<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 0-20278
ENCORE WIRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2274963
(State of incorporation) (I.R.S. employer identification number)
1410 MILLWOOD ROAD
MCKINNEY, TEXAS 75069
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 562-9473
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 [ ]
Number of shares of Common Stock outstanding as of April 15, 1998: 10,810,985
Page 1 of 21 Sequentially Numbered Pages
Index to Exhibits on Page 14
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FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 1998 (Unaudited) and December 31, 1997 ......................................3
Consolidated Statements of Income (Unaudited)
Quarters ended March 31, 1998 and
March 31, 1997.........................................................................5
Consolidated Statements of Cash Flows (Unaudited)
Quarters ended March 31, 1998 and March 31, 1997.......................................6
Notes to Consolidated Financial Statements......................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................................................14
ITEM 6. Exhibits and Reports on Form 8-K......................................................15
Signatures.......................................................................................................16
</TABLE>
2
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FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
In Thousands of Dollars (Unaudited) See Note 1
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash.............................................................. $ 878 $ 1,165
Accounts receivable (net of allowance of
$819 and $675)................................................ 48,430 44,302
Inventories (Note 2).............................................. 30,389 30,597
Prepaid expenses and other assets................................. 114 159
Deferred income taxes............................................. 793 793
--------------- ----------------
Total current assets.......................................... 80,604 77,016
Property, plant and equipment-on the basis of cost:
Land.............................................................. 1,796 1,747
Construction in Progress.......................................... 14,722 19,258
Buildings and improvements........................................ 17,797 8,793
Machinery and equipment........................................... 35,802 35,498
Furniture and fixtures............................................ 908 829
--------------- ----------------
Total property, plant, and equipment.......................... 71,025 66,125
Accumulated depreciation and
amortization.............................................. 15,986 14,797
--------------- ----------------
55,039 51,328
Other assets............................................................... 322 411
--------------- ----------------
Total assets............................................................... $ 135,965 $ 128,755
=============== ================
</TABLE>
See accompanying notes
3
<PAGE> 4
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
In Thousands of Dollars, Except Share Data (Unaudited) See Note 1
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Trade accounts payable................................................... $ 23,112 $ 23,380
Accrued liabilities...................................................... 3,650 8,248
Current income taxes payable............................................. 5,686 1,677
-------------- ---------------
Total current liabilities................................................ 32,448 33,305
Non-current deferred income taxes................................................. 3,240 3,240
Long term notes payable........................................................... 23,800 22,200
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (10,810,485
at March 31, 1998 and 10,798,385 at
December 31, 1997)................................................ 108 108
Additional paid-in capital........................................................ 30,041 30,010
Treasury stock - 200,2500 at March 31, 1998 and
December 31, 1997........................................................ (1,608) (1,608)
Retained earnings................................................................. 47,936 41,500
-------------- ---------------
Total stockholders' equity............................................... 76,477 70,010
-------------- ---------------
Total liabilities and stockholders' equity........................................ $ 135,965 $ 128,755
============== ===============
</TABLE>
Note: The consolidated balance sheet at December 31, 1997, as presented, is
derived from the audited consolidated financial statements at that
date.
