<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission file number: 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 No
--- ---
Number of shares of Common Stock outstanding as of July 24, 1999: 15,388,547
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<PAGE> 2
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets......................................3
June 30, 1999 (Unaudited) and December 31, 1998
Consolidated Statements of Income (Unaudited)....................5
Quarters and six months ended June 30, 1999 and June 30, 1998
Consolidated Statements of Cash Flows (Unaudited)................6
Six months ended June 30, 1999 and June 30, 1998
Notes to Consolidated Financial Statements (Unaudited)...........7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................17
ITEM 4. Submission of Matters to a Vote of Security Holders............17
ITEM 6. Exhibits and Reports on Form 8-K...............................18
Signatures...................................................................19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
In Thousands of Dollars 1999 1998
(Unaudited) (See Note 1)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................ $ 1,161 $ 1,431
Accounts receivable (net of allowance of
$507 and $500) .......................... 48,330 37,946
Inventories (Note 2) ........................ 38,546 37,859
Prepaid expenses and other assets ........... 695 247
Current taxes receivable .................... -- 582
--------- ---------
Total current assets .................... 88,732 78,065
Property, plant and equipment-on the basis of cost:
Land ........................................ 3,575 3,569
Construction in Progress .................... 13,040 12,296
Buildings and improvements .................. 25,548 25,363
Machinery and equipment ..................... 61,607 56,874
Furniture and fixtures ...................... 1,288 1,212
--------- ---------
Total property, plant, and equipment .... 105,058 99,314
Accumulated depreciation and
Amortization ........................ 24,315 20,654
--------- ---------
80,743 78,660
Other assets ......................................... 197 223
--------- ---------
Total assets ......................................... $169,672 $156,948
========= =========
</TABLE>
See accompanying notes
3
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ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
June 30, December 31,
In Thousands of Dollars, Except Share Data 1999 1998
(Unaudited) (See Note 1)
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Trade accounts payable ............................. $ 20,253 $ 16,848
Accrued liabilities ................................ 5,984 7,877
Current income taxes payable ....................... 2,012 --
Current deferred income taxes ...................... 516 516
--------- ---------
Total current liabilities .......................... 28,765 25,241
Non-current deferred income taxes ........................... 4,053 4,053
Long term notes payable ..................................... 52,700 44,000
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (15,393,547
at June 30, 1999 and 15,601,554 at
December 31, 1998)............. ............. 163 163
Additional paid-in capital .................................. 30,624 30,591
Treasury stock - 941,000 at June 30, 1999 and 702,575 at
December 31, 1998 .................................. (8,544) (6,167)
Retained earnings ........................................... 61,911 59,067
--------- ---------
Total stockholders' equity ......................... 84,154 83,654
--------- ---------
Total liabilities and stockholders' equity .................. $ 169,672 $ 156,948
========= =========
</TABLE>
Note: The consolidated balance sheet at December 31, 1998, as presented, is
derived from the audited consolidated financial statements at that
date.
See accompanying notes
4
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ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------- ----------------
In Thousands of Dollars, Except Per Share Data 1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales ........................................... $55,442 $63,906 $118,966 $126,833
Cost of goods sold .................................. 49,379 51,446 103,721 98,924
------- ------- -------- --------
Gross profit ....................................... 6,063 12,460 15,245 27,909
Selling, general, and administrative expense ....... 4,483 4,513 9,476 9,071
------- ------- -------- --------
Operating income ................................... 1,580 7,947 5,769 18,838
Interest expense (net) ............................. 630 267 1,148 520
------- ------- -------- --------
Income before income taxes ......................... 950 7,680 4,621 18,318
Provision for income taxes ......................... 364 3,114 1,777 7,316
------- ------- -------- --------
Net income ......................................... $ 586 $ 4,566 $ 2,844 $ 11,002
======= ======= ======== ========
Net income per common and common
equivalent share - basic ........................ $ .04 $ .29 $ .18 $ .69
======= ======= ======== ========
Weighted average common and common
equivalent shares - basic ....................... 15,530 15,949 15,576 15,925
======= ======= ======== ========
Net income per common and common
equivalent share - diluted ...................... $ .04 $ .27 $ .18 $ .66
======= ======= ======== ========
Weighted average common and common
equivalent shares - diluted ..................... 15,871 16,613 15,923 16,586
======= ======= ======== ========
Cash dividends declared per share .................. $ -- $ -- $ -- $ --
======= ======= ======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
In Thousands of Dollars 1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $ 2,844 $ 11,002
Adjustments to reconcile net income to cash provided by
(used in) operating
activities:
Depreciation and amortization ...................... 3,812 2,569
Provision for bad debts ............................ -- 375
Changes in operating assets and liabilities:
Accounts receivable ............................ (10,384) (7,928)
Inventory ...................................... (687) (5,881)
Accounts payable and accrued liabilities ....... 1,512 (1,946)
Other assets and liabilities ................... (433) (387)
Current income taxes payable ................... 2,594 1,487
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ....... (742) (709)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ................. (5,978) (15,459)
Increase in Long Term Investments .......................... 5 170
Proceeds from Sale of Equipment ............................ 89 12
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................. (5,884) (15,277)
-------- --------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable ................ 8,700 15,800
Purchases of Treasury Stock ................................ (2,377) --
Proceeds from issuance of common stock ..................... 33 392
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............. 6,356 16,192
-------- --------
NET DECREASE IN CASH ........................................... (270) 206
Cash at beginning of period .................................... 1,431 1,165
-------- --------
Cash at end of period .......................................... $ 1,161 $ 1,371
======== ========
</TABLE>
See accompanying notes
6
<PAGE> 7
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, 1999. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method.
Inventories (in thousands) consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials ........................... $ 6,333 $ 6,152
Work-in-process ......................... 2,647 4,339
Finished goods .......................... 24,404 23,356
---------- ----------
33,384 33,847
Increase to LIFO cost ................... 7,351 6,637
---------- ----------
40,735 40,484
Lower of Cost or Market Adjustment ...... (2,189) (2,625)
---------- ----------
$ 38,546 $ 37,859
========== ==========
</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 are based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to
7
<PAGE> 8
many forces beyond management's control, interim results are subject to the
final year-end LIFO inventory valuation.
NOTE 3 - INCOME PER SHARE
Income 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
June 30, 1999 June 30, 1998
<S> <C> <C>
Numerator:
Net Income $ 586,000 $ 4,566,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,529,901 15,948,891
Effect of dilutive securities:
Employee stock options 340,908 664,361
----------- -----------
Denominator for diluted earnings per share -
weighted average shares 15,870,809 16,613,252
=========== ===========
</TABLE>
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Six Months Ending Six Months Ending
June 30, 1999 June 30, 1998
<S> <C> <C>
Numerator:
Net Income $ 2,844,000 $11,002,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,575,987 15,924,930
Effect of dilutive securities:
Employee stock options 347,214 661,181
----------- -----------
Denominator for diluted earnings per share -
weighted average shares 15,923,201 16,586,111
=========== ===========
</TABLE>
8
<PAGE> 9
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 has been amended six times since June 9, 1997 to change, among other
items, the maximum borrowing amount, the term of the loan covenants and the
allowable purchases of the Company's common stock. The Financing Agreement
provides for maximum borrowings of the lesser of $65.0 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 banks. The calculated
maximum borrowing amount available at June 30, 1999, as computed under the
Financing Agreement, was $62.9 million. The Financing Agreement is unsecured and
contains customary covenants and events of default. The Company was in
compliance with these covenants, as amended, as of June 30, 1999. Pursuant to
the Financing Agreement, the Company is prohibited from declaring, paying or
issuing cash dividends. At June 30, 1999, the balance outstanding under the
Financing Agreement was $52.7 million. Amounts outstanding under the Financing
Agreement are payable on May 31, 2001 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
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 900,000 shares, or approximately 5.6%, of
its outstanding common stock dependent upon market conditions. Subsequent Board
actions increased this authorization to 946,000. As of July 31, 1999, the
Company had repurchased an aggregate of 946,000 shares of its common stock in
the open market completing this program.
NOTE 6 - STOCK DIVIDEND
On May 5, 1998 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 June 15, 1998 to stockholders of record at the close of
business on June 8, 1998. The per share amounts disclosed in this filing have
been restated to reflect the stock dividend.
9
<PAGE> 10
MANAGEMENTS 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 and 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
is the principal raw material used by the Company in manufacturing its products.
Copper accounted for approximately 66.2%, 73.8%, 77.4%, 76.8%, and 67.9% of the
Company's cost of goods sold during fiscal 1998, 1997, 1996, 1995 and 1994,
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 and six month
periods ended June 30, 1998 and 1999. 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, 1998.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Net sales for the second quarter of 1999 amounted to $55.4 million
compared with net sales of $63.9 million for the second quarter of 1998. This
decrease was due to a decrease in the average sales price per copper pound of
the Company's products, offset in part by an 8% increase in the pounds of copper
shipped during the period. The decrease in the average sales price per copper
pound of the Company's products was due to a 19% decrease in the average cost of
copper from the second quarter of 1998 to the same period in 1999, as well as
competitive pricing pressure for the Company's products. Sales volume increased
due to several factors, including increases in customer acceptance and product
availability. Sales volume of residential wire remained relatively constant
whereas the sales volume of commercial products increased during the second
quarter of 1999 compared to the second quarter of 1998. The average sales price
per copper pound of product sold was $1.28 in the second quarter of 1999,
compared to $1.59 in the second quarter of 1998. Fluctuations in sales prices
are primarily a result of price competition and changing copper raw material
prices.
