 1998 were antidilutive and were not included in the diluted EPS
computation.
(14) BUSINESS SEGMENT INFORMATION
During 1999, the Company adopted 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. The adoption
of SFAS No. 131 did not affect the Company's financial position, results of
operations or financial statement disclosures as the Company operates
exclusively in the wire products industry and currently reports as a single
industry segment.
There were no customers that accounted for 10% or more of the Company's
net sales in 2000 and 1999. One customer accounted for 11% of the Company's net
sales in 1998.
(15) RELATED PARTY TRANSACTIONS
In September 1998, the Company entered into a Conversion Agreement with
SRP, an affiliated company, whereby SRP will produce welded wire fabric for the
Company for a specified conversion fee. The Company paid SRP approximately $2.3
million in 2000 and $1.6 million in 1999 for the services provided under this
agreement.
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except for per share data)
(16) OTHER FINANCIAL DATA
Balance sheet information:
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 43,974 $ 31,429
Less allowance for doubtful accounts (1,360) (375)
---------- ----------
Total $ 42,614 $ 31,054
========== ==========
Inventories:
Raw materials $ 21,010 $ 20,414
Supplies 2,276 2,601
Work in process 2,449 1,578
Finished goods 22,740 11,767
---------- ----------
Total $ 48,475 $ 36,360
========== ==========
Other assets:
Goodwill $ 19,845 $ --
Less accumulated amortization (838) --
---------- ----------
Goodwill, net 19,007 --
Capitalized financing costs, net 3,717 238
Equity investment 3,241 3,101
Other 7,794 7,775
---------- ----------
Total $ 33,759 $ 11,114
========== ==========
Property, plant and equipment, net:
Land and land improvements $ 7,550 $ 5,360
Buildings 48,148 38,741
Machinery and equipment 114,972 102,829
Construction in progress 4,692 3,021
---------- ----------
175,362 149,951
Less accumulated depreciation (65,171) (64,422)
---------- ----------
Total $ 110,191 $ 85,529
========== ==========
</TABLE>
25
<PAGE> 26
REPORT OF MANAGEMENT
The management of Insteel Industries, Inc. is responsible for preparing the
consolidated financial statements and all related financial information that
appears in this annual report. The financial statements have been prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management's best estimates and judgments.
The Company maintains a system of internal accounting policies, procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
assets are safeguarded, and that transactions are properly executed and recorded
in accordance with management's authorization and are properly recorded and
reported in the financial statements.
Arthur Andersen LLP audits the Company's financial statements in accordance with
auditing standards generally accepted in the United States and provides an
objective, independent review of the Company's internal controls and the
fairness of its reported financial condition and results of operations.
The Audit Committee of the Board of Directors, composed of outside directors,
meets periodically with management, the Company's internal auditor, and the
independent public accountants to review internal accounting controls and
accounting, auditing, and financial reporting matters. Both Arthur Andersen LLP
and the internal auditor have unrestricted access to the Audit Committee.
H. O. WOLTZ III MICHAEL C. GAZMARIAN
------------------------------------- -------------------------------------
H. O. WOLTZ III MICHAEL C. GAZMARIAN
President and Chief Executive Officer Chief Financial Officer and Treasurer
26
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Insteel Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Insteel
Industries, Inc. (a North Carolina corporation) and subsidiaries as of September
30, 2000 and October 2, 1999 and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the years ended
September 30, 2000, October 2, 1999 and October 3, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Insteel Industries,
Inc. and subsidiaries as of September 30, 2000 and October 2, 1999, and the
results of their operations and their cash flows for each of the years ended
September 30, 2000, October 2, 1999 and October 3, 1998 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina
October 13, 2000,
except for Note 7,
as to which the date is
January 12, 2001.