See accompanying notes
4
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FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
March 31,
In Thousands of Dollars, Except Per Share Data 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales............................................................................... $ 62,927 $ 55,131
Cost of goods sold...................................................................... 47,478 44,660
---------- ------------
Gross profit............................................................................ 15,449 10,471
Selling, general, and administrative expenses........................................... 4,558 3,511
---------- ------------
Operating income........................................................................ 10,891 6,960
Net interest expense.................................................................... 253 363
---------- ------------
Income before income taxes.............................................................. 10,638 6,597
Provision for income taxes.............................................................. 4,202 2,540
---------- ------------
Net income.............................................................................. $ 6,436 $ 4,057
========== ============
Net income per common and common
equivalent share - basic....................................................... $ 0.61 $ 0.39
========== ============
Weighted average common and common
equivalent shares - basic...................................................... 10,600 10,489
========== ============
Net income per common and common
equivalent share - diluted..................................................... $ 0.58 $ 0.38
========== ============
Weighted average common and common
equivalent shares - diluted.................................................... 11,043 10,784
========== ============
========== ============
Cash dividends declared per share....................................................... $ -- $ --
========== ============
</TABLE>
See accompanying notes
5
<PAGE> 6
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
In Thousands of Dollars 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................ $ 6,436 $ 4,057
Adjustments to reconcile net income to cash provided by
(used) in operating activities:
Depreciation and amortization ..................... 1,232 927
Provision for bad debts ........................... 200 96
Changes in operating assets and liabilities:
Accounts receivable ............................... (4,328) (8,063)
Inventory ......................................... 208 (6,158)
Accounts payable and accrued liabilities .......... (4,866) 1,033
Other assets and liabilities ...................... 30 13
Current income taxes receivable/payable ........... 4,009 1,067
-------- --------
NET CASH PROVIDED BY (USED) IN OPERATING ACTIVITIES 2,921 (7,028)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ................ (4,940) (3,716)
Increase in long-term investments ......................... 89 --
Proceeds from sale of equipment ........................... 12 14
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............. (4,839) (3,702)
-------- --------
FINANCING ACTIVITIES
Increase in note payable .................................. 1,600 10,900
Proceeds from issuance of common stock .................... 31 91
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......... 1,631 10,991
-------- --------
Net increase (decrease) in cash ............................... (287) 261
Cash at beginning of period ................................... 1,165 1,261
-------- --------
Cash at end of period ......................................... $ 878 $ 1,522
======== ========
</TABLE>
See accompanying notes
6
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FORM 10-Q
ENCORE WIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Encore Wire
Corporation have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation, have been included. Results of operations for
the periods presented are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. These financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost, determined by the last-in
first-out (LIFO) method, or market.
Inventories (in thousands) consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials .................... $ 558 $ 2,299
Work-in-process .................. 4,366 6,128
Finished goods ................... 22,899 20,818
-------- --------
27,823 29,245
Increase to LIFO cost ............ 3,843 2,629
-------- --------
31,666 31,874
Lower of Cost or Market Adjustment (1,277) (1,277)
-------- --------
$ 30,389 $ 30,597
======== ========
</TABLE>
An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
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FORM 10-Q
NOTE 3 - INCOME PER SHARE
Income (loss) per common and common equivalent share is computed using
the weighted average number of shares of Common Stock and common stock
equivalents outstanding during each period. If dilutive, the effect of stock
options, treated as common stock equivalents, is calculated using the treasury
stock method.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Quarter Ending Quarter Ending
3/31/98 3/31/97
<S> <C> <C>
Numerator:
Net Income $ 6,436,000 $ 4,057,000
===================================
Denominator:
Denominator for basic earnings per share -
weighted average shares 10,600,468 10,489,160
Effect of dilutive securities:
Employee stock options 442,644 294,956
------------------------------------
Denominator for diluted earnings per share -
weighted average shares 11,043,112 10,784,116
====================================
</TABLE>
NOTE 4 - LONG TERM NOTE PAYABLE
Effective June 9, 1997, the Company completed an unsecured loan
facility with a group of banks (the "Financing Agreement"). The Financing
Agreement provides for maximum borrowings of the lesser of $55.0 million or the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the bank. On
February 20, 1998 the Company amended the Financing Agreement to reduce the
maximum amount of borrowing to the lesser of (i) $40.0 million or (ii) the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the bank.
The calculated maximum borrowing amount available at March 31, 1998, as computed
under the Financing Agreement, was $40.0 million. The Financing Agreement is
unsecured and contains customary covenants and events of default. The Company
was in compliance with these covenants as of March 31, 1998. Pursuant to the
Financing Agreement, the Company is prohibited from declaring, paying, or
issuing cash dividends. At March 31, 1998, the balance outstanding under the
Financing Agreement was $23.8 million. Amounts outstanding under the Financing
Agreement are payable on May 31, 2000 with interest due quarterly based on the
bank's prime rate or LIBOR Rate options, at the Company's election.
NOTE 5 - STOCK REPURCHASE AUTHORIZATION
In 1995, the Board of Directors authorized the Company to purchase up
to 600,000 shares, or approximately 5.6%, of its outstanding common stock
dependent upon market conditions. Purchases made pursuant to the repurchase
program are made from time to time in the open market or through
8
<PAGE> 9
FORM 10-Q
privately negotiated transactions. As of March 31, 1998, the Financing Agreement
discussed in note 4 allows the Company to purchase up to 407,250 shares in the
future at an aggregate price not to exceed $3,991,410. The Company did not
purchase any shares under this authorization during the first quarter of 1998.