Cost of goods sold decreased to $49.4 million in the second quarter of
1999, from $51.4 million in the second quarter of 1998. Copper costs decreased
to $28.7 million in the second quarter of 1999 from $34.7 million in the second
quarter of 1998. The average cost per copper pound purchased decreased to $.69
in the second quarter of 1999 from $.85 in the second quarter of 1998. Copper
costs as a percentage of net sales decreased to 51.8% in the second quarter of
1999 from 54.3% in the second quarter of 1998. This decrease as a percentage of
net sales in the second quarter of 1999 from the comparable quarter in 1998 was
due primarily to lower copper costs per pound of product sold partially offset
by a decreased
10
<PAGE> 11
differential between what the Company pays per pound of copper purchased and the
Company's net sales price per copper pound. This differential decreased in the
second quarter of 1999 because the average cost per copper pound purchased
decreased less than the sales price per copper pound. The decreased differential
resulted from competitive pricing conditions. Other raw material costs as a
percentage of net sales increased to 18.7% in the second quarter of 1999,
compared with 14.6% in the second quarter of 1998. This increase is due to raw
materials per pound of copper sold remaining relatively constant while the sales
price per copper pound of product sold decreased as discussed above.
Depreciation, labor and overhead costs as a percentage of net sales increased to
19.2% in the second quarter of 1999, compared with 12.9% in the second quarter
of 1998 due to an increase in depreciation, labor and overhead per pound of
copper sold relating to the Company's expansion projects and a lower sales price
per copper pound of product sold as discussed above.
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. The price
of copper increased during the second quarter of 1999 (as compared to the first
quarter of 1999), necessitating an increase in the LIFO reserve of $971,000 and
a corresponding increase in cost of goods sold. In the second quarter of 1998,
the price of copper decreased necessitating a decrease in the LIFO reserve that
resulted in an increase to the inventory value and a decrease to the cost of
goods sold of $835,000. At June 30, 1999, LIFO cost exceeded the market value of
the inventory. The amount in which the June 30, 1999 LIFO cost exceeded the
market value of the inventory was less than the amount established at March 31,
1999. Therefore, there was a reduction in the lower of cost or market reserve
and a decrease in the cost of goods sold in the amount of $1.3 million. The
resulting lower of cost or market reserve at June 30, 1999 was $2.2 million. At
June 30, 1998, LIFO cost exceeded the market value of the inventory. However,
the excess did not require an addition to the lower of cost or market reserve
because the reserve previously established, in the amount of $1.3 million, was
adequate to adjust for the amount of cost over market. Future reductions in the
price of copper could require the Company to record lower of cost or market
adjustments against the related inventory balance which would result in a
negative impact on net income. In addition, if the quantity of inventory
decreases in any period, copper that is carried in inventory at a cost different
from the cost of copper in the period in which the reduction occurs will be
included in cost of goods sold at the different price.
Due to the items discussed above, gross profit decreased to $6.1
million, or 10.9% of net sales, for the second quarter of 1999 compared to $12.5
million, or 19.5% of net sales, for the second quarter of 1998.
General and administrative expenses were $1.3 million, or 2.3% of net
sales, in the second quarter of 1999 compared to $1.0 million, or 1.7% of net
sales, in the second quarter of 1998. This increase in general and
administrative expenses was due to increased expenses related to the Company's
increased volume. As a percentage of sales, this increase was caused by the
increase in general and administrative costs as well as a decrease in the sales
price per copper pound sold. There was no provision for bad debts in the second
quarter of 1999 compared to $117,000 in the second quarter of 1998. Selling
expenses for the second quarter of 1999 were $3.2 million, or 5.8% of net sales,
compared to $3.3 million, or 5.1% of net sales, in the second quarter of 1998.
Freight charges per copper pound of product shipped decreased because the
Company shipped a greater percentage of its sales to geographic locations closer
to the Company's plant in the second quarter of 1999 compared to the same
quarter of 1998. This decrease was partially offset by the decrease in the sales
price per copper pound sold.
11
<PAGE> 12
Net interest expense was $631,000 in the second quarter of 1999
compared to $267,000 in the second quarter of 1998. The increase was due to a
higher average debt balance outstanding during the second quarter of 1999 than
the comparable period during 1998, reduced by the capitalization of interest
related to the Company's copper rod fabrication facility construction during the
second quarter of 1998. This increase in average debt outstanding was the result
of capital expenditures and additional working capital. As a result of the
decreased cost of copper in the second quarter of 1999 compared to the second
quarter of 1998, the amount of working capital necessary for inventory decreased
but this was offset by increased quantities of inventory and an increased
accounts receivable balance.
The Company's effective tax rate decreased to 38.3% in the second
quarter of 1999 compared to 40.5% in the second quarter of 1998. The higher
effective tax rate in 1998 was partly due to the accrual for a non-deductible
penalty in the second quarter of 1998 (See Part II - Item 1. Legal Proceedings).
Without the accrual of this amount in the second quarter of 1998, the Company's
effective tax rate in the second quarter of 1998 would have been 39.5%.
As a result of the foregoing factors, the Company's net income was
$586,000 in the second quarter of 1999 compared to $4.6 million in the second
quarter of 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales for the first six months of 1999 amounted to $118.9 million
compared with net sales of $126.8 million for the first six months of 1998. This
decrease was due to a decrease in the average sales price per copper pound of
the Company's products, offset in part by a 21% increase in the pounds of copper
shipped during the period. The decrease in the average sales price per copper
pound of the Company's products was caused by a 20% decrease in the average cost
of copper from the first six months of 1998 to the same period in 1999, as well
as competitive pricing pressure on the Company's products in the first six
months of 1999. Sales volume increased due to several factors, including
increases in customer acceptance and product availability. Sales volume of the
Company's residential and commercial products increased during the first six
months of 1999 compared to the first six months of 1998. The average sales price
per copper pound of product sold was $1.29 in the first six months of 1999,
compared to $1.66 in the first six months of 1998. Fluctuations in sales prices
are primarily a result of price competition and changing copper raw material
prices.
Cost of goods sold was $103.7 million in the first six months of 1999,
compared to $98.9 million in the first six months of 1998. Copper costs
decreased to $63.4 million in the first six months of 1999 from $67.2 million in
the first six months of 1998. The average cost per copper pound purchased
decreased to $.68 in the first six months of 1999 from $.85 in the first six
months of 1998. Copper costs as a percentage of net sales remained relatively
constant at 53.3% in the first six months of 1999 compared to 53.0% in the first
six months of 1998. The lower copper cost per pound of product sold in the first
six months of 1999 as compared to the same period of 1998 was partially offset
by a slightly decreased differential between what the Company pays per pound of
copper purchased and the Company's net sales price per copper pound. This
differential decreased in the first six months of 1999 because the average cost
per copper pound purchased decreased less than the sales price per copper pound.
The decreased differential was a result of competitive pricing conditions in the
first six months of 1999. Other raw material costs as a percentage of net sales
increased to 17.6% in the first six months of 1999, compared with 14.8% in the
first six months of 1998. This increase is due to a decrease in the sales price
per copper
12
<PAGE> 13
pound sold, as discussed above, which more than offset the slight decrease in
raw materials per pound of copper sold. Depreciation, labor and overhead costs
as a percentage of net sales increased to 17.7% in the first six months of 1999
compared to 11.8% in the first six months of 1998. This increase is due to an
increase in depreciation labor and overhead per pound of copper sold relating to
the Company's expansion projects as well as a lower sales price per copper pound
of product sold as discussed above.
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. The price
of copper decreased during the first six months of 1999, necessitating a
decrease in the LIFO reserve of $1.3 million that resulted in an increase to the
inventory value and a decrease in cost of goods sold. In the first six months of
1998, the price of copper decreased, necessitating a decrease in the LIFO
reserve that resulted in an increase to the inventory value and a decrease to
the cost of goods sold of $2.0 million. At June 30, 1999, LIFO cost exceeded the
market value of the inventory. The amount in which the June 30, 1999 LIFO cost
exceeded the market value of the inventory was less than the amount established
at March 31, 1999. Therefore, there was a reduction in the lower of cost or
market reserve and a decrease in the cost of goods sold in the amount of $1.3
million. The resulting lower of cost or market reserve at June 30, 1999 was $2.2
million. At June 30, 1998, LIFO cost exceeded the market value of the inventory.
However, the excess did not require an addition to the lower of cost or market
reserve because the reserve previously established, in the amount of $1.3
million, was adequate to adjust for the amount of cost over market. Future
reductions in the price of copper could require the Company to record lower of
cost or market adjustments against the related inventory balance which would
result in a negative impact on net income. In addition, if the quantity of
inventory decreases in any period, copper that is carried in inventory at a cost
different from the cost of copper in the period in which the reduction occurs
will be included in cost of goods sold at the different price.
Due to the items discussed above, Gross profit decreased to $15.2
million, or 12.8% of net sales, for the first six months of 1999 compared to
$27.9 million, or 22.0% of net sales, for the first six months of 1998.
General and administrative expenses were $2.4 million, or 2.1% of net
sales, in the first six months of 1999 compared to $2.1 million, or 1.7% of net
sales, in the first six months of 1998. This increase in general and
administrative expenses was due to increased expenses related to the Company's
increased sales volume. As a percentage of sales, this increase was caused by
the dollar increase in general and administrative costs as well as the decrease
in the sales price per copper pound sold. There was no provision for bad debts
in the first six months of 1999 compared to $375,000 in the first six months of
1999. Selling expenses for the first six months of 1999 were $7.0 million, or
5.9% of net sales, compared to $6.6 million, or 5.2% of net sales, in the first
six months of 1998. Freight charges per copper pound of product shipped
decreased slightly because the Company shipped a greater percentage of its sales
to geographic locations closer to the Company's plant in the first six months of
1999 compared to the same period of 1998. This decrease was offset in part by
the decrease in the sales price per copper pound sold.