27
<PAGE> 28
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2000, OCTOBER 2, 1999 AND OCTOBER 3, 1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 375 $ 225 $ 242
Additions charged to earnings 458 150 19
Additions from acquisition 524 -- --
Accounts collected, net 3 -- --
--------- --------- ---------
Balance, end of year $ 1,360 $ 375 $ 225
========= ========= =========
</TABLE>
28
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders
Insteel Industries, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated balance sheets of Insteel Industries, Inc. and
subsidiaries as of September 30, 2000 and October 2, 1999, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the years ended September 30, 2000, October 2, 1999 and October 3, 1998,
and have issued our report thereon dated October 13, 2000, except for Note 7, as
to which the date is January 12, 2001. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
Item 14(a)(2) of this Form 10-K is the responsibility of the Company's
management and is presented for the purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. The information included in this schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina
October 13, 2000.
29
<PAGE> 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information with respect to directors and nominees required for
this item appears under the caption "Election of Directors" in the Company's
Proxy Statement for the 2001 Annual Meeting of Shareholders and is herein
incorporated by reference.
Information on executive officers appears under the caption "Executive
Officers of the Company" in Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item appears under the caption
"Executive Compensation""in the Company's Proxy Statement for the 2001 Annual
Meeting of Shareholders and is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required for this item appears under the caption
"Security Ownership of Principal Shareholders and Management" in the Company's
Proxy Statement for the 2001 Annual Meeting of Shareholders and is herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item appears under the captions
"Compensation Committee Interlocks and Insider Participation" and "Transactions
with Management and Others" in the Company's Proxy Statement for the 2001 Annual
Meeting of Shareholders and is herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS
The financial statements as set forth under Item 8 are filed as part of
this report.
(A)(2) FINANCIAL STATEMENT SCHEDULES
Supplemental Schedule II - Valuation and Qualifying Accounts appears on
page 28 of this report.
All other schedules have been omitted because they are either not
required or not applicable.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2000
(C) EXHIBITS
See exhibit index on page 32.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14 (a)(2) above.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSTEEL INDUSTRIES, INC.
Dated: January 12, 2001 By: H. O. WOLTZ III
-------------------------------------
H. O. WOLTZ III
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on January 12, 2001 below by the following persons
on behalf of the registrant and in the capacities indicated:
<TABLE>
<CAPTION>
Name and Signature Position(s)
----------------------------- -------------------------------------------------
<S> <C>
HOWARD O. WOLTZ, JR. Chairman of the Board
-----------------------------
HOWARD O. WOLTZ, JR.
H. O. WOLTZ III President, Chief Executive Officer and a Director
-----------------------------
H. O. WOLTZ III
MICHAEL C. GAZMARIAN Chief Financial Officer and Treasurer (Principal
----------------------------- Financial and Accounting Officer)
MICHAEL C. GAZMARIAN
LOUIS E. HANNEN Director
-----------------------------
LOUIS E. HANNEN
FRANCES H. JOHNSON Director
-----------------------------
FRANCES H. JOHNSON
CHARLES B. NEWSOME Director
-----------------------------
CHARLES B. NEWSOME
GARY L. PECHOTA Director
-----------------------------
GARY L. PECHOTA
W. ALLEN ROGERS II Director
-----------------------------
W. ALLEN ROGERS II
WILLIAM J. SHIELDS Director
-----------------------------
WILLIAM J. SHIELDS
C. RICHARD VAUGHN Director
-----------------------------
C. RICHARD VAUGHN
</TABLE>
31
<PAGE> 32
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3- ARTICLES OF INCORPORATION AND BYLAWS
3.1 Restated articles of incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated May
3, 1988).
3.2 Bylaws of the Company (as last amended April 26, 1999) (incorporated by reference
to the exhibit of the same number contained in the Company's Quarterly Report on
Form 10-Q for the quarter ended April 3, 1999).
3.3 Articles of Amendment to the restated articles of incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 3, 1999).
4- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
++++ 4.1 Credit Agreement by and among Insteel Industries, Inc., as borrower, Bank of
America, N.A., as Administrative Agent and as Lender, and The Lenders Party
Hereto From Time to Time dated January 31, 2000 providing for a $80,000,000 term
loan and a $60,000,000 revolving credit loan, including Forms of Facility
Guaranty, Security Agreement, Intellectual Property Security Agreement and
Pledge Agreement.
