1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 1-9929 INSTEEL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0674867 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1373 BOGGS DRIVE, MOUNT AIRY, NORTH CAROLINA 27030 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (336) 786-2141 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of Each Class Name of Each Exchange on Which Registered - --------------------------- ----------------------------------------- COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] The aggregate market value of the common stock held by non-affiliates of the registrant as of January 9, 2001 was $14,731,069. The number of shares outstanding of the registrant's common stock as of January 9, 2001 was 8,460,187. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Company's Proxy Statement to be delivered to shareholders in connection with the 2001 Annual Meeting of Shareholders are incorporated by reference as set forth in Part III hereof.
2 PART I ITEM 1. BUSINESS. GENERAL Insteel Industries, Inc. ("Insteel" or "the Company") is one of the nation's largest manufacturers of wire products. The Company manufactures and markets concrete reinforcing products, industrial wire, nails, tire bead wire and galvanized products for a broad range of construction and industrial applications. Insteel is the parent holding company for two wholly-owned operating subsidiaries, Insteel Wire Products Company ("IWP") and Florida Wire and Cable, Inc. ("FWC"). Insteel's business strategy is driven off of a return on capital framework with the primary objective of creating economic value through the generation of returns that exceed the Company's cost of capital. The Company seeks to achieve leadership positions in its markets and operate as the lowest cost producer. The Company pursues expansion opportunities in existing or related product lines sold to the same customers that leverage off of the Company's infrastructure and core competencies in the manufacture and marketing of wire products. During 2000, the Company furthered this strategy with the acquisition of FWC, a manufacturer of PC strand and galvanized products. The addition of FWC more than tripled the size of Insteel's PC strand business, making the Company the largest producer in North America. Insteel had entered this business in 1994 with the start-up of a new manufacturing facility and had expanded to become one of the leading producers. PRODUCTS CONCRETE REINFORCING PRODUCTS (62% of 2000 consolidated net sales) include welded wire fabric and prestressed concrete strand ("PC strand"). Welded wire fabric is produced as both standard and specially engineered reinforcing products for concrete pipe manufacturers, precasters, distributors and construction companies. PC strand is a sophisticated reinforcing product sold to precasters and posttensioning suppliers that is used for both pretensioned and posttensioned prestressed concrete construction. The Company's concrete reinforcing products are used in concrete pipe and box culverts, concrete elements for bridges, buildings and other concrete structures, and other commercial and residential construction applications. INDUSTRIAL WIRE PRODUCTS (16% of 2000 consolidated net sales) are primarily sold to manufacturers of springs for bedding and furniture, appliances, display racks and a broad range of other products. Product attributes vary with the end use and can include galvanizing for corrosion resistance and intermediate heat-treating, in addition to stringent tolerance requirements and mechanical properties. BULK NAILS (8% of 2000 consolidated net sales) consist of a wide variety of products such as common nails, finishing nails, box nails, sinkers, duplex nails and galvanized nails sold to wholesalers and distributors primarily for construction-related applications. In addition, the Company produces machine quality nails that are used for industrial applications such as pallet manufacturing. GALVANIZED AND OTHER PRODUCTS (6% of 2000 consolidated net sales) include guy strand, Aluminum Conductor Steel Reinforced ("ACSR") support wire and strand, barrier strands and other ancillary products. Guy strand is a seven-wire strand constructed from galvanized high carbon wire that is used in the electrical distribution, telecommunication and cable television industries to support utility poles, traffic lights and electric transmission cables. ACSR support wire and strand are used in electric transmission lines as the load bearing members for aluminum conductors. Barrier products and guide rail strand are used in parking decks and other structures as a barrier medium, as well as for separation media between traffic lanes. TIRE BEAD WIRE (5% of consolidated net sales) is a bronze-plated steel wire sold to tire manufacturers that is used to reinforce the inside diameter of a tire and hold the tire to the wheel. COLLATED NAILS (3% of 2000 consolidated net sales) are comprised of a broad range of brite and galvanized collated nails that are used by a variety of pneumatic nailing tools. The products are sold to distributors and original equipment manufacturers ("OEMs") primarily for construction-related applications. 2
3 MARKETING AND DISTRIBUTION Insteel markets its products through sales representatives who are employees of the Company. The Company's sales organization is aligned with its product lines, assigned to the specific markets served. The Company's products are sold directly to users and through numerous wholesalers, distributors and retailers located nationwide as well as into Canada, Mexico, and Central and South America. Insteel delivers its products primarily by truck using common or contract carriers. CUSTOMERS The Company sells its products to a broad range of customers including OEMs, distributors, wholesalers and retailers. There were no customers that represented 10% or more of the Company's net sales in 2000 or 1999. One customer accounted for approximately 11% of the Company's net sales in 1998. SEASONALITY The Company's operating results are impacted by seasonal factors, particularly in the first quarter of the fiscal year, which has historically represented the lowest quarterly sales volume. Shipments typically increase in the second quarter and reach a high point in the third or fourth quarter, reflecting the buying patterns of the Company's customers. RAW MATERIALS The primary raw material required in the production of Insteel's wire products is hot rolled carbon steel wire rod, which the Company purchases from both domestic and foreign suppliers. Market conditions for wire rod were relatively stable during 2000 following the resolution of trade actions. In January 1999, domestic steel wire rod producers initiated a Section 201 filing with the U.S. International Trade Commission ("ITC") alleging that rising import levels had resulted in serious injury to the domestic industry. In response to the ITC's report, in February 2000, President Clinton announced import relief for the domestic industry in the form of a "tariff-rate-quota" ("TRQ"), which will remain in place for three years. In the first year, steel wire rod from countries subject to the TRQ will face additional