Net interest expense increased to $1.1 million in the first six months
of 1999 compared to $520,000 in the first six months of 1998. The increase was
due to a higher average debt balance outstanding during the first six months of
1999 than the comparable period during 1998, and reduced by the capitalization
of interest related to the Company's copper rod fabrication facility
construction in the first six months of 1998. This increase in average debt
outstanding funded capital expenditures and additional
13
<PAGE> 14
working capital. As a result of the decreased cost of copper in the first six
months of 1999 compared to the comparable period of 1998, the amount of working
capital necessary for inventory decreased, but was offset by increased
quantities of inventory and an increased accounts receivable balance.
The Company's effective tax rate decreased to 38.5% in the first six
months of 1999 compared to 39.9% in the first six months of 1998. This decrease
was due to the accrual for a non deductible penalty in the first six months of
1998 (See Part II - Item 1. Legal Proceedings). Without the accrual of this
amount, the Company's effective tax rate in the first six months of 1998 would
have been 39.5%.
As a result of the foregoing factors, the Company's net income
decreased to $2.8 million in the first six months of 1999 from $11.0 million in
the first six months of 1998.
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 payment terms to most of its customers that
exceed terms that it receives from its suppliers. 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 has been amended six times since June 9, 1997 to change, among other
items, the maximum borrowing amount, the term of the loan covenants and the
allowable purchases of the Company's common stock. The Financing Agreement
provides for maximum borrowings of the lesser of $65.0 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 banks. The calculated
maximum borrowing amount available at June 30, 1999, as computed under the
Financing Agreement, was $62.9 million. The Financing Agreement is unsecured and
contains customary covenants and events of default. The Company was in
compliance with these covenants, as amended, as of June 30, 1999. Pursuant to
the Financing Agreement, the Company is prohibited from declaring, paying or
issuing cash dividends. At June 30, 1999, the balance outstanding under the
Financing Agreement was $52.7 million. Amounts outstanding under the Financing
Agreement are payable on May 31, 2001 with interest due quarterly based on the
bank's prime rate or LIBOR Rate options, at the Company's election.
Cash used by operations was $762,000 in the first six months of 1999
compared to $709,000 million in the first six months of 1998. This increase in
cash used by operations is primarily the result of a decrease in net income and
a greater increase in accounts receivable during the first six months of 1999
compared to 1998 offset by lower copper prices in the first six months of 1999
compared to 1998. Cash used in investing activities decreased from $15.3 million
in the first six months of 1998 to $5.9 million in the first six months of 1999.
In both periods, these funds were used primarily to increase the Company's
production capacity and to purchase equipment for use in the Company's vertical
integration projects that are discussed in the following paragraph. The increase
in cash provided by financing activities was due primarily to borrowings in the
first six months of 1999 and 1998, the proceeds of which were used to fund the
activities discussed above.
14
<PAGE> 15
During 1999, the Company expects to expend capital for additional
manufacturing equipment for its residential and commercial wire operations. In
addition, the Company plans to complete the construction of its new facility to
manufacture polyvinyl chloride ("PVC") which was substantially complete at June
30, 1999. This PVC manufacturing facility will allow the Company to produce its
own PVC instead of purchasing it from outside sources. During 1998 the Company
completed the construction of its copper rod fabrication facility which allows
the Company to manufacture a portion of its own copper rod requirements instead
of purchasing rod from outside vendors. The Company believes that both of these
vertical integration projects will reduce the cost of the Company's raw
materials. The total capital expenditures in 1999 associated with the PVC
facility and the additional manufacturing equipment are estimated to be
approximately $10.0 million. The Company also expects its working capital
requirements to increase during 1999 as a result of expected continued increases
in sales. Moreover, the Company expects that the inventory levels necessary to
support sales of additional wire products will continue to grow. 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.
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 900,000 shares, or approximately 5.6%, of
its outstanding common stock dependent upon market conditions. Subsequent Board
actions increased this authorization to 946,000. As of July 31, 1999, the
Company had repurchased an aggregate of 946,000 shares of its common stock in
the open market completing this program.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written to
use two digits rather than four digits to define the applicable year. Any
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
temporary inability to process transactions or engage in normal manufacturing or
other business activities.
The Company has completed its initial review of the impact of the year
2000 issue on the Company's information systems and support systems, including
hardware and software used in the manufacture and distribution of its products.
Based on the Company's initial inventory and assessment of its systems, the
Company does not believe that any modifications to or replacement of its
information technology or other systems are necessary as a result of the year
2000 problem. Unrelated to any potential year 2000 issues, the Company is in the
process of replacing its financial accounting software, and the Company expects
the new system to be operational by year-end 1999 and to be fully Year 2000
compliant.
The Company has initiated communications with its significant third
party suppliers and customers to determine the extent to which the Company may
be vulnerable to their failure to correct their own year 2000 issues. The
Company intends to continue such communications in 1999. The Company does not
participate in any electronic data interchange with any of its principal vendors
and only participates with a limited number of customers. As a result, the
Company's vulnerability to third party Year 2000 failures should be limited. The
Company believes its significant trading partners have addressed year 2000
issues, but their failure to do so could have a material adverse effect on the
Company's operations.
A contingency plan has been developed for dealing with the most
reasonably likely year 2000 worst case scenario. The Company currently plans to
implement the steps necessary to carry out the contingency plan by December 31,
1999.
15
<PAGE> 16
The Company believes that the cost of its year 2000 identification,
assessment, remediation and testing efforts will not exceed $100,000, and, to
date, the Company has incurred costs significantly less than that amount in
connection with such efforts. The costs and timing of such efforts by the
Company are based on management's current evaluation using available
information. Factors that might cause material changes include, but are not
limited to availability of key year 2000 personnel, the readiness of third
parties and the Company's ability to respond to unforeseen year 2000
complications.
While the Company believes its efforts to address the year 2000 issue
will allow the Company to successfully avoid any material adverse effect on the
Company's operations or financial condition, it recognizes that failure by the
Company, its customers or vendors to resolve adequately the year 2000 problem on
a timely basis could, in a most reasonably likely worst case scenario, limit its
ability to manufacture and distribute its products and process its daily
business transactions for a period of time, especially if such failure is
coupled with infrastructure failures.
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.
16
<PAGE> 17
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 off-site management of a defined group of chemicals, including
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 a 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 has filed an Answer
to the Complaint and has requested an informal settlement conference and a
hearing on all matters alleged by the EPA. The Company intends to vigorously
defend itself in this matter.
ITEM 4. SUBMISSION OF MATTERS IN A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the stockholders of the Company was held in
McKinney, Texas at 9:00 a.m., local time, on May 4, 1999.
17
<PAGE> 18
(b) Proxies were solicited by the Board of Directors of the Company
pursuant to Regulation 14A under the Securities and Exchange Act of
1934. There was no solicitation in opposition to the Board of Directors
nominees as listed in the proxy statement and all of such nominees were
duly elected.
(c) Out of a total of 15,628,222 shares of the Company's common stock
outstanding and entitled to vote, 14,678,834 shares were present in
person or by proxy, representing approximately 94 percent of
outstanding shares. The first matter voted on by the stockholders, as
fully described in the proxy statement for the annual meeting was the
election of Donald E. Courtney, Joseph M. Brito, Daniel L. Jones, John
P. Pringle, Vincent A. Rego, William R. Thomas and John Wilson as
directors of the Company. No nominee received less than 99% of the
shares voted.
The second matter voted on by the stockholders was a resolution to
approve Ernst & Young as the auditor of the Company's financial
statements for the year ending December 31, 1999. The resolution was
adopted with the holders of 14,634,874 shares voting in favor of the
resolution and 32,233 voting against the resolution. Holders of 11,727
abstained from voting on the resolution.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fifth Amendment to Second Amended and Restated Financing
Agreement dated as of May 10, 1999 by and among Encore Wire
Corporation, NationsBank of Texas, N.A. and Comerica Bank -
Texas.
10.2 Sixth Amendment to Second Amended and Restated Financing
Agreement dated as of June 24, 1999 by and among Encore Wire
Corporation, NationsBank of Texas, N.A. and Comerica Bank -
Texas.
(b) No reports on Form 8-K were filed by the Company during the
three months ended June 30, 1999.
18
<PAGE> 19
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: August 13, 1999 /s/ Vincent A. Rego
--------------------------------------------------
Vincent A. Rego,
Chief Executive Officer
Date: August 13, 1999 /s/ Daniel L. Jones
--------------------------------------------------
Daniel L. Jones, President
Chief Operating Officer
Date: August 13, 1999 /s/ Scott D. Weaver
--------------------------------------------------
Scott D. Weaver, Vice President - Finance,
Treasurer and Secretary
(Principal Financial Officer)
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C>
10.1 Fifth Amendment to Second Amended and Restated Financing Agreement
dated as of May 10, 1999 by and among Encore Wire Corporation,
NationsBank of Texas, N.A. and Comerica Bank - Texas 22
10.2 Sixth Amendment to Second Amended and Restated Financing Agreement
dated as of June 24, 1999 by and among Encore Wire Corporation,
NationsBank of Texas, N.A. and Comerica Bank - Texas 29
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIFTH AMENDMENT TO SECOND
AMENDED AND RESTATED FINANCING AGREEMENT
THIS FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AGREEMENT
(the "Amendment" ") dated as of May 10, 1999, is by and among ENCORE WIRE
CORPORATION, a Delaware corporation ("Borrower"), NATIONSBANK, N.A., dba BANK OF
AMERICA, NATIONAL ASSOCIATION (successor by merger to NationsBank of Texas,
N.A.), a national banking association, and COMERICA BANK-TEXAS (Comerica Bank"),
a state banking association, in their individual capacities as "Lenders" (as
such term is defined herein), and NATIONSBANK, N.A., dba BANK OF AMERICA,
NATIONAL ASSOCIATION (successor by merger to 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, 1997, as
amended by the First Amendment to Second Amended and Restated Financing
Agreement, dated as of February 20, 1998 (the "First Amendment"), by the
Second Amendment to Second Amended and Restated Financing Agreement, dated as of
June 15, 1998 (the "Second Amendment"), by the Third Amendment to Second
Amended and Restated Financing Agreement, dated as of August 28, 1998 (the
"Third Amendment") and by the Fourth Amendment to Second Amended and Restated
Financing Agreement, dated as of October 28, 1998 (the "Fourth Amendment") (as
so amended, the "Original Financing Agreement") relating to a $65,000,000
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, 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 and 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
Fifth Amendment.