As of March 31, 1998, the Company had repurchased an aggregate of 200,250 shares
of its common stock in the open market (including 5,000 shares in 1997) at a
weighted average price of $8.03 per share.
NOTE 6 - STOCK DIVIDEND
On July 22, 1997 the Board of Directors of the Company declared a
3-for-2 stock split to be paid as a 50% stock dividend on its common stock. The
stock dividend was payable August 18, 1997 to stockholders of record at the
close of business on August 11, 1997. The per share amounts disclosed in this
filing have been restated to reflect the stock dividend.
9
<PAGE> 10
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a low-cost manufacturer of copper electrical building
wire and cable. The Company is a significant supplier of residential wire for
interior wiring in homes, apartments and manufactured housing. In 1994, the
Company completed a major plant expansion and began manufacturing commercial
wire for commercial and industrial buildings.
Price competition for electrical wire and cable is intense, and the
Company sells its products in accordance with prevailing market prices. Copper
rod, a commodity product, is the principal raw material used by the Company in
manufacturing its products. Copper accounted for approximately 73.8%, 77.4%,
76.8%, 67.9% and 70.0% of the Company's cost of goods sold during fiscal 1997,
1996, 1995, 1994 and 1993 respectively. The price of copper fluctuates,
depending on general economic conditions and in relation to supply and demand
and other factors, and has caused monthly variations in the cost of copper
purchased by the Company. The Company cannot predict copper prices in the future
or the effect of fluctuations in the cost of copper on the Company's future
operating results.
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the three month periods ended
March 31, 1998 and 1997. Reference should also be made to the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
Net sales for the first quarter of 1998 amounted to $62.9 million
compared with net sales of $55.1 million for the first quarter of 1997, an
increase of 14%. This increase was primarily due to an increase in sales volume
of 30% which was offset by a lower selling price per copper pound for the
Company's products. The lower selling price per copper pound of product sold was
primarily due to a significant decrease in the price of copper in the first
quarter of 1998 compared to the first quarter of 1997. Sales volume increased
due to several factors, including increases in customer acceptance and product
availability. Sales volume of both the residential and commercial products
increased during the first quarter of 1998 compared to the first quarter of
1997. The average sales price per copper pound of product sold was $1.73 in the
first quarter of 1998, compared to $1.96 in the first quarter of 1997.
Fluctuations in sales prices are primarily a result of price competition and
changing copper raw material prices.
Cost of goods sold was $47.5 million in the first quarter of 1998,
compared to $44.6 million in the first quarter of 1997. Copper costs increased
to $32.5 million in the first quarter of 1998 compared to $30.9 million in the
first quarter of 1997. This increase was due to the increased pounds of copper
sold, offset in part by the lower price of copper in the first quarter of 1998
compared to the first quarter of 1997. The average cost per copper pound
purchased decreased to $.85 in the first quarter of 1998 from $1.16 in the first
quarter of 1997. Copper costs as a percentage of net sales decreased to 51.7% in
the first quarter of 1998 from 56.1% in the first quarter of 1997. This decrease
as a percentage of net sales in the first quarter of 1998 from the comparable
quarter in 1997 was due primarily to an increased differential between what the
Company pays per pound of copper purchased and the Company's net sales price per
copper pound. This differential was increased in the first quarter of 1998 due
to
10
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FORM 10-Q
improved pricing for the Company's products. Other raw material costs as a
percentage of net sales increased to 14.9% in the first quarter of 1998,
compared with 13.1% in the first quarter of 1997. This increase as a percentage
of sales was due to other raw material costs per copper pound remaining
relatively constant while the sales price per copper pound decreased as
discussed above. Depreciation, labor and overhead costs as a percentage of net
sales increased to 10.6% in the first quarter of 1998 compared to 8.2% in the
first quarter of 1997. This increase as a percentage of sales was also due to
the sales price per copper pound decreasing while such costs per copper pound
increased slightly . The absolute dollar increase is due to higher depreciation
and other costs associated with the Company's expansion projects.