4.1(a) Amendment Agreement No. 1 dated January 12, 2001 to Credit Agreement between
Insteel Industries, Inc., Bank of America, N.A. and Lenders dated January 31,
2000. (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment).
4.2 Articles IV and VI of the Company's restated articles of incorporation, which are
incorporated herein by reference to Exhibit 3.3.
4.3 Article 2, Section 8, of the registrant's bylaws, which is incorporated herein by
reference to Exhibit 3.2.
4.4 Rights Agreement dated April 27, 1999 between Insteel Industries, Inc. and First
Union National Bank (incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on May 7, 1999).
* 4.13 Loan Agreement dated as of September 1, 1988, between Liberty County Industrial
Development Corporation ("Issuer") and Insteel Industries, Inc. pursuant to
which the Issuer agreed to loan the proceeds from its $3,400,000 Industrial
Development Revenue Refunding Bonds, Series 1988 (Insteel Industries, Inc.
Project) (the "Bonds") to the Company and the Company agreed to repay such loan
to the Issuer.
* 4.14 Promissory Note dated October 26, 1988 and issued by the Company to the Issuer in the
principal amount of $3,400,000, which note evidences the loan from the Issuer to
the Company under the Loan Agreement (Exhibit 4.13).
* 4.15 Purchase Contract dated October 26, 1988, among the Issuer, the Company, Texas
Department of Commerce and Federated Tax-Free Trust ("Purchaser") pursuant to
which the Purchaser agreed to purchase the Bonds issued by the Issuer.
* 4.16 Letter of Credit and Reimbursement Agreement dated as of September 1, 1988, by and
between the Company and First Union National Bank of North Carolina ("Bank")
pursuant to which the Bank agreed to issue its Letter of Credit to secure
payment of the Bonds and the Company agreed to reimburse the Bank for any and
all drawings made under the Letter of Credit.
# 4.24 Indenture of Trust between Industrial Development Authority of the City of
Fredericksburg, Virginia and Crestar Bank as Trustee, dated as of September 1,
1990, relating to $4,205,000 Industrial Development Authority of the City of
Fredericksburg, Virginia Industrial Development First Mortgage Revenue Refunding
Bonds (Insteel Industries, Inc./Rappahannock Wire Company Project) Series of
1990.
</TABLE>
32
<PAGE> 33
EXHIBIT INDEX, CONTINUED
TO
ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
# 4.25 Refunding Agreement between Industrial Development Authority of the City of
Fredericksburg, Virginia ("Issuer") and Insteel Industries, Inc., and
Rappahannock Wire Company (since renamed Insteel Wire Products Company)
(together, the "Companies"), dated as of September 1, 1990 pursuant to which the
Issuer agreed to loan the proceeds from its $4,205,000 Industrial Development
First Mortgage Revenue Refunding Bonds (Insteel Industries, Inc./Rappahannock
Wire Company Project), Series of 1990 to the Companies and the Companies agreed
to repay such loan to the Issuer.
## 4.41 Amended and Restated Credit Agreement between First Union National Bank of North
Carolina and Insteel Industries, Inc. dated January 26, 1996 providing for a
$35,000,000 revolving line of credit and a $17,500,000 letter of credit and
banker's acceptance facility.
*** 4.42 First Amendment dated April 11, 1997 to Amended and Restated Credit Agreement
between First Union National Bank of North Carolina and Insteel Industries, Inc.
dated January 26, 1996.
*** 4.43 Second Amendment dated April 30, 1997 to Amended and Restated Credit Agreement
between First Union National Bank of North Carolina and Insteel Industries, Inc.
dated January 26, 1996.
+++ 4.44 Third Amendment dated November 17, 1997 to Amended and Restated Credit Agreement
between First Union National Bank of North Carolina and Insteel Industries, Inc.
dated January 26, 1996.