2. Amendment of Section 7.26. Section 7.26 of the Original Financing
Agreement is amended by deleting Section 7.26 in its entirety and replacing it
with the following:
7.26 Limitation on Indebtedness. Borrower will not be obligated,
directly or indirectly, for borrowed money or otherwise under any
promissory note, bond, indenture or similar instrument, other than (a)
in favor of Agent and the Lenders hereunder, (b) trade indebtedness
incurred in the normal and ordinary course of Borrower's business and
not more than ninety (90) days past due, and (c) (i) other indebtedness
of Borrower, provided
<PAGE> 2
that the payments required in respect of such indebtedness do not
exceed $2,100,000.00 in the aggregate during any 12-month period and
the Agent gives its consent to such other indebtedness, which shall not
be unreasonably withheld.
3. Amendment of Section 7.31. Section 7.31 of the Original Financing
Agreement is amended by deleting Section 7.31 in its entirety and replacing it
with the following:
7.31 Redemptions and Acquisition of Shares. Borrower will not make any
payment on account of the purchase, redemption or other acquisition or
retirement of any shares of capital stock, provided, that
notwithstanding the foregoing, for so long as no Event of Default shall
have occurred and be continuing, and no other event or condition which
is reasonably expected to result in a Material Adverse Effect or would
be the subject of a required notice under paragraph 7.13 is in
existence, Borrower shall not be prohibited from repurchasing shares to
be held as treasury shares, provided further that (i) the aggregate
number of such shares purchased after May 1, 1999, shall not exceed
1,635,000 and the aggregate purchase price paid by Borrower for all
such shares shall not exceed the maximum amount of $23,700,000.00, and
(ii) no Event of Default shall result from, or exist immediately
following, any such repurchase.
4. 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.
5. Miscellaneous.
5.1 Headings. Section headings are for reference only and shall not
affect the interpretation or meanings of any provision of this Amendment.
5.2 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.
5.3 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW.
5.4 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.
5.5 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
2
<PAGE> 3
CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR
AMONG THE PARTIES.
REST OF PAGE INTENTIONALLY LEFT BLANK
3
<PAGE> 4
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
-----------------------------------
Scott Weaver, Vice President
LENDERS AND AGENT:
NATIONSBANK, N.A.,
dba BANK OF AMERICA,
NATIONAL ASSOCIATION,
Individually and as Agent
By:
-----------------------------------
Todd M. Bums, Vice President
COMERICA BANK-TEXAS
By:
-----------------------------------
William J. Rolley, Vice President
4
<PAGE> 5
CONFIRMATION OF GUARANTY
EWC Leasing Corp. ("Guarantor"), a wholly-owned subsidiary of Encore
Wire Corporation, hereby acknowledges the matters covered by the Fifth Amendment
to Second Amended and Restated Financing Agreement to which this Confirmation of
Guaranty is attached and confirms that, notwithstanding such matters, the
Guaranty By Corporation dated as of June 9, 1997 issued by Guarantor to and in
favor of NationsBank of Texas, N.A., (and now in favor of NationsBank, N.A., dba
Bank of America, National Association as a result of the merger of NationsBank
of Texas, N.A. with and into NationsBank, N.A.) and the Guaranty By Corporation
dated as of June 9, 1997 issued by Guarantor to and in favor of Bank of America,
Texas, N.A., assigned to Comerica Bank, National Association, remain in full
force and effect as continuing obligations of Guarantor, enforceable against
Guarantor in accordance with their respective terms.
In Witness Whereof, this Confirmation of Guaranty is executed and
delivered as of the ___ day of May, 1999.
EWC LEASING CORP.
By: /s/ SCOTT D. WEAVER
------------------------------
Scott D. Weaver
Vice President
5
<PAGE> 1
EXHIBIT 10.2
SIXTH AMENDMENT TO
SECOND AMENDED AND RESTATED
FINANCING AGREEMENT
AND CONSENT AND WAIVER
THIS SIXTH AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AGREEMENT
AND CONSENT AND WAIVER (the "Amendment") dated as of June 24, 1999, is by and
among ENCORE WIRE CORPORATION, a Delaware corporation ("Borrower"), NATIONSBANK,
N.A., dba BANK OF AMERICA, NATIONAL ASSOCIATION (successor by merger to
NationsBank of Texas, N.A.), a national banking association, and COMERICA
BANK-TEXAS ("Comerica Bank"), a state banking association, in their individual
capacities as "Lenders" (as such term is defined herein), and NATIONSBANK, N.A.,
dba BANK OF AMERICA, NATIONAL ASSOCIATION (successor by merger to 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").
WITNESSETH:
WHEREAS, the Borrower, the Agent, and the Lenders are parties to the
Second Amended and Restated Financing Agreement, dated as of June 9, 1997, as
amended by the First Amendment to Second Amended and Restated Financing
Agreement, dated as of February 20, 1998 (the "First Amendment"), by the Second
Amendment to Second Amended and Restated Financing Agreement, dated as of June
15, 1998 (the "Second Amendment"), by the Third Amendment to Second Amended
and Restated Financing Agreement, dated as of August 28, 1998 (the "Third
Amendment"), by the Fourth Amendment to Second Amended and Restated Financing
Agreement, dated as of October 28, 1998 (the "Fourth Amendment") and by the
Fifth Amendment to Second Amended and Restated Financing Agreement, dated as of
May 10, 1999 (the "Fifth Amendment") (as so amended, the "Original Financing
Agreement") relating to a $65,000,000 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 to effect a corporate reorganization
("Reorganization") pursuant to which Borrower shall contribute all of its
operating assets to GP and to LP, which corporations may, in turn, contribute
all of such operating assets to the Partnership (as such terms are defined below
in Section 2 of this Amendment);
WHEREAS, Agent and the Lenders are willing to consent to such
reorganization on the terms and conditions contained herein and, accordingly,
desire to amend the Original Financing Agreement in accordance with the terms
and provisions of this Amendment;
<PAGE> 2
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 and 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
Sixth Amendment.
2. Amendment of ARTICLE I. ARTICLE I of the Original Agreement as
amended by deleting paragraph 1.19, paragraph 1.26, paragraph 1.28, paragraph
1.49, paragraph 1.77, paragraph 1.81, paragraph 1.83, in their entireties and
replacing them with the corresponding revised paragraph set forth below, by
renumbering the paragraph defining "Comerica Bank" as paragraph 1.88 instead of
paragraph 1.87, and by adding the following paragraphs 1.89 through 1.93 as new
paragraphs at the end of such ARTICLE I:
1.19 "Contract Term" means the effective date specified in the
preamble of this Agreement and continuing through May 31, 2001.
1.26 "Eligible Accounts" means the net amount of the accounts of
Borrower and its Subsidiaries which own accounts which meet each of the
following criteria: (a) payment terms are within Borrower's or such
Subsidiary's ordinary course of business, and the account is aged less
than one hundred twenty (120) days from the date of invoice and arose
in the ordinary course of business from the bona fide sale of Inventory
under an enforceable agreement, and such Inventory has been fully
delivered thereunder; (b) the title of Borrower or such Subsidiary to
the account is absolute and is not subject to any assignment, claim,
lien or security interest; (c) the full amount shown on the books of
Borrower or such Subsidiary and on the invoice evidencing the account,
and on the Borrowing Base Report delivered to Agent, is owing to
Borrower or such Subsidiary, as appropriate, and no partial payment has
been made thereon, except as otherwise may be shown on such invoice and
disclosed to Agent; (d) the account is not subject to any dispute,
claim of reduction, counterclaim, set-off, recoupment or any claim for
credits, allowances or adjustments by the account debtor, except for
customary discounts allowed for prompt payment as may be noted on the
invoice evidencing such account, or as has been disclosed to and
approved by Agent; (e) the account is not an account that Agent in its
sole discretion determines to be an unacceptable credit risk at the
time of such determination; (f) the account debtor has not rejected,
returned or refused to accept any Inventory relating to the transaction
from which the account arose; (g) the account does not arise out of a
contract or purchase order that, by its terms, forbids assignment,
conditions assignment on consent by the account debtor or otherwise
purports to make an assignment thereof conditional, void or
unenforceable; (h) neither Borrower nor such Subsidiary has received
any notice and has no knowledge of the dissolution or termination of
existence of any corporate account debtor, or the insolvency, business
failure or the filing of a petition in bankruptcy by or against any
account debtor. Notwithstanding the
2
<PAGE> 3
foregoing, the total amount at any time includable in Eligible Accounts
with respect to any account debtor shall not exceed an amount equal to
ten percent (10.0%) of the aggregate amount of all accounts of Borrower
its such Subsidiaries which otherwise meet all criteria for being
Eligible Accounts (including those of such account debtor). Eligible
Accounts shall not include any of the following: "contra accounts;"
accounts subject to credit memos or accounts in connection with
"C.0.D." sales, "bill and hold " sales, guaranteed sales, consignment
sales or other special billing arrangements; amounts, if any,
excludable in respect of returned inventory; amounts owing by any
Affiliate; all amounts owing by any account debtor with respect to
which more than twenty-five percent (25.0%) of its aggregate amount of
accounts owing to Borrower and such Subsidiary is aged one hundred
twenty (120) or more days from the date of invoice; all amounts owing
by the United States or any state or local government (unless
otherwise expressly agreed by Agent); amounts owing by any account
debtor whose principal place of business is located outside the United
States.