Inventories are stated at the lower of cost, determined by the last in,
first out (LIFO) method, or market. As permitted by generally accepted
accounting principles, the Company maintains its inventory costs and cost of
goods sold on a first in, first out (FIFO) basis and makes a quarterly LIFO
adjustment to adjust total inventory and cost of goods sold to LIFO. As a result
of decreases in the price of copper during the first quarter of 1998, the value
of all inventory at March 31, 1998 using the LIFO method was greater than its
FIFO value by approximately $3.8 million, resulting in a corresponding decrease
in the cost of goods sold of $1.2 million. At March 31, 1998, LIFO value
exceeded the market value of the inventory. Since a reserve was provided at
December 31, 1997 reducing the cost of inventory to market in the amount of $1.3
million, the reserve was not adjusted. As a result of the increase in copper
during the first quarter of 1997, the value of all inventory at March 31, 1997
using the LIFO method was less than its FIFO value by approximately $2.0
million, resulting in a corresponding increase in the cost of goods sold of $1.9
million. At March 31, 1997, LIFO value did not exceed the market value of the
inventory, thus there was no reserve reducing the cost of inventory to market.
Future reductions in the price of copper could require the Company to record a
lower of cost or market adjustment against the related inventory balance which
would result in a negative impact on net income. Additionally, a reduction in
the quantity of inventory in any period could cause copper that is carried in
inventory at costs different from the cost of copper in that period to be
included at the different price in cost of goods sold for that period.
Gross profit increased to $15.4 million, or 24.6% of net sales, for the
first quarter of 1998 from $10.4 million, or 19.0% of net sales, for the first
quarter of 1997. The increase in gross profit as a percentage of net sales was
due primarily to increased sales volume and improved pricing for the Company's
products which resulted in a greater differential between product price and
copper cost in the first quarter of 1998, as discussed above.
General and administrative expenses were $1.2 million, or 1.9% of net
sales, in the first quarter of 1998 compared to $873,000, or 1.6% of net sales,
in the first quarter of 1997. The increase as a percentage of sales was due
primarily to higher general and administrative costs in the first quarter of
1998 relating to increased sales volume. The increase as a percentage of sales
was also caused by a lower sales price per copper pound of product sold as
discussed above. Selling expenses for the first quarter of 1998 were $3.3
million, or 5.3% of net sales, compared to $2.6 million, or 4.8% of net sales,
in the first quarter of 1997. This increase as a percentage of sales was due
primarily to freight charges per copper pound of product shipped remaining
relatively unchanged while the sales price per copper pound sold decreased.
Net interest expense was $253,000 in the first quarter of 1998 compared
to $363,000 in the first quarter of 1997. The decrease was due to a lower
average debt balance during the first quarter of 1998 compared to the first
quarter of 1997. The balance of the Company's debt at the end of the first
quarter of
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FORM 10-Q
1998 decreased from the first quarter of 1997 due to improved income and cash
flow combined with lower copper prices.
The Company's effective tax rate increased to 39.5% in the first
quarter of 1998 due to the Company's increased net income causing it to be
placed in a higher statutory tax bracket.
As a result of the foregoing factors, the Company's net income
increased to $6.4 million in the first quarter of 1998 from $4.0 million in the
first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a substantial inventory of finished products to
satisfy customers' prompt delivery requirements. As is customary in the
industry, the Company provides to most of its customers 60- day payment terms,
although the Company's suppliers typically require more immediate payment,
generally within 30 days. Therefore, the Company's liquidity needs have
generally consisted of operating capital necessary to finance these receivables
and inventory. Capital expenditures have historically been necessary to expand
the production capacity of the Company's manufacturing operations. The Company
has satisfied its liquidity and capital expenditure needs with cash generated
from operations, borrowings under its revolving credit facilities and sales of
its Common Stock.
Effective June 9, 1997, the Company completed an unsecured loan
facility with a group of banks (the "Financing Agreement"). The Financing
Agreement provides for maximum borrowings of the lesser of $55.0 million or the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the bank. On
February 20, 1998 the Company amended the Financing Agreement to reduce the
maximum amount of borrowing to the lesser of (i) $40.0 million or (ii) the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the bank.