duties of 10% once imports exceed 1.58 million net tons. In the second and third years, the quantity of imports exempt from the higher duty will increase by 2.0% a year and the level of the surcharge will decline by 2.5% a year. The Company believes that domestic and imported wire rod will continue to be available in quantities that are sufficient to support the requirements of its markets. COMPETITION The markets in which Insteel's business is conducted are highly competitive, including competition from companies whose revenues and financial resources are much larger than the Company's. Some of its competitors are integrated steelmakers that produce both wire rod and wire products and offer multiple product lines over broad geographical areas. Other competitors are smaller independent wire mills that offer limited competition in certain markets. Market participants compete on the basis of price, quality and service. Selling prices tend to ultimately move with changes in raw material costs, although spreads can widen or narrow depending upon market conditions. Quality and service expectations of customers have risen substantially over the years and are key factors that impact their selection of suppliers. Technology has become a critical factor in maintaining competitive levels of conversion costs and quality. The Company believes that it is one of the leading low cost producers of wire products based upon its technologically-advanced manufacturing facilities and production capabilities. In addition, the Company believes that it offers a broader range of products through more diverse distribution channels than any of its competitors. The Company believes that it is well positioned to compete favorably on the industry's critical success factors. EMPLOYEES As of September 30, 2000, the Company employed 1,270 people. The Company has collective bargaining agreements with labor unions at its Wilmington, Delaware and Jacksonville, Florida plants, which expire in November 2003 and April 2003, respectively. Approximately 201 employees were covered by these agreements and were eligible for union membership of which 135 were union members. The Company believes that its relations with the labor unions and its employees are satisfactory. 3
4 ENVIRONMENTAL MATTERS The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. The Company has experienced no material difficulties in complying with legislative or regulatory standards and believes that these standards have not materially impacted its financial position or results of operations. Compliance with future additional environmental requirements could necessitate capital outlays. However, the Company does not believe that these expenditures should ultimately result in a material adverse effect on its financial position or results of operations. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows: Name Age Position with the Company - -------------------- --- ------------------------------------ Howard O. Woltz, Jr. 75 Chairman of the Board and a Director H.O. Woltz III 44 President, Chief Executive Officer and a Director Gary D. Kniskern 55 Vice President - Administration and Secretary Michael C. Gazmarian 41 Chief Financial Officer and Treasurer Howard O. Woltz, Jr., has been Chairman of the Board since 1958 and has served in various capacities for more than 45 years. He had been President of the Company from 1958 to 1968 and from 1974 to 1989. He previously served as Vice President, General Counsel and a director of Quality Mills, Inc., a publicly-held manufacturer of knit apparel and fabrics, for more than 35 years prior to its acquisition in 1988 by Russell Corporation. H. O. Woltz III, a son of Howard O. Woltz, Jr., was elected Chief Executive Officer in 1991 and has served in various capacities for more than 22 years. He was named President and Chief Operating Officer in 1989. He had been Vice President of the Company since 1988 and, previously, President of Rappahannock Wire Company, formerly a subsidiary of the Company, since 1981. Mr. Woltz has been a director of the Company since 1986 and also serves as President of IWP and FWC. Gary D. Kniskern was elected Vice President - Administration in 1994 and has served in various capacities for more than 20 years. He had been Secretary and Treasurer since 1984 and, previously, internal auditor since 1979. Michael C. Gazmarian joined Insteel as Chief Financial Officer and was elected Treasurer in 1994. He had been with Guardian Industries Corp., a privately held glass manufacturer, since 1986, serving in various financial capacities. The executive officers listed above were elected by the Board of Directors at its annual meeting held February 1, 2000 for a term that will expire at the next annual meeting of the Board of Directors or until their successors are elected and qualify. The next meeting at which officers will be elected is scheduled for February 16, 2001. ITEM 2. PROPERTIES. Insteel's corporate headquarters are located in Mount Airy, North Carolina. IWP has nine manufacturing facilities located in Andrews, South Carolina (2 plants); Gallatin, Tennessee (2 plants); Dayton, Texas; Fredericksburg, Virginia; Mount Airy, North Carolina; Wilmington, Delaware; and Hickman, Kentucky. FWC has two manufacturing facilities located in Jacksonville and Sanderson Florida. The Company owns all of its properties with the exception of the land at its Wilmington facility, which is leased. All of the Company's properties are pledged as security under long-term financing agreements. The Company considers that its properties are in good operating condition and that its machinery and equipment have been well-maintained. The Company's manufacturing facilities are suitable for their intended purposes and have capacities adequate for current and projected needs for existing products. 4
5 ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or which any of their property is a subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. The Company's common stock is listed on the New York Stock Exchange under the symbol III. At December 8, 2000, the record date for the 2001 Annual Meeting of Shareholders, there were 633 shareholders of record. Selected quarterly financial data appears under the caption "Financial Information by Quarter (Unaudited)" in Item 8(b) of this report. Historically, the Company has paid a quarterly dividend ($0.06 per share for each of the last eight quarters ending September 30, 2000). However, as previously announced on November 10, 2000, the Company suspended its quarterly cash dividend in connection with the terms of a covenant waiver with its senior lenders under its credit facility. Pursuant to an amendment to the credit facility dated January 12, 2001, the Company is prohibited from making dividend payments (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt Facilities"). While the Company does not intend to pay cash dividends in the foreseeable future, it will continue to evaluate the strategic and financial rationale for the resumption of dividend payments. ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED ---------------------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, OCTOBER 2, OCTOBER 3, ------------------------ 2000 1999 1998 1997 1996 ------------- ---------- ---------- --------- -------- <S> <C> <C> <C> <C> <C> Net sales $315,285 $270,992 $ 266,147 $ 262,325 $264,382 Earnings from continuing operations before extraordinary loss 2,121 9,986 328 2,536 5,237 Net earnings (loss) 2,121 9,986 (80) (341) 4,243 Earnings per share from continuing operations before extraordinary loss (basic and diluted) 0.25 1.18 0.04 0.03 0.62 Net earnings (loss) per share (basic and diluted) 0.25 1.18 (0.01) (0.04) 0.50 Cash dividends per share 0.24 0.24 0.24 0.24 0.24 Total assets 245,448 167,896 147,131 171,476 146,122 Total debt 105,000 46,817 36,363 52,293 32,843 Shareholders' equity 77,439 77,329 69,260 71,322 73,677 </TABLE> 5