1.28 "Eligible Inventory" means copper raw material inventory and
finished goods inventory owned by Borrower or any of its Subsidiaries
which is wire and cable inventory but unless otherwise agreed by Agent,
does not in any event include (a) Inventory which is subject to any
security interest, lien, encumbrance or claim by any Person, (b)
Inventory acquired by Borrower or such Subsidiary other than in the
ordinary course of business (except pursuant to the Reorganization),
and (c) Inventory which is damaged or obsolete or which otherwise is
not in good saleable condition. Eligible Inventory shall be valued at
the lesser of its cost or current market value, in a manner acceptable
to Agent.
1.49 "Inventory" means all of Borrower's or any Subsidiary's inventory
now or hereafter owned or acquired, including raw materials, work in process,
finished goods and all other goods held for sale or lease, wherever located.
"Inventory" also includes returned inventory.
1.77 "Receivables" means all present and future accounts, chattel
paper, contract rights, documents, instruments, deposit accounts, and general
intangibles now or hereafter owned, held, or acquired by Borrower or any
Subsidiary and includes, without limitation, all of the following: all of
Borrower's or any Subsidiary's accounts receivable, including all rights to
payment for goods sold or leased or for services rendered, whether or not earned
by performance (and in any case where an account arises from the sale of goods,
the interest of Borrower or such Subsidiary in such goods); lease receivables;
license receivables; notes receivable; all other rights to receive payments of
money from any Person; documents of title; warehouse receipts; Borrower's or any
Subsidiary's right, title and interest under equipment leases; Borrower's or any
Subsidiary's rights under any service, lease rental, consulting or similar
agreements; trademarks, trade names and service marks; rights or claims under
contracts; all tax refunds or claims for tax refunds; books of account, customer
lists and other records relating in any way to any of the foregoing.
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1.81 "Required Lenders" means, at any date of determination, Lenders
having in the aggregate at least 80% (in Dollar amount) of the
aggregate amount of the outstanding Commitments (or, if such
Commitments have terminated or expired, the aggregate outstanding
principal amount of the Loans and the aggregate Letter of Credit
Liabilities).
1.83 "Revolving Credit Limit" means the amount of Sixty-Five Million
Dollars ($65,000,000) for the period commencing August 28, 1998 until
the last day of the Contract Term.
1.88 "Comerica Bank" means Comerica Bank-Texas in its individual
capacity as a Lender.
1.89 "GP" means EWC GP Corp., a Delaware corporation, and a
wholly-owned Subsidiary of Borrower which is the sole general partner
of the Partnership.
1.90 "LP" means EWC LP Corp., a Delaware corporation and a wholly-owned
Subsidiary of Borrower which is the sole limited partner of the
Partnership.
1.91 "Partnership" means Encore Wire Limited, a Texas limited
partnership organized to succeed to the business of Borrower and which
is owned entirely by GP as general partner and LP as limited partner."
1.92 "Reorganization" has the meaning set forth in paragraph 7.24.
1.93. "EWC Aviation" " means EWC Aviation, Inc., a Delaware corporation
and a wholly-owned Subsidiary of Borrower.
3. Amendment of ARTICLE VII. ARTICLE VII of the Original Financing
Agreement is amended by deleting ARTICLE VII, as amended, in its entirety and
replacing it with the following:
"ARTICLE VII. COVENANTS
Throughout the Contract Term and until payment and performance in full
of the Obligations, Borrower agrees that it will comply, and will cause its
Subsidiaries to comply, with the following covenants (unless otherwise allowed
by prior written consent of Agent):
7.1 Compliance Certificate. Within forty-five (45) days following the
end of each fiscal quarter, Borrower shall deliver to Agent a certificate signed
by the president or chief financial officer of Borrower certifying to Agent that
no event or condition that would be the subject of a required notice under
paragraph 7.12 or paragraph 7.13 is in existence as of the date of such
certificate. Such certificate shall be deemed to be a continuing representation
and warranty pending any subsequent certification or notification by Borrower
respecting its
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compliance or non-compliance with this Agreement, and Borrower acknowledges
that Agent shall rely upon the same in making loans under the Facility.
7.2 Authority. Immediately following any effective change thereof (and
at such other times, from time to time, at the request of Agent) Borrower shall
certify to Agent the names and signatures of all Persons authorized to execute
and deliver Borrowing Base Reports to Agent and any other documentation
contemplated by or relating to any of the Loan Documents.
7.3 Books and Records. Inspection.
7.3.1 Books and Records. Borrower and each Subsidiary shall keep and
maintain proper, complete and consistent books of record and account
respecting its affairs and financial condition in accordance with GAAP.
7.3.2 Inspection. . Agent shall have the right without hindrance or
delay to conduct field examinations to inspect, audit and copy
Borrower's and each Subsidiary's books, records, journals,
correspondence and other records and data relating to its business and
its properties. During normal business hours, Agent is authorized to
discuss Borrower's and each Subsidiary's affairs with any Person,
including without limitation employees of Borrower and such Subsidiary,
as Agent may deem necessary in relation to Borrower's and such
Subsidiary's financial condition or Agent's rights under the Loan
Documents. To the extent not prohibited under the terms of Borrower's
or any Subsidiary's agreement with any credit reporting service, bureau
or similar service, Agent shall have full access to all records
available to Borrower and such Subsidiary from such credit reporting
service, bureau or similar service and shall have the right to examine
and make copies of any such records. Agent may exhibit a copy of this
Agreement to such service and such service shall be entitled to rely on
the provisions hereof in providing access to Agent as provided herein.
7.4 Corporate Existence. Borrower and each Subsidiary shall preserve
and maintain its corporate or partnership existence, good standing and authority
to transact business in all jurisdictions where necessary for the proper conduct
of its business, and shall maintain all of its properties, rights, privileges
and franchises necessary or desirable in the normal conduct of its business.
7.5 Annual Financial Statements. Borrower shall deliver to Agent, as
soon as practicable after the end of each fiscal year, and in any event within
one hundred forty-five (145) days thereafter, its unqualified audited
consolidated and consolidating balance sheet as of the end of such fiscal year,
and its audited consolidated and consolidating statement of income and retained
earnings and consolidated and consolidating statements of cash flow, in
reasonable detail, prepared in accordance with GAAP and certified by an
independent certified public accounting firm acceptable to Agent as fairly
presenting Borrower's financial condition and results of operations. Such
financial statements shall be accompanied by a copy of the report to
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management delivered to Borrower by such accountants and also by a statement
signed by Borrower's president or chief financial officer representing to Agent
that such financial statements are true and complete and fairly present
Borrower's and its Subsidiaries' financial condition and results of operation,
and that no event or condition that would be the subject of a required notice
under paragraph 7.12 or paragraph 7.13 is in existence as of the date of
delivery of such statements.
7.6 Interim Financial Statements. Borrower shall deliver to Agent, as
soon as practicable after the end of each fiscal Quarter and in any event within
forty-five (45) days thereafter, a consolidated and consolidating balance sheet
as of the end of such quarter, and consolidated and consolidating income
statement for such quarter and for the period from the beginning of the current
fiscal year to the end of such quarter, in reasonable detail and prepared in
accordance with GAAP. Such financial statements shall be accompanied by a
statement signed by Borrower's president or chief financial officer representing
to Agent that such financial statements are true and complete and fairly present
Borrower's and its Subsidiaries' financial condition and results of operations,
and that no event or condition that would be the subject of a required notice
under paragraph 7.12 or paragraph 7.13 is in existence as of the date of
delivery of such statements.
7.7 SEC Filings. Borrower shall deliver to Agent a correct and complete
copy of (i) each Form 10-K Report filed with the Securities and Exchange
Commission, which shall be delivered to Agent as soon as possible upon filing
thereof and in any event within one hundred forty-five (145) days after the end
of each fiscal year of Borrower, (ii) each Form 10-Q Report filed with the
Securities and Exchange Commission, which shall be delivered to Agent as soon as
possible upon filing thereof and in any event within forty-five (45) days after
the end of each fiscal quarter of Borrower and (iii) each other filing from time
to time made with the Securities and Exchange Commission, which shall be
delivered to Agent as soon as possible upon filing thereof.