The calculated maximum borrowing amount available at March 31, 1998, as computed
under the Financing Agreement, was $40.0 million. The Financing Agreement is
unsecured and contains customary covenants and events of default. The Company
was in compliance with these covenants as of March 31, 1998. Pursuant to the
Financing Agreement, the Company is prohibited from declaring, paying, or
issuing cash dividends. At March 31, 1998, the balance outstanding under the
Financing Agreement was $23.8 million. Amounts outstanding under the Financing
Agreement are payable on May 31, 2000 with interest due quarterly based on the
bank's prime rate or LIBOR Rate options, at the Company's election.
In 1995, the Board of Directors authorized the Company to purchase up
to 600,000 shares, or approximately 5.6%, of its outstanding common stock
dependent upon market conditions. Purchases made pursuant to the repurchase
program are made from time to time in the open market or through privately
negotiated transactions. As of March 31, 1998, the Financing Agreement discussed
in note 4 allows the Company to purchase up to 407,250 shares in the future at
an aggregate price not to exceed $3,991,410. The Company did not purchase any
shares under this authorization during the first quarter of 1998. As of March
31, 1998, the Company had repurchased an aggregate of 200,250 shares of its
common stock in the open market (including 5,000 shares in 1997) at a weighted
average price of $8.03 per share.
Cash provided by operations increased to $2.9 million in the first
quarter of 1998 from cash used by operations of $7.0 million in the first
quarter of 1997. This increase in cash provided by operations
12
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FORM 10-Q
is primarily the result of an increase in net income, a smaller decrease in the
inventory during the first quarter of 1998 compared to 1997 and lower copper
prices in the first quarter of 1998 compared to 1997. Cash used in investing
activities increased from $3.7 million in the first quarter of 1997 to $4.8
million in the first quarter of 1998. In both quarters, these funds were used
primarily to increase the Company's production capacity and to purchase
equipment for use in the Company's copper rod fabrication facility which is
discussed in the following paragraph. The cash provided by financing activities
was due primarily to borrowings in the first quarter of 1998 and 1997, the
proceeds of which were used to fund the activities discussed above.
During 1998, the Company expects its capital expenditures will consist
of additional manufacturing equipment for its residential and commercial wire
operations. In addition, the Company plans to complete the construction of its
copper rod fabrication facility. This copper rod fabrication facility will allow
the Company to produce its own copper rod from copper cathodes instead of
purchasing the rod from outside sources. The Company will also be able to
reprocess copper scrap generated by its operations and copper scrap purchased
from others. The total capital expenditures in 1998 associated with this
facility and the additional manufacturing equipment are estimated to be
approximately $21.0 million. The Company also expects its working capital
requirements to increase during 1998 as a result of expected continued increases
in sales. Moreover, the Company expects that the inventory levels necessary to
support sales of commercial wire will continue to be greater than the levels
necessary to support comparable sales of residential wire. These requirements
will be impacted by the price of copper. The Company believes that the cash flow
from operations and the financing that it expects to receive from its banks
under the Financing Agreement will satisfy working capital and capital
expenditure requirements for the next twelve months.
IMPACT OF YEAR 2000
The Company is currently working to determine the impact of the year
2000 issue on the processing of date sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
information available at this time, costs of addressing potential problems are
not currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods. The
Company is currently engaged in identifying and resolving all significant year
2000 issues in a timely manner.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This report contains various forward-looking statements and information that are
based on management's belief as well as assumptions made by and information
currently available to management. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected. Among the key factors that may have a direct bearing on the Company's
operating results are fluctuations in the economy and in the level of activity
in the building and construction industry, demand for the Company's products,
the impact of price competition and fluctuations in the price of copper.
13
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FORM 10-Q
PART II. OTHER INFORMATION
ITEM 1. LEGAL MATTERS
On August 20, 1997, the Company was inspected by the U.S. Environmental
Protection Agency (the "EPA") to determine the Company's compliance with the
requirements of the Emergency Planning and Community Right-to-Know Act
provisions ("EPCRA") of the Comprehensive Environmental Response, Compensation
and Liability Act, as amended. In general, EPCRA requires private businesses to
maintain and file with the government specified documents concerning the on-site
recycling and disposal of a defined group of chemicals and metal compounds.