6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that reflect management's current assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements contain words such as "expects," "plans," "believes," "will," "estimates," "intends," and other words of similar meaning that do not relate strictly to historical or current facts. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected, stated or implied by the statements. Such risks and uncertainties include, but are not limited to, general economic conditions in the markets in which the Company operates; unanticipated changes in customer demand, order patterns and inventory levels; fluctuations in the cost and availability of the Company's primary raw material, hot rolled steel wire rod; the Company's ability to raise selling prices in order to recover increases in wire rod prices; legal, environmental or regulatory developments that significantly impact the Company's operating costs; continuation of good labor relations; increased demand for the Company's concrete reinforcing products resulting from increased federal funding levels provided for in the TEA-21 highway spending legislation; the financial impact of the acquisition of FWC, the Hickman, Kentucky manufacturing facility and the 25% interest in SRP; the inability of the Company to expedite the qualification process with prospective customers for tire bead wire and increase the operating volumes of its Fredericksburg, Virginia manufacturing facility; the failure of the Company to receive regular and substantial orders for its new products; the Company's ability to avoid events of default with respect to its indebtedness, particularly under its senior secured credit facility, as amended; and the Company's ability to refinance its current indebtedness on favorable terms. RESULTS OF OPERATIONS STATEMENTS OF EARNINGS - SELECTED DATA (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ---------------------------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 CHANGE 1999 CHANGE 1998 ------------- ------ ---------- ------ ---------- <S> <C> <C> <C> <C> <C> Net sales $315,285 16% $270,992 2% $266,147 Gross profit 32,002 (10)% 35,647 167% 13,353 Percentage of net sales 10.2% 13.2% 5.0% Selling, general and administrative expense $ 19,368 11% $ 17,429 30% $ 13,410 Percentage of net sales 6.1% 6.4% 5.0% Operating income (loss) 12,634 (31)% 18,218 N/M (57) Percentage of net sales 4.0% 6.7% -- Interest expense $ 8,943 260% $ 2,482 (35)% $ 3,810 Percentage of net sales 2.8% 0.9% 1.4% Effective income tax rate 38.2% 36.3% 35.4% Earnings before extraordinary loss $ 2,121 (79)% $ 9,986 N/M $ 328 Percentage of net sales 0.7% 3.7% 0.1% </TABLE> 2000 COMPARED WITH 1999 Net sales rose 16% to $315.3 million in 2000 from $271.0 million in 1999 a result of the revenues contributed by Florida Wire and Cable, Inc. ("FWC"), which was acquired in January 2000. On a comparable basis, excluding the sales of FWC, sales decreased 7% primarily due to lower sales of industrial wire. Industrial wire sales fell 33% for the year as a result of significant changes in the Company's operating strategy that were executed during the first quarter together with transition-related inefficiencies at the Andrews, South Carolina facility. The Company completed a realignment of its industrial wire manufacturing capacity, ceasing production at the Gallatin, Tennessee plant and shifting the majority of its volume to the South Carolina facility. The expected increase in the operating level of the South Carolina plant proceeded slower than anticipated, constraining the sales of industrial wire as well as nails through most of the year. Sales of concrete reinforcing products rose 3% (excluding the sales of FWC) primarily due to higher shipments of welded wire fabric at the Hickman, Kentucky facility, which was acquired in April 1999. Although the demand for PC strand remained strong, pricing pressure continued as a result of increased import competition together with the announcement of a new competitor's plans to enter the business. Sales of bulk 6
7 nails decreased 10% from a year ago due to price deterioration and lower shipments, while collated nail sales rose 17% as a result of higher operating volumes. Selling prices for bulk and collated nails were negatively impacted by import competition together with the substantial consolidation that has occurred in the Company's customer base. Sales of tire bead wire increased 26%, but fell short of expected levels due to equipment-related constraints that resulted in production inefficiencies as well as lower than planned orders and operating volumes. During the third quarter, sales of tire bead wire decreased primarily due to mechanical and electrical malfunctions on a process line. The Company completed an extensive equipment upgrade and expansion program in the fourth quarter that is expected to resolve these issues. Gross profit decreased to $32.0 million, or 10.2% of sales in 2000 from $35.6 million, or 13.2% of sales in 1999. Margins were negatively impacted by the operating inefficiencies associated with the reconfiguration of the industrial wire business, which resulted in unfavorable manufacturing costs as well as reduced sales. In certain product lines, margins were also compressed by the combination of higher raw material costs and lower selling prices. These unfavorable factors were partially offset by the contribution of the FWC acquisition. Selling, general and administrative expense ("SG&A expense") rose 11%, but decreased as a percentage of sales to 6.1% from 6.4% in the prior year. The increase was primarily due to the incremental expenses associated with FWC that were partially offset by lower incentive plan expenses. Interest expense increased significantly to $8.9 million in 2000 compared with $2.5 million in 1999 due to the higher debt levels principally related to the acquisition of FWC together with an increase in the Company's borrowing rates under its new credit facility. 