7.8 Borrowing Base Reports. On or before the thirtieth (30th) day of
each calendar quarter, and at such other times as Agent may request, Borrower
shall execute and deliver to Agent, in form satisfactory to Agent and Borrower,
a Borrowing Base Report setting forth a certification of Eligible Accounts and
Eligible Inventory as of the last day of the preceding calendar quarter and such
other date as may be specified in such other Borrowing Base reports Borrower may
deliver to Agent, and calculation of the Borrowing Base. Each Borrowing Base
Report shall include a reconciliation of the calculation of the Borrowing Base
as certified in the most recent Borrowing Base Report delivered to Agent, and be
accompanied by such documents and supporting information relating to Eligible
Accounts and Eligible Inventory as Agent may request. Borrower and each
Subsidiary owning Eligible Accounts or Eligible Inventory shall maintain, and
shall furnish to Agent at Agent's request, such supporting documents or copies
as Agent may require including, but not limited to: a schedule of Eligible
Accounts created, and Eligible Inventory purchased and received, since the
previous Borrowing Base Report delivered to Agent; copies of invoices and
supporting delivery or service records in connection therewith; a schedule of
collections received; copies of credit memos or other advices of credit or
reductions
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against amounts previously billed; and such other reports as Agent may request
from time to time. If any of such records or reports are prepared by an
accounting service or other agent, Borrower and each Subsidiary owning Eligible
Accounts or Eligible Inventory hereby authorizes such service or agent to
deliver such records, reports and related documents to Agent. Agent may exhibit
a copy of this Agreement to any such service or agent and such service or
agent shall be entitled to rely on the provisions hereof in providing such
documentation to Agent. Each Borrowing Base Report shall bear a signed statement
by an authorized officer of Borrower and each Subsidiary owning Eligible
Accounts or Eligible Inventory certifying the accuracy and completeness of all
information included therein and shall incorporate therein by reference, as if
fully set forth therein, all the terms and provisions hereof. The execution and
delivery of a Borrowing Base Report shall in each instance constitute an
agreement, representation and warranty by Borrower to Agent that: Borrower or
its Subsidiaries purporting to own Eligible Accounts or Eligible Inventory, as
appropriate, is the sole owner of the Receivables and Inventory included therein
free from any lien, security interest or encumbrance; each account included
therein is in existence, unconditional and valid, and arose from a bona fide
outright sale of Inventory by Borrower and each Subsidiary owning Eligible
Accounts or Eligible Inventory, in the ordinary course of business, for
liquidated amounts as set forth in the Borrowing Base Report, and such Inventory
has been delivered or provided to the respective account debtors; no account
included therein arose in connection with a contract or assignment which
purports to make an assignment or security interest therein void or conditions
such assignment or security interest on consent of the account debtor; no
account is subject to any sale, assignment, claim or security interest of any
character, and neither Borrower nor any Subsidiary owning Eligible Accounts or
Eligible Inventory will make any sale or other assignment thereof or create any
other security interest therein; no account is subject to any claim for credit,
deduction, allowance, extension or adjustment, defense, dispute, setoff or
counterclaim, except for discounts for early payment and volume purchases and
credits for returns of merchandise, as allowed by Borrower and each Subsidiary
owning Eligible Accounts or Eligible Inventory in the ordinary course of
business as previously disclosed to Agent and with respect to early payment
discounts, as reflected on the face of the invoice evidencing such account; all
Inventory reflected in such Borrowing Base Report is held for sale in the
ordinary course of the business of Borrower and each Subsidiary owning Eligible
Accounts or Eligible Inventory, and no such Inventory is located at any location
in breach of the requirements of this Agreement and no negotiable documents have
been issued in respect of any such Inventory; no Inventory reflected in such
Borrowing Base Report is returned Inventory subject to the restrictions of
paragraph 7.22 unless otherwise disclosed to Agent in writing.
7.9 Aging Reports. Contemporaneously with delivery of each Borrowing
Base Report, and in any event within thirty (30) days after the end of each
calendar quarter, Borrower shall furnish to Agent an analysis of amounts owing
on all accounts included within the Receivables, showing an aging as follows:
(i) those aged 60 days or less from date of invoice, (ii) those aged over 60
days, but less than 91 days, from date of invoice, (ii) those aged over 90 days,
but less than 121 days, from date of invoice, and (iii) those aged over 120 days
from date of invoice. Such analysis shall include a listing of the name and
complete address of each account debtor and such other information as Agent may
request.
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7.10 This Paragraph Is Intentionally Deleted.
7.11 Notification of Contingent Liabilities. Promptly upon receiving
notice or otherwise becoming aware thereof, Borrower shall notify Agent of any
pending or threatened lawsuit, claim, action, liability, investigation or
proceeding against it or any of its Subsidiaries that would be treated as a
contingent liability under GAAP and is in an amount in excess of $100,000.00.
7.12 Notification of Material Changes. Borrower will notify Agent in
writing at least thirty (30) days prior to the occurrence of any of the
following: (i) change of Borrower's or any Subsidiary's name, (ii) change of
Borrower's or any Subsidiary's address or principal place of business, (iii)
change of the location of Borrower's or any Subsidiary's books and records, (iv)
the opening of any new place of business or the closing of any existing place of
business (excluding any such places of business that result solely from
arrangements made by Borrower or any Subsidiary with its sales
representatives) in the ordinary course of business, or (v) use of any trade
name, fictitious name or other assumed name. Borrower shall promptly notify
Agent of any change in any other material fact or circumstance represented or
warranted in any of the Loan Documents.
7.13 Notification Regarding Default. Borrower shall immediately notify
Agent in writing upon becoming aware of the existence of any condition or event
which constitutes an Event of Default or any condition or event which, after
notice or lapse of time, or both, would constitute an Event of Default, therein
specifying the nature and period of existence thereof and what action Borrower
is taking or proposes to take with respect to such condition or event. Borrower
shall immediately notify Agent in writing, if it knows, or reasonably expects,
that an Event of Default will occur, therein specifying the nature of the
anticipated Event of Default. Without limiting the foregoing, Borrower will also
immediately notify Agent of any of the following: (i) Borrower's or any
Subsidiary's board of directors has authorized the filing by such Person of a
petition in bankruptcy, (ii) Borrower is aware that any covenant under this
Agreement has been breached, or reasonably expects that any such covenant will
be breached, (iii) Borrower or any Subsidiary owning Eligible Receivables is
aware that any account debtor obligated on any Receivables is in bankruptcy
(provided, that no such notice shall be required with respect to any such
account debtor (a) from whom the aggregate account balance owing to Borrower or
any Subsidiary owning Eligible Receivables is less than ten percent (10%) of the
total aggregate amount of the sum or all accounts owned by Borrower and all
Subsidiaries owning Eligible Receivables, and (b) to whom the aggregate sales of
Borrower and all Subsidiaries owning Eligible Receivables during the preceding
twelve (12) calendar months was less than ten percent (10%) of the total
aggregate of all of such sales during such period), and (iv) repossession or
attempted repossession by any Person of any Inventory.
7.14 Payment of Taxes. Borrower and each Subsidiary shall promptly
pay, or cause to be paid, when due, any and all taxes except such taxes as may
be contested in good faith by appropriate proceedings, provided, that adequate
reserves shall be maintained as are appropriate according to GAAP. At Agent's
request pending resolution of any such contest and prior to the
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delinquency of such tax, Borrower or the affected Subsidiary shall furnish to
Agent a cash reserve in the amount of the tax, together with a reasonable
additional sum to pay all projected costs, interest and penalties in connection
therewith, conditioned that such tax, together with applicable interest, cost,
and penalties, if any, be timely paid to the extent required upon resolution of
such contest. Borrower agrees that it shall immediately notify Agent of the
initiation of any such contest and advise Agent from time to time of the status
thereof. Borrower or the affected Subsidiary shall promptly pay any amounts
adjudged to be due pursuant to any such contest, with all costs, penalties, and
interest thereon, before such judgment becomes final or any writ or order is
issued under which Borrower's or the affected Subsidiary's property, or any
portion thereof, may become subject to any lien or encumbrance.
7.15 Compliance with Laws. Borrower and each Subsidiary shall comply
with all applicable laws, regulations and orders applicable to it or its
property, a violation of which would reasonably be expected to result in a
Material Adverse Effect. At Agent's request, Borrower will provide Agent with
evidence of Borrower's and each Subsidiary's compliance with Environmental
Requirements.
7.16 Compliance with Agreements. Borrower and each Subsidiary shall
comply in all material respects with all agreements, indentures, mortgages, or
documents binding upon or affecting its property or business.
7.17 Fees, Costs and Expenses. Borrower agrees to promptly pay upon
demand all costs, fees and expenses as provided in paragraph 11.11.
7.18 Subordination Agreements. At Agent's request, all present and
future obligations due by Borrower to Affiliates (excluding ordinary course
items such as travel and expense reimbursements and other similar ordinary
course items determined by agreement) shall be subordinate in right of payment
and claim to the Obligations, pursuant to definitive subordination agreements
executed by Borrower and such Affiliates in form satisfactory to Agent.
7.19 Change of Fiscal Year. Borrower shall notify Agent at least ninety
(90) days prior to the effective date of any change in its fiscal year.
7.20 Employee Benefit Plans. Borrower shall timely deliver the
following to Agent: (a) a copy of any notice of noncompliance received from the
PBGC under Section 4041(b)(2)(c), within three (3) days after receipt of such
notice; (b) a copy of any notice received by Borrower or any ERISA Affiliate, or
the administrator of any Plan, that the PBGC has instituted proceedings to
terminate such Plan or to appoint a trustee to administer such Plan, promptly
upon receipt and in no event more than three (3) days after the receipt of such
notice; (c) a copy of any notice received by Borrower or any ERISA Affiliate
concerning the imposition of any withdrawal liability under Section 4202 of
ERISA, within ten (10) days after receipt thereof by Borrower or such ERISA
Affiliate; (d) a copy of any notification of intention to impose or assert
withdrawal liability under ERISA against Borrower or any ERISA Affiliate,
promptly upon receipt thereof
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and in any event within three (days) of receipt thereof; and (e) a copy of any
notice from the Internal Revenue Service regarding revocation or investigation
of possible revocation of the qualified status of any Plan under the IRC,
promptly upon receipt thereof and in any event within three (3) days after
receipt thereof. If requested by Agent, Borrower shall timely deliver the
following to Agent: (f) a copy of all materials required to be filed with the
PGBC with respect to any Reportable Event, within ten (10) days after the
earlier of the filing or the occurrence thereof; (g) a copy of any notice sent
by Borrower to participants of a Plan of Borrower's intent to terminate such
Plan, no later than the date such notice is required to be provided to
participants under Section 4041(a)(2) of ERISA; (h) a copy of each annual and
other report with respect to each Plan or any trustee created thereunder,
promptly after the filing thereof with the United States Secretary of Labor or
the PBGC; and (i) such additional information concerning any of Borrower's
Employee Benefit Plans as may be requested by Agent. Borrower shall make prompt
payment of all contributions required under all Plans to the extent required to
meet the minimum funding standard set forth in ERISA with respect to such Plans,
but shall reduce contributions or benefits if and to the extent necessary to
avoid an Event of Default hereunder to the extent such reduction is not
prohibited by applicable provisions of ERISA.