The Company was required to provide the EPA by September 12, 1997 with
information concerning its processing of copper, lead compounds, antimony
compounds and methyl ethyl ketone for calendar years 1994 and 1995. This
information was researched by the Company, and the required documents were
timely filed with the EPA.
In a separate matter, by letter dated February 17, 1998, the Company
was issued "Findings of Violation and Order for Compliance" by the EPA. In this
document, the EPA alleged that the Company had failed to obtain a federal storm
water discharge permit pursuant to the Clean Water Act ("CA") for its past and
current ongoing operations in McKinney, Texas, and to otherwise meet the terms
of this permitting program. The Company was ordered timely to (1) apply for a
federal storm water discharge permit, (2) prepare and submit a Storm Water
Pollution Prevention Plan and (3) prepare and file a report with the EPA
describing actions that the Company has taken or would take to correct
violations alleged by the EPA.
On March 6, 1998, the Company applied for a federal storm water
discharge permit. On March 23, 1998, the Company filed the Storm Water Pollution
Prevention Plan and the written report required by the "Findings of Violation
and Order for Compliance" with the EPA.
In addition, the "Findings of Violation and Order for Compliance"
offered the Company the opportunity to contact the EPA to schedule a Show Cause
hearing to demonstrate to the EPA why it should not take further enforcement
action against the Company relating to the matters stated in this document. The
Company requested a Show Cause Hearing, and it was held on April 13, 1998.
On April 17, 1998, the Company was issued a consolidated "Complaint and
Notice of Opportunity for Hearing" by the EPA (the "1998 Complaint"). In the
1998 Complaint, the EPA proposed a civil penalty of $151,000 for seven alleged
violations of EPCRA's reporting requirements and proposed as civil penalty of
$27,500 for the alleged failure to have a federal storm water discharge permit.
In accordance with the EPA's Rule of Practice, the Company intends to file an
Answer to the Complaint and to request a hearing on all matters alleged by the
EPA. The Company intends to vigorously defend itself in this matter.
14
<PAGE> 15
FORM 10-Q
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to Second Amended and Restated
Financing Agreement dated as of February 20, 1998 by
and among Encore Wire Corporation, NationsBank of
Texas, N.A. and Bank of America, Texas N.A.
(b) No reports on Form 8-K were filed by the Company during the
three months ended March 31, 1998.
15
<PAGE> 16
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENCORE WIRE CORPORATION
-----------------------------------------
(Registrant)
Date: May 13, 1998 /s/ VINCENT A. REGO
-----------------------------------------
Vincent A. Rego, President and
Chief Executive Officer
Date: May 13, 1998 /s/ DANIEL L. JONES
-----------------------------------------
Daniel L. Jones, President
Date: May 13, 1998 /s/ SCOTT D. WEAVER
-----------------------------------------
Scott D. Weaver, Vice President - Finance,
Treasurer and Secretary
(Principal Financial Officer)
16
<PAGE> 17
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Numbered
Number Exhibit Page
- ------------ ------- ------------
<S> <C>
10.1 First Amendment to Second Amended and Restated Financing Agreement
dated as of February 20, 1998 by and among Encore Wire Corporation,
NationsBank of Texas, N.A. and Bank of America, Texas N.A...................... 18
</TABLE>
17
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO SECOND
AMENDED AND RESTATED FINANCING AGREEMENT
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AGREEMENT
(the "Amendment") dated as of February 20, 1998, is by and among ENCORE WIRE
CORPORATION, a Delaware corporation ("Borrower"), NATIONSBANK OF TEXAS, N.A., a
national banking association, and BANK OF AMERICA, TEXAS, N.A., a national
banking association, in their individual capacities as "Lenders" (as such term
is defined herein), and NATIONSBANK OF TEXAS, N.A., a national banking
association, as agent for itself and the other Lenders (in such capacity,
together with its successors in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders are parties to the Second
Amended and Restated Financing Agreement, dated as of June 9, 197, (the
"Original Financing Agreement") relating to a $55,000,000 revolving credit
facility ("Facility"), pursuant to which, inter alia, the Lenders agreed to
make certain loans available to the Borrower upon the terms and conditions
contained in the Original Financing Agreement;
WHEREAS, Borrower desires that the Lenders reduce the available credit
under said facility to an aggregate of $40,000,000 and make certain other
modifications to the Original Financing Agreement; and
WHEREAS, the parties hereto desire to amend the Original Financing
Agreement in accordance with the terms and provisions of this Amendment;
NOW, THEREFORE, for and in consideration of these premises and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower, the Agent an the Lenders hereby agree as follows:
1. Terms. All capitalized terms defined in the Original Financing
Agreement and not otherwise defined herein shall have the same definitions when
used herein as set forth in the Original Financing Agreement as amended by this
Amendment.