1999 COMPARED WITH 1998 Net sales rose 2% to $271.0 million in 1999 from $266.1 million in 1998. The growth in sales was in spite of the sale of the Company's agricultural fencing product line in February 1998, which reduced current year sales relative to the prior year. On a comparable basis, sales rose 4% for the year. Sales of concrete reinforcing products increased 20% for the year as a result of strong construction markets together with the additional manufacturing capacity provided by the Company's supply agreement with Structural Reinforcement Products, Inc. ("SRP") and its acquisition of a competitor's concrete reinforcing business. Sales of tire bead wire more than doubled from the prior year as the Company continued to gain customer acceptance and further its market penetration. Industrial wire sales declined 21% for the year primarily due to a significant increase in the proportion of wire consumed internally by downstream value-added processes to manufacture other products. Gross profit increased to $35.6 million, or 13.2% of sales in 1999 from $13.3 million, or 5.0% of sales in 1998. The margin improvement was primarily generated by the Company's recent expansions together with strong market conditions and widening spreads between selling values and raw material costs for certain product lines. Gross margins were also favorably impacted by higher operating volumes and lower per-unit manufacturing costs. SG&A expense rose 30%, increasing to 6.4% of sales in 1999 from 5.0% in 1998. The increase in SG&A expense was primarily due to higher employee incentive plan and profit-sharing expenses resulting from the significant improvement in the Company's financial results together with legal fees associated with employment-related issues. Interest expense fell sharply in 1999 compared with 1998 due to a decrease in average borrowing levels and lower interest rates on the Company's revolving credit facility. The reduction in debt was primarily due to the significant improvement in the Company's earnings relative to the year-ago loss. During 1998, the Company sold the inventory and equipment related to its agricultural fencing product line. The Company's 1998 financial results reflect a pre-tax gain of $3.4 million, or 26 cents per share after-tax, on the sale of the assets in other income, net of a provision for the estimated transition-related costs. Under the terms of the sale, the Company agreed to manufacture fencing products for the buyer until the equipment was relocated to the buyer's facilities. The Company ceased the remainder of its agricultural fencing activities in October 1998. The Company terminated one of its pension plans during 1998, recognizing a pre-tax gain of $1.2 million, or 7 cents per share after-tax, in other income for the curtailment of plan benefits and settlements that had been made to date. The Company completed the settlement of the plan in September 1999. 7
8 Also in 1998, the Company retired its $10.0 million 8.25% senior secured notes, funding the prepayment under its revolving credit facility. The Company's financial results reflect an extraordinary loss of $408,000 after income taxes, or approximately 5 cents per share, related to the early extinguishment of debt. LIQUIDITY AND CAPITAL RESOURCES SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ---------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Net cash provided by continuing operating activities $ 24,515 $ 13,708 $ 14,517 Net cash provided by (used for) investing activities (74,088) (21,840) 2,372 Net cash provided by (used for) financing activities 51,976 8,537 (17,912) Working capital 38,336 35,633 26,307 Total debt $ 105,000 $ 46,817 $ 36,363 Percentage of total capitalization 58% 38% 34% Shareholders' equity $ 77,439 $ 77,329 $ 69,260 Percentage of total capitalization 42% 62% 66% Total capital $ 182,439 $ 124,146 $ 105,623 </TABLE> CASH FLOW ANALYSIS Continuing operating activities generated $24.5 million of cash in 2000 compared with $13.7 million and $14.5 million in 1999 and 1998, respectively. The increase in 2000 was primarily the result of reductions in inventories and receivables in relation to the prior year (excluding the FWC-related additions) which offset the decline in net earnings. The inventory decrease was primarily related to a reduction in FWC's inventories from the levels as of the acquisition date. The decrease in receivables was due to lower days sales outstanding on a comparable basis. Depreciation and amortization rose by $2.3 million, or 26%, in 2000 due to goodwill amortization associated with the FWC acquisition together with the amortization of capitalized financing costs related to the Company's new senior secured credit facility. In 1999, the higher earnings level was partially offset by a planned build in inventories in anticipation of rising raw material prices and the potential unfavorable impact of trade actions filed by domestic rod producers. In 1998, inventories decreased due to a substantial reduction in raw material inventories together with the sale of finished goods inventories associated with the agricultural fencing product line. Cash generated from the inventory reduction was partially offset by a decline in accounts payable related to lower raw material purchases. Investing activities used $74.1 million and $21.8 million of cash in 2000 and 1999, respectively, while providing $2.4 million in 1998. The increase in 2000 was principally related to the acquisition of FWC. The Company also executed a sale-leaseback transaction that generated $2.8 million of cash, which was used to pay down the term loan balance outstanding on its credit facility. In 1999, investing activities include a total of $6.6 million related to the investment in SRP and $8.4 million for the acquisition of a concrete reinforcing business. Capital expenditures amounted to $9.2 million, $7.3 million and $6.7 million in 2000, 1999 and 1998, respectively, principally related to the tire bead wire expansion. In 1998, proceeds primarily generated from the sale of the Company's agricultural fencing equipment exceeded capital expenditures. Financing activities provided $52.0 million and $8.5 million of cash in 2000 and 1999, respectively, while using $17.9 million in 1998. In January 2000, the Company entered into a $140.0 million senior secured credit facility with a group of banks, consisting of a $60.0 million revolving credit loan and a $80.0 million term loan. Borrowings under the new credit facility were used to fund the acquisition of FWC and pay off the balances outstanding on the Company's previous $60.0 million unsecured revolving credit facility. In 1999, the increase in financing requirements was primarily related to the investment in SRP and the acquisition of a concrete reinforcing business. During 1998, cash generated from the reduction in inventories and the sale of agricultural fencing assets was used to pay down debt. In April 2000, the Company entered into interest rate swap agreements to reduce the financial impact of future interest rate fluctuations on its earnings and cash flows. These agreements effectively converted $50.0 million of the Company's floating rate debt to a fixed rate of 10.58% based upon the interest rate margin that was applicable at September 30, 2000. Interest rate differentials paid or received under these swap agreements are recognized in income over the life of the agreements as 8