7.21 Financial Covenants.
(a) Borrower agrees that the following financial covenants must be
maintained as set forth herein. Borrower's compliance shall be measured
as of the end of each Fiscal Quarter, unless the context provides
otherwise.
1. Fixed Charge Ratio. Fixed Charge Ratio shall not at any
time be less than 2.5 to 1.
2. Funded Debt to EBITDA. Funded Debt to EBITDA shall not at
any time be more than 3.0 to 1.0.
3. Capital Expenditures. Capital Expenditures shall not
exceed in any one fiscal year the amount of $7,500,000;
provided, however, solely with respect to Borrower's
fiscal year ending in 1998, Capital Expenditures may not
exceed $35,000,000.
(b) For purposes of measuring the financial covenants under this
paragraph, the following definitions shall apply, each determined on
a consolidated basis for Borrower and the Subsidiaries according to
GAAP:
1. "Capital Expenditures" means all expenditures which are
classified as capital expenditures according to GAAP.
2. "EBITDA" means an amount equal to the sum of the
following, determined for the preceding four (4)
completed Fiscal Quarters:
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(i) income before provision for income taxes plus (ii)
all interest charges paid or accrued plus (iii)
depreciation and amortization.
3. "Fixed Charge Ratio" means the ratio of the following,
determined for the preceding four (4) Fiscal Quarters:
(a) the sum of income before provision for income taxes
plus Lease Expense plus Interest Expense, (b) divided by
the sum of Lease Expense plus Interest Expense.
As used herein "Lease Expense" means all operating lease
expenses and "Interest Expense" means all interest
charges paid or accrued, excluding capitalized interest,
if any.
4. "Funded Debt" at any time means an amount equal to the
aggregate principal amount outstanding at such time under
the Facility.
7.22 No Liens; Inventory. Borrower covenants and agrees that (i)
neither Borrower nor any Subsidiary will grant, or suffer to exist, any security
interest, lien or other encumbrance on any of its assets other than (A) liens
with respect to indebtedness permitted by paragraph 7.26(c) and (d), (B)
Permitted Encumbrances, and (C) the lien and security interest of Agent in all
of the issued and outstanding capital stock of GP and LP and all of the general
partner and limited partner interests in the Partnership, and (ii) all such
assets shall at all times be and remain free and clear of security interests,
liens or other encumbrances other than Permitted Encumbrances. Borrower
represents and warrants to Agent that all Inventory owned by Borrower or any
Subsidiary shall be held for sale in the ordinary course of its business, and is
and will be fit for such purpose. Borrower and each Subsidiary will keep the
Inventory owned by it in good and marketable condition, at its own expense. All
sales of Inventory shall be in accordance with applicable law. Borrower and each
Subsidiary will maintain a perpetual inventory system for finished goods at all
times. Borrower and each Subsidiary will conduct a physical count of the
Inventory at least once per calendar year and at Agent's request shall promptly
supply Agent with a copy of such count. No negotiable documents have been issued
in respect of any Inventory, and none shall be issued without prior written
notice to Agent. No Inventory is held by Borrower or any Subsidiary on
consignment or approval, or on a sale or return, bill-and-hold, guaranteed sale,
repurchase or similar basis and, no Inventory has been sold or delivered to any
Person on consignment or approval, or on a sale or return, bill-and-hold,
guaranteed sale, repurchase or similar basis. Neither Borrower nor any
Subsidiary will acquire or accept any Inventory on consignment or approval, or
on a sale or return, bill-and-hold, guaranteed sale, repurchase or similar basis
without the prior written consent of Agent, and neither Borrower nor any
Subsidiary will sell any Inventory on consignment or approval, or on a sale or
return, bill-and-hold, guaranteed sale, repurchase or similar basis without the
prior written consent of Agent, provided that, this shall not preclude Borrower
or any Subsidiary from holding at its facilities raw materials and other goods
owned by suppliers and other third parties (separately identified and segregated
from the Inventory), in exchange for such consideration as Borrower deems to be
adequate.
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Unless Agent agrees otherwise, all returned Inventory shall be segregated from
all other Inventory, and shall not be reported as Eligible Inventory, unless and
until Borrower or the Subsidiary owning Eligible Inventory demonstrates to
Agent's satisfaction that such returned Inventory is in saleable condition and
meets all criteria for Eligible Inventory. Unless otherwise agreed by Agent, the
amount of such accounts owned by Borrower or any Subsidiary relating to all
returned Inventory shall be deemed excluded from Eligible Accounts. Except for
sales in the ordinary course of business, neither Borrower nor any Subsidiary
will deliver possession or control of any Inventory held at its chief executive
office to any Person without Agent's prior written consent. At Agent's request,
Borrower and each Subsidiary owning Inventory will cause the landlord to execute
and deliver to Agent a landlord's waiver with respect to any leased locations
where any such Inventory will be located, thereby waiving any right to claim a
landlord's lien therein. Borrower or the affected Subsidiary shall immediately
notify Agent upon receipt of any notice from any Person claiming past due rent,
fees or other charges in respect of any Inventory.
7.23 Insurance. Borrower and each Subsidiary shall keep and maintain
adequate insurance with respect to its business and property, written by
insurers acceptable to Agent (or, as to workers' compensation or similar
insurance, self-insurance authorized by the jurisdiction in which it operates).
Such insurance shall be with respect to loss, damages, and liability of amounts
not less than reasonably requested by Agent, and shall include, at minimum,
extended coverage insurance, insurance against business interruption, insurance
for workers compensation, and insurance for general premises liability, fire,
theft, burglary, pilferage, loss in transit, casualty and all risk. Borrower and
each Subsidiary will make timely payment of all premiums required to maintain
such insurance in force. Borrower and each Subsidiary shall deliver copies of
each insurance policy to Agent upon request. If Borrower or any Subsidiary fails
to procure such insurance or to pay the premiums therefor when due, Agent shall
have the right (but with no obligation) to make such payment, which amount
Borrower shall pay to Agent on demand or, at Agent's option (but with no
obligation to do so) Agent may add such amount to the unpaid principal due by
Borrower under the Facility, in which event such amount will be deemed paid and
the aggregate amount thereof shall be treated as a loan under the Facility.
7.24 Sale of Assets. Neither Borrower nor any Subsidiary will sell or
dispose of any assets other than the sale of Inventory, or disposal or
replacement of equipment, in the ordinary course of business; provided, however,
Borrower may contribute all of its operating assets to GP and to LP, which
corporations may, in turn, contribute all of such operating assets to the
Partnership, to effect a corporate reorganization (the "Reorganization") of
Borrower if such transaction is completed by July 31, 1999.
7.25 Dissolution. Liquidation, Merger. Neither Borrower nor any
Subsidiary shall dissolve or liquidate, or become a party to any merger or
consolidation with any Person, provided, EWC Leasing Corp. may be dissolved and
liquidated into Borrower or merged into Borrower or any other Subsidiary.
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7.26 Limitation on Indebtedness. Except as provided below in this
paragraph 7.26, neither Borrower nor any Subsidiary will be obligated, directly
or indirectly, for borrowed money or otherwise under any promissory note,
bond, indenture or similar instrument, other than (a) in favor of Agent and the
Lenders hereunder, (b) trade indebtedness incurred in the normal and ordinary
course of Borrower's or any Subsidiary's business and not more than ninety (90)
days past due, (c) other indebtedness of Borrower or any Subsidiary, provided
that the payments required in respect of such indebtedness do not exceed
$2,100,000.00 in the aggregate during any 12-month period and the Agent gives
its consent to such other indebtedness, which shall not be unreasonably
withheld, and (d) the loans from Borrower to EWC Aviation permitted by
paragraph 7.36; provided, however, following completion of the Reorganization,
the Partnership may borrow from and repay to Borrower and Borrower may make
intercompany loans or advances from time to time to the Partnership in such
amounts as the Borrower deems appropriate, which loans and advances may be used
and expended by the Partnership solely in compliance with the terms and
conditions of this Agreement.
7.27 Limitation on Contingent Liabilities. Neither Borrower nor any
Subsidiary will be directly or indirectly liable in connection with the
obligations of any Person, whether by guarantee, surety, endorsement (other than
endorsement of negotiable instruments for collection in the ordinary course of
business), agreement to purchase or repurchase, agreement to make investments,
agreement to provide funds or maintain working capital, or any agreement to
assure a creditor against loss, other than (a) those in favor of Agent and the
Lenders hereunder, and (b) indemnities by Borrower and its Subsidiaries of
liabilities of directors and officers pursuant to provisions contained in such
Person's articles of incorporation, bylaws, or partnership agreement or
otherwise permitted by applicable law and other contractual indemnities (such as
contractual indemnifications in favor of customers) typically entered into in
the normal course of business or in the course of the issuance and sale of
securities.
7.28 Change in Business. Neither Borrower nor any Subsidiary shall
discontinue, or make any material change in, its business as currently
established, or enter any new or different line of business not directly related
to Borrower's existing line of business; provided, however, the sole and
exclusive business of each of GP and LP shall be to own its respective interest
in the Partnership.
7.29 Change in Management. There will be no change of the personnel
performing the functions of Borrower's Chairman of the Board and President and
Chief Executive Officer as such positions are presently constituted.