2. Amendment of Section 1.83. Section 1.83. of the Original Financing
Agreement is amended by deleting Section 1.83 in its entirety and replacing it
with the following:
3. Reduction of Commitment. Pursuant to Section 2.9 of the Original
Financing Agreement, the aggregate Commitment of all Lenders is reduced from
$55,000,000 to $40,000,000;
<PAGE> 2
the amount of NationsBank's Commitment is reduced from $35,000,000 to
$25,500,000; and the amount of Bank of America's Commitment is reduced from
$20,000,000 to $14,500,000.
4. Amendment to Section 7.21 of the Original Financing Agreement.
Section 7.21 of the Original Financing Agreement is amended by deleting
Subsection(a) 3 thereof in its entirety and replacing it with the following:
3. Capital Expenditures. Capital Expenditures shall not
exceed in any fiscal year the sum of (i) $5,000,000.00, (ii)
expenditures made pursuant to the line item designated
"Other Equipment" in the Budget, but only up to an
aggregate amount of $4,000,000.00, and (iii) the
expenditures provided in the Budget for construction of the
Rod Mill and Distribution Center for such fiscal year.
Provided. however, the $5,000,000.00 limitation set forth
in (i) above shall be $18,000,000.00 solely for Borrower's
fiscal year ending in 1998. The amounts in excess of
$5,000,000.00 for such fiscal year may be used only for (x)
developing in-house capacity for the production of PVC
jacketing and insulating materials, (y) increasing
production capacity for existing residential and commercial
plants of Borrower, and (z) increasing the smelting
capacity of the Rod Mill. After the fiscal year ending in
1998, the Capital Expenditure limitation shall thereafter
be $,000,000.0. Capital Expenditures for the Rod Mill and
Distribution Center (A) may not exceed $23,500,000.00 in
the aggregate for the entire project and (B) may not exceed
$1,000,000.00 above the amount provided in the Budget for
any single line item which is included in the construction
costs for the Rod Mill and Distribution Center.
5. Costs. The Borrower shall pay all reasonable out-of-pocket costs and
expenses incurred by the Agent or any Lender in connection with the
negotiation, preparation, execution and consummation of this Amendment and the
transactions contemplated by this Amendment, including, without limitation, the
reasonable fees and expenses of counsel to the Agent and the Lenders.
6. Miscellaneous.
6.1 Headings. Section headings are for reference only and shall not
affect the interpretation or meanings of any provision of this Amendment.
6.2 Effect of this Amendment. The Original Financing Agreement, as
amended by this Amendment, shall remain in full force and effect except that
any reference therein, or in any other Loan Document referring to the Original
Financing Agreement, shall be deemed to refer to the Original Financing
Agreement as amended by this Amendment.
2
<PAGE> 3
6.3 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE
FEDERAL LAW.
6.4 Counterparts. This Amendment may be executed by the different
parties hereto on separate counterparts, each of which, when so executed,
shall be deemed an original but all such counterparts shall constitute but one
and the same Amendment.
6.5 NO ORAL AGREEMENTS. THE Original Financing Agreement, AS
AMENDED BY THIS AMENDMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENTS
THE ENTIRE AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective duly authorized officers as of the date first
above written.
BORROWER:
ENCORE WIRE CORPORATION
By: /s/ SCOTT WEAVER
-------------------------
Name: Scott Weaver
-----------------------
Title: Vice President-Finance
----------------------
NATIONSBANK OF TEXAS, N.A.
Individually and as Agent
By: /s/ TODD M. BURNS
-------------------------
Name: Todd M. Burns
-----------------------
Title: Vice President
----------------------
BANK OF AMERICA, TEXAS, N.A.
By: /s/ DONALD P. HELLMAN
-------------------------
Name: Donald P. Hellman
-----------------------
Title: Vice President
----------------------
3
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