9 adjustments to interest expense. As of September 30, 2000, the fair value of these swap agreements was ($978). The Company's total debt to capital ratio increased to 58% at September 30, 2000 compared with 38% and 34% at October 2, 1999 and October 3, 1998, respectively. The increase in the debt level was primarily related to the acquisition of FWC in January 2000. DEBT FACILITIES At September 30, 2000, the Company was not in compliance with certain financial covenants of its senior secured credit facility, which constitutes an event of default. Pursuant to a waiver agreement, the default was waived through January 15, 2001. On January 12, 2001, the Company and its senior lenders agreed to an amendment to the credit agreement that modified these financial covenants, curing the event of default. Under the terms of the amendment, the maturity date of the credit facility was accelerated from January 31, 2005 to January 15, 2002. Additionally, the Company is subject to certain terms and conditions during fiscal 2001, including: (1) that it will maintain earnings before interest, taxes, depreciation and amortization ("EBITDA") at certain required levels; (2) that it will not make dividend payments or repurchase shares of the Company's common stock; and (3) that it will not allow capital expenditures to exceed $4.5 million. The Company has also agreed to permanent reductions in the revolving credit facility from $60.0 million to $50.0 million at January 12, 2001; to $45.0 million at October 1, 2001, and to $40.0 million at December 31, 2001. The amendment is expected to increase the Company's interest expense as a result of: (1) an increase in the applicable interest rates (from 9.62% as of September 30, 2000 to 10.75% as of January 12, 2001); (2) additional graduated fees payable to the lenders on certain dates if a refinancing of the credit facility is not completed prior to such dates, and (3) higher amortization expense related to capitalized financing costs due to the acceleration of the maturity date. The Company intends to refinance the senior secured credit facility prior to its amended maturity date of January 15, 2002. In the event that such efforts are unsuccessful, the Company would likely experience a material adverse impact on its financial condition, liquidity and results of operation. OUTLOOK In view of the Company's recent financial performance, it is pursuing a range of initiatives to reduce operating costs and debt. During the first and second quarters of 2001, the Company expects to complete the reconfiguration of certain of its manufacturing facilities and business operations in order to boost productivity levels and reduce operating costs. The Company anticipates that the suspension of its cash dividend, curtailment of capital outlays and improved management of working capital will facilitate reductions in its debt. Although there can be no assurances, the Company believes that these actions will have a favorable impact on its financial performance in 2001 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements"). 9
10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (A) FINANCIAL STATEMENTS <TABLE> <S> <C> Consolidated Balance Sheets as of September 30, 2000 and October 2, 1999 11 Consolidated Statements of Earnings for the three years ended September 30, 2000, October 2, 1999 and October 3, 1998 12 Consolidated Statements of Shareholders' Equity for the three years ended September 30, 2000, October 2, 1999 and October 3, 1998 13 Consolidated Statements of Cash Flows for the three years ended September 30, 2000, October 2, 1999 and October 3, 1998 14 Notes to Consolidated Financial Statements 15 Report of Management 26 Report of Independent Public Accountants 27 Schedule II - Valuation and Qualifying Accounts for the three years ended September 30, 2000, October 2, 1999 and October 3, 1998 28 Report of Independent Public Accountants on Schedule 29 </TABLE> (B) SUPPLEMENTARY DATA Selected quarterly financial data is as follows: FINANCIAL INFORMATION BY QUARTER (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AND PRICE DATA) <TABLE> <CAPTION> QUARTER ENDED ----------------------------------------------------------- JANUARY 1 APRIL 1 JULY 1 SEPTEMBER 30 ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> 2000 OPERATING RESULTS Net sales $ 58,571 $ 78,822 $ 90,922 $ 86,970 Gross profit 6,117 9,294 10,793 5,798 Net earnings (loss) 850 898 1,454 (1,081) PER SHARE DATA Net earnings (loss) (basic and diluted) 0.10 0.11 0.17 (0.13) Cash dividends 0.06 0.06 0.06 0.06 Stock prices High 9.34 8.91 6.79 6.61 Low 6.51 4.83 5.14 3.75 <CAPTION> QUARTER ENDED ---------------------------------------------------------- JANUARY 2 APRIL 3 JULY 3 OCTOBER 2 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> 1999 OPERATING RESULTS Net sales $ 62,267 $ 66,162 $ 72,676 $ 69,887 Gross profit 6,566 9,204 10,729 9,148 Net earnings 1,524 2,517 3,388 2,557 PER SHARE DATA Net earnings (basic and diluted) 0.18 0.30 0.40 0.30 Cash dividends 0.06 0.06 0.06 0.06 Stock prices High 6.38 7.13 9.63 9.88 Low 3.88 4.88 5.75 8.38 </TABLE> 10
11 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> SEPTEMBER 30, OCTOBER 2, 2000 1999 ------------- ---------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 3,230 $ 827 Accounts receivable, net 42,614 31,054 Inventories 48,475 36,360 Prepaid expenses and other 7,179 3,012 -------- -------- Total current assets 101,498 71,253 Property, plant and equipment, net 110,191 85,529 Other assets 33,759 11,114 -------- -------- Total assets $245,448 $167,896 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 43,466 $ 25,035 Accrued expenses 9,576 9,965 Current portion of long-term debt 10,120 620 -------- -------- Total current liabilities 63,162 35,620 Long-term debt 94,880 46,197 Deferred income taxes 8,934 7,734 Other liabilities 1,033 1,016 Commitments and contingencies Shareholders' equity: Preferred stock, no par value Authorized shares: 1,000 None issued -- -- Common stock, $2 stated value Authorized shares: 20,000 Issued and outstanding shares: 2000, 8,460; 1999, 8,457 16,920 16,914 Additional paid-in capital 38,327 38,314 Retained earnings 22,192 22,101 -------- -------- Total shareholders' equity 77,439 77,329 -------- -------- Total liabilities and shareholders' equity $245,448 $167,896 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 11
12 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED ------------------------------------------------ SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Net sales $315,285 $270,992 $ 266,147 Cost of sales 283,283 235,345 252,794 -------- -------- --------- Gross profit 32,002 35,647 13,353 Selling, general and administrative expense 19,368 17,429 13,410 -------- -------- --------- Operating income (loss) 12,634 18,218 (57) Interest expense 8,943 2,482 3,810 Other expense (income) 258 59 (4,375) -------- -------- --------- Earnings before income taxes and extraordinary loss 3,433 15,677 508 Provision for income taxes 1,312 5,691 180 -------- -------- --------- Earnings before extraordinary loss 2,121 9,986 328 Extraordinary loss on early extinguishment of debt (net of income tax benefit of $224) -- -- (408) -------- -------- --------- Net earnings (loss) $ 2,121 $ 9,986 $ (80) ======== ======== ========= Per share (basic and diluted): Earnings before extraordinary loss $ 0.25 $ 1.18 $ 0.04 Extraordinary loss -- -- (0.05) -------- -------- --------- Net earnings (loss) $ 0.25 $ 1.18 $ (0.01) ======== ======== ========= Cash dividends per share $ 0.24 $ 0.24 $ 0.24 ======== ======== ========= </TABLE> See accompanying notes to consolidated financial statements. 12