7.30 Dividends, Distributions. Borrower will not declare, pay or issue
any dividends or other distributions in respect of its capital stock (other than
distributions declared or paid wholly in shares of capital stock), or
distribute, reserve, secure or otherwise make or commit distributions in respect
of its capital stock. Each of the Partnership, GP and LP may declare and make
dividend or other distributions to their respective parents.
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7.31 Redemptions and Acquisition of Shares. Borrower will not make any
payment on account of the purchase, redemption or other acquisition or
retirement of any shares of capital stock, provided, that notwithstanding the
foregoing, for so long as no Event of Default shall have occurred and be
continuing, and no other event or condition which is reasonably expected to
result in a Material Adverse Effect or would be the subject of a required notice
under paragraph 7.13 is in existence, Borrower shall not be prohibited from
repurchasing shares to be held as treasury shares, provided further that (i) the
aggregate number of such shares purchased after May 1, 1999, shall not exceed
1,635,000 and the aggregate purchase price paid by Borrower for all such shares
shall not exceed the maximum amount of $23,700,000.00, and (ii) no Event of
Default shall result from, or exist immediately following, any such repurchase.
7.32 Bonuses, Consulting Fees to Shareholders and Directors. Neither
Borrower nor any Subsidiary will declare or pay any bonus compensation, or pay
any consulting fees, to any Affiliates in the aggregate for any calendar year in
excess of ten percent (10%) of its prior year's after-tax income.
7.33 Loans to Officers, Directors, Shareholder and Others. Except for
usual and customary extensions of credit to customers of Borrower and its
Subsidiaries made in the ordinary course of its business, Borrower and the
Subsidiaries will not make, in the aggregate, any loans or advances to or for
the benefit of (i) any officer, director or shareholder, other than usual
expense allowances for employees in the ordinary course of business, or (ii) any
officer, director, shareholder or other person or entity in excess of an
aggregate amount of $200,000 at any one time outstanding.
7.34 Transactions with Affiliates. Other than EWC Equipment Loans, the
loans from Borrower to EWC Aviation permitted by paragraph 7.36 and the loans
and advances provided for in the proviso of paragraph 7.26, Borrower will not
make any loans, advances or extensions of credit to or for the benefit of any
Affiliate. Borrower will not make any payment on any obligation owing to any
Affiliate (excluding reasonable expense reimbursements in the ordinary course of
business) unless specifically allowed under any Affiliate Subordination
Agreement or otherwise allowed by Agent. Except for effecting the
Reorganization, Borrower will not enter into any transaction with an Affiliate
except in the ordinary course of business on terms no less favorable to
Borrower, nor more favorable to such Affiliate, than would be obtainable in a
comparable arm's length transaction with a Person who is not an Affiliate.
Except for the Reorganization, Borrower will not enter into any transaction with
an Affiliate unless such transaction is specifically approved by Borrower's
board of directors as being an arm's length transaction on terms no less
favorable to Borrower, nor more favorable to such Affiliate, than would be
obtainable in a comparable arm's length transaction with a Person who is not an
Affiliate.
7.35 Acquisitions. Neither Borrower nor any Subsidiary shall purchase
or otherwise acquire assets from any Person outside the ordinary course of its
business, except for purchases
14
<PAGE> 15
or acquisitions of equipment in an aggregate amount which when added to all
other capital expenditures for such year do not exceed $7,500,000 in any
calendar year.
7.36 Limitation on Investments. Borrower shall not invest in or
otherwise purchase or acquire the securities of any Person, except for (i) the
organization of GP, LP and the Partnership to effect the Reorganization, (ii)
the organization of EWC Aviation, which has a capitalization consisting of (A)
$100,000 in the form of common stock and (B) loans from Borrower not to exceed
$1,000,000 at any one time outstanding, and (iii) ordinary course investments in
securities of the United States and certificates of deposit issued by commercial
banks organized in the United States which have assets in excess of
$1,000,000,000.
7.37 Key Man Life Insurance. Borrower shall keep and maintain "key man"
life insurance on the life of Vincent Rego, the Chairman and Chief Executive-,
Officer of Borrower, in an amount not less than $2,000,000.00 (the "Key Man Life
Insurance"). The Key Man Life Insurance shall be written by financially
responsible companies selected by Borrower and having an A.M. Best rating of
"A-" or better and being in a financial size category of XI or larger, or by
other companies acceptable to Agent. The Key Man Life Insurance policy shall
provide that it will not be canceled or reduced, or allowed to lapse without
renewal. Borrower will advise Agent promptly of any policy cancellation,
reduction or amendment relating to the Key Man Life Insurance.
7.38 Ownership of GP, LP and the Partnership. For as long as any
amounts are outstanding under this Agreement, Borrower shall at all times own
one hundred percent (100%) of the issued and outstanding capital stock of each
of GP and LP, and each of GP and LP shall own one hundred percent (100%) of the
general partner and limited partner interests, respectively, in the Partnership.
7.39 Covenants Cumulative. The covenants contained in this Article VII
are in addition to all other covenants provided in the Loan Documents.
4. Conditions to Amendment. As a condition to the effectiveness of
their respective agreements contained herein, Agent and the Lenders require that
each of the following conditions be satisfied on or before the execution and
delivery of this Amendment:
A. Pledge of Stock and Partnership Interests. Borrower shall have
executed and delivered to Agent, for the ratable benefit of the
Lenders, a Stock Pledge Agreement ("Stock Pledge Agreement") in form
and substance satisfactory to Agent pledging one hundred percent (100%)
of the issued and outstanding capital stock of each of GP and LP as
security for the Obligations. Each of GP and LP shall have executed and
delivered to Agent, for the ratable benefit of the Lenders, a
non-recourse Pledge Agreement ("Pledge Agreement") in form and
substance satisfactory to Agent pledging one hundred percent (100%) of
their respective general partner and limited partner interests in the
Partnership as security for the Obligations.
15
<PAGE> 16
B. Guaranty by EWC Aviation. EWC Aviation shall have executed and
delivered to Agent, for the ratable benefit of the Lenders, a guaranty
of the Obligations substantially the same as the Guaranty of EWC.
C. Legal Opinion. Borrower shall have delivered to Agent a legal
opinion from Thompson & Knight, in form and substance satisfactory to
Agent, dealing with such matters as Agent may reasonably request.
D. Related Certificates. Borrower shall have delivered to Agent such
certificates of existence, good standing, qualification, certified
resolutions of Boards of Directors and certified copies of articles of
incorporation and partnership certificates with respect to Borrower,
GP, LP and the Partnership as Agent may reasonably request.
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. Consent and Waiver. Subject to the satisfaction of the conditions
contained in Section 4. hereof, Agent and the Lenders hereby (a) waive (i) the
application of paragraph 7.24 and paragraph 7.34 under the Original Financing
Agreement solely as such paragraphs relate to effecting the Reorganization and
(ii) the application of paragraph 7.26, paragraph 7.34 and paragraph 7.36 under
the Original Financing Agreement solely as such paragraphs relate to the
formation of EWC Aviation, its capitalization and Borrower's loans to it, and
(b) consent (i) to the Reorganization and (ii) to formation and capitalization
of EWC Aviation as provided in such paragraph 7.26, paragraph 7.34 and paragraph
7.36 . This waiver and consent shall apply only to the Reorganization and the
formation and capitalization of EWC Aviation and not to any other transaction or
series of transactions which are prohibited by such paragraphs.
7. Miscellaneous.
7.1 Headings. Section headings are for reference only and shall not
affect the interpretation or meanings of any provision of this Amendment.
7.2 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. It is the intent of the parties hereto
that all prior amendments to the Second Amended and Restated Financing
Agreement, dated as of June 15, 1998, which have not been expressly incorporated
into the text of this Amendment and which have not otherwise expressly been
superseded or terminated in writing remain a part of the Agreement.
16
<PAGE> 17
7.3 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW.
7.4 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.
7.5 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.
7.6 No Defaults. Borrower hereby represents and warrants to Agent and
the Lenders that no Default and no Event of Default currently exist with respect
to the Agreement and that no such Default or Event of Default shall exist after
giving effect to the Reorganization and other transactions contemplated by this
Amendment.
REST OF PAGE INTENTIONALLY LEFT BLANK
17
<PAGE> 18
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:
----------------------------
Scott Weaver, Vice President
LENDERS AND AGENT:
NATIONSBANK, N.A.,
dba BANK OF AMERICA,
NATIONAL ASSOCIATION,
Individually and as Agent
By:
-----------------------------
Todd M. Burns, Vice President
COMERICA BANK-TEXAS
By:
-----------------------------
William J. Rolley, Vice President
18
<PAGE> 19
CONFIRMATION OF GUARANTY
EWC Leasing Corp. ("Guarantor"), a wholly-owned subsidiary of Encore
Wire Corporation, hereby acknowledges the matters covered by the Sixth Amendment
to Second Amended and Restated Financing Agreement to which this Confirmation of
Guaranty is attached and confirms that, notwithstanding such matters, the
Guaranty By Corporation dated as of June 9, 1997 issued by Guarantor to and in
favor of NationsBank of Texas, N.A.,(and now in favor of NationsBank, N.A., dba
Bank of America, National Association as a result of the merger of NationsBank
of Texas, N.A. with and into NationsBank, N.A.) and the Guaranty By Corporation
dated as of June 9, 1997 issued by Guarantor to and in favor of Bank of America,
Texas, N.A., assigned to Comerica Bank, National Association, remain in full
force and effect as continuing obligations of Guarantor, enforceable against
Guarantor in accordance with their respective terms.
In Witness Whereof, this Confirmation of Guaranty is executed and
delivered as of the ____ day of June, 1999.
EWC LEASING CORP.
By:
------------------------
Scott D. Weaver
Vice President
19
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