### 4.45 Fourth Amendment dated January 6, 1998 to Amended and Restated Credit Agreement
between First Union National Bank of North Carolina and Insteel Industries, Inc.
dated January 26, 1996.
### 4.46 Fifth Amendment dated March 27, 1998 to Amended and Restated Credit Agreement between
First Union National Bank of North Carolina and Insteel Industries, Inc. dated
January 26, 1996.
### 4.47 Sixth Amendment dated August 7, 1998 to Amended and Restated Credit Agreement between
First Union National Bank of North Carolina and Insteel Industries, Inc. dated
January 26, 1996.
### 4.48 Seventh Amendment dated October 27, 1998 to Amended and Restated Credit Agreement
between First Union National Bank of North Carolina and Insteel Industries, Inc.
dated January 26, 1996.
**** 4.49 Eighth Amendment dated April 6, 1999 to Amended and Restated Credit Agreement between
First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26,
1996.
UNDERTAKING: The Company agrees to file upon request of the Commission any instrument
with respect to long-term debt not registered for which the total amount authorized
does not exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
10- MATERIAL CONTRACTS
++++ 10.1 Stock Purchase Agreement between GS Technologies Operating Co., Inc., and Insteel
Industries, Inc. dated November 19, 1999.
++++ 10.2 Rod Supply Agreement by and between GS Industries, Inc., and Florida Wire and Cable,
Inc. dated November 19, 1999.
+ 10.5 Employee Stock Ownership Plan of Insteel Industries, Inc., including Employee Stock
Ownership Plan Trust Agreement.
</TABLE>
33
<PAGE> 34
EXHIBIT INDEX, CONTINUED
TO
ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.6 1990 Director Stock Option Plan of Insteel Industries, Inc. (incorporated by
reference to the exhibit of the same number contained in the Company's Annual
Report on Form 10-K for the year ended September 30, 1991).
** 10.7 Profit Sharing Plan of Insteel Wire Products Company.
** 10.8 Profit Sharing Plan of Insteel Industries, Inc.
++ 10.9 1994 Employee Stock Option Plan of Insteel Industries, Inc.
10.11 Nonqualified Stock Option Plan (incorporated by reference to the exhibit of the
same number contained in the Company's Annual Report on Form
10-K for the year ended September 30, 1995).
### 10.12 1994 Director Stock Option Plan of Insteel Industries, Inc. as Amended and
Restated Effective as of April 28, 1998.
+++ 10.21 Insteel Industries, Inc. Return on Capital Incentive Compensation Plan for Key
Members of Management
+++ 10.22 1997 Declaration of Amendment to Insteel Industries, Inc. Return on Capital
Incentive Compensation Plan for Key Members of Management
+++ 10.30 Insteel Industries, Inc. Director Compensation Plan
**** 10.50 Stock Purchase Agreement dated January 15, 1999 between H.A. Schlatter,
Quilni B.V., Structural Reinforcement Products, Inc. and Insteel Industries, Inc.
**** 10.51 Asset Purchase Agreement dated April 6, 1999 between Insteel Industries, Inc. and
Northwestern Steel and Wire Company and Northwestern Steel and Wire Company -
Kentucky.
21- List of Subsidiaries of Insteel Industries, Inc., at September 30, 2000.
23- Consents of Experts and Counsel: Independent Auditors' Consent.
23.1 Consent of Arthur Andersen LLP
27- Financial Data Schedule (for SEC use only)
* Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended September 30, 1988.
+ Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended September 30, 1989.
# Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended September 30, 1990.
** Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended September 30, 1993.
++ Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended September 30, 1994.
## Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended September 30, 1996.
*** Incorporated by reference to the exhibit of the same number contained in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
+++ Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997.
### Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended October 3, 1998.
**** Incorporated by reference to the exhibit of the same number contained in the
Company's Annual Report on Form 10-K for the year ended October 2, 1999.
++++ Incorporated by reference to the exhibit of the same number contained in the
Company's Quarterly Report on Form 10-Q for the quarter ended January 1, 2000.
</TABLE>
34