13 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED -------------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Common stock: Balance, beginning of year $ 16,914 $ 16,885 $ 16,873 Stock options exercised 6 29 12 -------- -------- -------- Balance, end of year $ 16,920 $ 16,914 $ 16,885 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL: Balance, beginning of year $ 38,314 $ 38,232 $ 38,200 Stock options exercised 13 82 32 -------- -------- -------- Balance, end of year $ 38,327 $ 38,314 $ 38,232 ======== ======== ======== RETAINED EARNINGS: Balance, beginning of year $ 22,101 $ 14,143 $ 16,249 Cash dividends declared (2,030) (2,028) (2,026) Net earnings (loss) 2,121 9,986 (80) -------- -------- -------- Balance, end of year $ 22,192 $ 22,101 $ 14,143 ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 13
14 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ----------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Cash Flows From Operating Activities: Net earnings (loss) $ 2,121 $ 9,986 $ (80) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities (net of effect of acquisitions): Depreciation and amortization 11,203 8,908 8,738 Extraordinary loss -- -- 408 Loss (gain) on sale of assets 774 (75) (4,575) Deferred income taxes 1,139 1,732 (188) Net changes in assets and liabilities: Accounts receivable, net 3,862 (2,338) 2,365 Inventories 8,371 (4,168) 13,898 Accounts payable and accrued expenses (717) 217 (6,083) Other changes (2,238) (554) 34 --------- --------- ---------- Total adjustments 22,394 3,722 14,597 --------- --------- ---------- Net cash provided by operating activities 24,515 13,708 14,517 --------- --------- ---------- CASH FLOWS FROM DISCONTINUED OPERATING ACTIVITIES: Net cash provided by discontinued operating activities -- -- 366 --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (9,230) (7,344) (6,708) Acquisition of businesses and investments (66,594) (11,647) -- Payment of acquisition-related costs (1,453) -- -- Purchases of short-term investments -- (1,875) -- Proceeds from (issuance of) notes receivable 173 (1,290) 222 Proceeds from sale of property, plant and equipment 3,016 316 8,858 --------- --------- ---------- Net cash provided by (used for) investing activities (74,088) (21,840) 2,372 --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 197,458 106,435 107,132 Principal payments on long-term debt (139,275) (95,981) (123,062) Payment of debt issuance costs (4,196) -- -- Proceeds from exercise of stock options 19 111 44 Cash dividends paid (2,030) (2,028) (2,026) --------- --------- ---------- Net cash provided by (used for) financing activities 51,976 8,537 (17,912) --------- --------- ---------- Net increase (decrease) in cash and cash equivalents 2,403 405 (657) Cash and cash equivalents at beginning of period 827 422 1,079 --------- --------- ---------- Cash and cash equivalents at end of period $ 3,230 $ 827 $ 422 ========= ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 8,363 $ 1,947 $ 4,843 Income taxes 2,261 3,723 596 </TABLE> See accompanying notes to consolidated financial statements. 14
15 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2000, OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Amounts in thousands, except for per share data) (1) DESCRIPTION OF BUSINESS Insteel Industries, Inc. ("Insteel" or "the Company") is one of the nation's largest manufacturers of wire products. The Company manufactures and markets concrete reinforcing products, industrial wire, nails, tire bead wire and galvanized products for a broad range of construction and industrial applications. Insteel is the parent holding company for two wholly-owned operating subsidiaries, Insteel Wire Products Company ("IWP") and Florida Wire and Cable, Inc. ("FWC"). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR. Effective October 1, 1997, the Company adopted a 52 or 53-week fiscal year ending on the Saturday closest to September 30. Fiscal years 2000, 1999 and 1998 were 52-week fiscal years. All references to years relate to fiscal years rather than calendar years. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. REVENUE RECOGNITION. Revenue is recognized when the related products are shipped. INVENTORIES. Inventories are valued at the lower of average cost (which approximates computation on a first-in, first-out basis) or market (net realizable value or replacement cost). PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 3 - 15 years; buildings, 10 - 30 years; land improvements, 5 - 15 years. Capitalized software is amortized over the shorter of the estimated useful life or 5 years. No interest costs were capitalized in 2000, 1999 or 1998. OTHER ASSETS. Other assets consist principally of goodwill, capitalized financing costs, investments in affiliated companies, long-term notes receivable, the cash surrender value of life insurance policies and various intangible assets. Investments in affiliated companies are accounted for using the equity method. Goodwill and other intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line basis over the economic lives of the respective assets. LONG-LIVED ASSETS. Long-lived assets include property, plant and equipment, identifiable intangible assets and goodwill. Long-lived assets are periodically reviewed for impairment by comparing the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss is recognized during the period incurred. An impairment loss is calculated as the difference between the carrying value and the present value of estimated future net cash flows or comparable market values. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts for cash and cash equivalents, accounts and notes receivable, accounts payable and other accrued liabilities approximate fair value because of their short maturities. The estimated fair value of long-term debt is primarily based upon quoted market prices as well as borrowing rates currently available to the Company for bank loans with similar terms and maturities. The carrying amount of long-term debt approximates its estimated fair value under the amended terms of the Company's senior secured credit facility (see Note 7 - Debt Facilities). 15
16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) INCOME TAXES. Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. EARNINGS PER SHARE. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" in 1998. SFAS No. 128 replaces the primary and fully diluted earnings per share ("EPS") computations with basic and diluted EPS. Basic EPS are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS are computed by dividing net earnings by the weighted average number of common shares and other dilutive equity securities outstanding during the period. Securities that have the effect of increasing EPS are considered to be antidilutive and are not included in the computation of diluted EPS. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The Company adopted SFAS 133 in the first quarter of fiscal 2001 and the initial adoption of the pronouncement did not have a material impact on its results of operations or financial position. (3) EXTRAORDINARY LOSS - EARLY EXTINGUISHMENT OF DEBT In 1998, the Company retired its $10.0 million 8.25% senior secured notes due 2002, funding the prepayment under its revolving credit facility. The Company recorded an extraordinary loss of $408 after income taxes, or approximately 5 cents per share, related to the redemption premium and write-off of deferred financing costs. (4) INVESTMENT IN STRUCTURAL REINFORCEMENT PRODUCTS In January 1999, the Company acquired a 25% interest in Structural Reinforcement Products, Inc. ("SRP"), a manufacturer of welded wire fabric products for the construction industry. Under the terms of the purchase agreement, the Company acquired 25% of the common stock in SRP for $3.3 million. In addition, the Company provided SRP with $1.5 million of debt financing and $1.9 million of collateral to support its existing credit facility in assuming a proportionate share of SRP's debt-related obligations. The Company may be obligated to increase its investment for its equity position by up to $500 depending upon SRP's future performance. The Company is accounting for its investment in SRP on an equity basis and, accordingly, is including its share of SRP's earnings in its consolidated earnings. The Company recorded equity income of $140 in 2000 and an equity loss of $149 in 1999 in other expense on its consolidated statement of earnings. (5) ACQUISITION OF FLORIDA WIRE AND CABLE, INC. In January 2000, the Company acquired Florida Wire and Cable, Inc. ("FWC"), a manufacturer of PC strand and galvanized products. Under the terms of the purchase agreement, the Company acquired all of the outstanding stock of FWC for $66.6 million from GS Technologies Operating Co., Inc. ("GSTOC"), a subsidiary of GS Industries, Inc. ("GSI"). In addition, the Company entered into a five-year agreement with GSI under which GSI will supply FWC with a portion of its raw material requirements. The acquisition has been accounted for under the purchase method of accounting and, accordingly, the results of operations of FWC have been included in the consolidated financial statements since the date of the acquisition, January 31, 2000. The excess of cost over the estimated fair value of net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over 20 years. 16
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) A summary of the purchase price and the preliminary purchase price allocation based on the net assets as of January 31, 2000 is as follows: <TABLE> <CAPTION> <S> <C> PURCHASE PRICE Cash paid to GSTOC $ 66,600 Financial advisors, accounting, legal and other direct acquisition costs 1,453 -------- Total purchase price $ 68,053 ======== PRELIMINARY ALLOCATION OF PURCHASE PRICE Total purchase price $ 68,053 Less: net book value of tangible net assets acquired (34,368) -------- Excess of cost over net book value of tangible net assets acquired 33,685 Adjustments to record assets and liabilities at fair market value: Inventories 1,021 Property, plant and equipment (14,830) Deferred tax assets (2,446) Accrued expenses 2,404 Other 11 -------- Total adjustments (13,840) Goodwill $ 19,845 ======== </TABLE> In connection with the acquisition of FWC, on January 31, 2000 the Company began the execution of its plans to relocate certain FWC administrative activities to the Company's headquarters, to terminate certain management and administrative support employees of FWC, and to exit certain facility leases. Additional purchase price liabilities have been recorded for approximately $1,999 for severance and other exit costs related to these plans. As of September 30, 2000, 58 employees have been terminated. The Company expects to finalize its plans for the termination of employees and reconfiguration of facilities within one year from the date of the FWC acquisition. Additional liabilities for severance, relocation, and other facility-related costs may result in an adjustment to purchase accounting. A reconciliation of activity with respect to these liabilities, which are included in accrued expenses on the consolidated balance sheet as of September 30, 2000, is as follows: <TABLE> <CAPTION> OTHER EXIT SEVERANCE COSTS TOTAL --------- ---------- ------- <S> <C> <C> <C> Recognized as liabilities assumed and included in purchase price allocation $ 1,857 $ 142 $ 1,999 Payments made/reserve utilized (1,117) (140) (1,257) ------- ---------- ------- Balance, end of year $ 740 $ 2 $ 742 ======= ========== ======= </TABLE> The following unaudited pro forma information has been prepared as if the acquisition had occurred as of the beginning of fiscal 1999: <TABLE> <CAPTION> YEAR ENDED --------------------------- SEPTEMBER 30, OCTOBER 2, 2000 1999 ------------- ---------- <S> <C> <C> Net sales $346,636 $376,211 Net earnings 1,802 7,662 Earnings per share (basic and diluted) 0.21 0.91 </TABLE> 17
18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The foregoing unaudited pro forma information is provided for illustrative purposes only and does not purport to be indicative of results that actually would have been achieved had the acquisition been consummated at the beginning of fiscal 1999, nor is it intended to be indicative of future results. (6) ACQUISITION OF CONCRETE REINFORCING BUSINESS In April 1999, the Company acquired the assets of the concrete reinforcing business of Northwestern Steel and Wire Company ("Northwestern"). Under the terms of the purchase agreement, the Company acquired the inventory, property, plant and equipment of Northwestern's Hickman, Kentucky facility for approximately $8.4 million. In addition, the companies entered into a three-year agreement under which Northwestern will supply Insteel with a portion of its raw material requirements. (7) DEBT FACILITIES In January 2000, the Company entered into a $140.0 million senior secured credit facility with a group of banks, consisting of a $60.0 million revolving credit loan and a $80.0 million term loan. Borrowings under the new credit facility were used to fund the acquisition of FWC and pay off the balances outstanding on the Company's previous $60.0 million unsecured revolving credit facility. At September 30, 2000, the Company was not in compliance with certain financial covenants of its senior secured credit facility, which constitutes an event of default. Pursuant to a waiver agreement, the default was waived through January 15, 2001. On January 12, 2001, the Company and its senior lenders agreed to an amendment to the credit agreement that modified these financial covenants, curing the event of default. Under the terms of the amendment, the maturity date of the credit facility was accelerated from January 31, 2005 to January 15, 2002. Additionally, the Company is subject to certain terms and conditions during fiscal 2001, including: (1) that it will maintain earnings before interest, taxes, depreciation and amortization ("EBITDA") at certain required levels; (2) that it will not make dividend payments or repurchase shares of the Company's common stock; and (3) that it will not allow capital expenditures to exceed $4.5 million. The Company has also agreed to permanent reductions in the revolving credit facility from $60.0 million to $50.0 million at January 12, 2001; to $45.0 million at October 1, 2001, and to $40.0 million at December 31, 2001. The amendment is expected to increase the Company's interest expense as a result of: (1) an increase in the applicable interest rates (from 9.62% as of September 30, 2000 to 10.75% as of January 12, 2001); (2) additional graduated fees payable to the lenders on certain dates if a refinancing of the credit facility is not completed prior to such dates, and (3) higher amortization expense related to capitalized financing costs due to the acceleration of the maturity date. The Company intends to refinance the senior secured credit facility prior to its amended maturity date of January 15, 2002. In the event that such efforts are unsuccessful, the Company would likely experience a material adverse impact on its financial condition, liquidity and results of operation. Scheduled maturity dates and interest rates (as of September 30, 2000 and October 2, 1999) related to the Company's debt are as follows: <TABLE> <CAPTION> SEPTEMBER 30, OCTOBER 2, INTEREST RATE MATURITY 2000 1999 ------------- -------- ------------- ---------- <S> <C> <C> <C> <C> Term loan 9.62% 2002 $ 69,000 $ -- Revolving credit facility 8.88% - 9.62% 2002 32,700 42,897 Industrial revenue refunding bonds 7.20% - 7.75% 2005 1,680 1,960 Industrial development revenue refunding bonds 4.30% 2003 1,020 1,360 Mortgage note 600 600 ---------- -------- Total long-term debt 105,000 46,817 Less current maturities 10,120 620 ---------- -------- Long-term debt, excluding current maturities $ 94,880 $ 46,197 ========== ======== </TABLE> Under the amended terms of the credit agreement, interest rates are determined based upon a base rate that is established at the higher of the prime rate or 0.5% plus the federal funds rate, plus an applicable interest rate margin. In addition, 18
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) a commitment fee is payable on the unused portion of the revolving credit facility. Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. At September 30, 2000, approximately $9.2 million was available on the facility and $69.0 million was outstanding on the term loan. The senior secured facility is collateralized by all of the Company's assets. In April 2000, the Company entered into interest rate swap agreements to reduce the financial impact of future interest rate fluctuations on its earnings and cash flows. These agreements effectively converted $50.0 million of the Company's floating rate debt to a fixed rate of 10.58% based upon the interest rate margin that was applicable at September 30, 2000. Interest rate differentials paid or received under these swap agreements are recognized in income over the life of the agreements as adjustments to interest expense. As of September 30, 2000, the fair value of these swap agreements was ($978). Aggregate scheduled maturities of long-term debt (reflecting the amended terms of the senior secured credit facility) for the next five years are as follows: 2001, $10,120; 2002, $92,820; 2003, $620; 2004, $280; 2005, $280. Capitalized financing costs associated with the senior secured facility were $4.3 million and are being amortized on a straight-line basis over the remaining term of the facility. (8) SHAREHOLDERS' EQUITY Shares of common stock outstanding are as follows: <TABLE> <CAPTION> YEAR ENDED ------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Balance, beginning of year 8,457 8,443 8,437 Stock options exercised 3 14 6 ------ ------ ------ Balance, end of year 8,460 8,457 8,443 ====== ====== ====== </TABLE> (9) STOCK OPTION PLANS The Company has stock option plans under which employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under the 1985 employee and 1990 director stock option plans vest over five years and expire five years from the date of the grant. By action of the Board of Directors in 1994, no further options may be granted under these plans. Options granted under the 1994 employee and director stock option plans vest over five years and expire ten years from the date of the grant. A summary of stock option activity follows: <TABLE> <CAPTION> EXERCISE PRICE PER SHARE ------------------------------- OPTIONS WEIGHTED OUTSTANDING RANGE AVERAGE ----------- ------------------ -------- <S> <C> <C> <C> Balance, September 30, 1997 504 $ 6.88 - $ 10.68 $ 8.71 Granted 232 4.69 - 7.31 5.49 Exercised (6) 7.00 - 7.88 7.43 Cancelled (104) 6.38 - 10.68 9.41 ----- Balance, October 3, 1998 626 4.69 - 10.44 7.41 Granted 229 4.75 - 9.19 7.61 Exercised (14) 4.69 - 8.94 7.58 Cancelled (217) 4.69 - 10.44 8.85 ----- Balance, October 2, 1999 624 4.69 - 9.19 6.98 Granted 225 5.25 - 8.38 6.52 Exercised (3) 4.69 - 8.63 6.36 ----- Balance, September 30, 2000 846 4.69 - 9.19 6.86 ===== </TABLE> 19
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The weighted average characteristics of outstanding stock options at September 30, 2000 for various price ranges are as follows: <TABLE> <CAPTION> OUTSTANDING OPTIONS EXERCISABLE OPTIONS -------------------------------------- ------------------- WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE ------------------------ ------ ------------ -------- ------ -------- <S> <C> <C> <C> <C> <C> $ 4.69 - $ 5.25 240 9.0 $ 5.00 91 $ 4.85 5.38 - 6.56 184 7.9 6.35 112 6.26 7.00 - 7.56 150 5.6 7.31 136 7.29 7.88 - 8.38 144 7.4 8.19 82 8.05 8.50 - 9.19 128 7.4 9.03 78 8.97 </TABLE> At September 30, 2000, 860 shares were available for future grants under the plans. Options exercisable were 499 at September 30, 2000 and 348 at October 2, 1999. The weighted average exercise price for these shares was $7.00 for 2000 and $7.12 for 1999. The Company has elected to follow APB No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock option plans. APB No. 25 specifies that no compensation expense is recognized when the exercise price of the stock options equals the market value of the underlying stock at the grant date, as in the case of options granted under the Company's plans. SFAS No. 123, "Accounting for Stock-Based Compensation," specifies the use of certain option valuation models to calculate estimated compensation expense to be reflected in pro forma net earnings and net earnings per share. The Company's pro forma information is as follows: <TABLE> <CAPTION> YEAR ENDED --------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Net earnings (loss) - as reported $ 2,121 $ 9,986 $ (80) Net earnings (loss) - pro forma 1,823 9,763 (224) Basic net earnings (loss) per share - as reported 0.25 1.18 (0.01) Basic net earnings (loss) per share - pro forma 0.22 1.16 (0.03) Diluted net earnings (loss) per share - as reported 0.25 1.18 (0.01) Diluted net earnings (loss) per share - pro forma 0.21 1.15 (0.03) </TABLE> The fair value of the options at the date of grant were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions: <TABLE> <CAPTION> YEAR ENDED ----------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Expected life (in years) 5.0 5.0 5.0 Risk-free interest rate 6.3% 5.4% 5.5% Expected volatility 0.50 0.40 0.30 Expected dividend yield 3.0% 3.0% 3.0% </TABLE> The weighted average estimated fair values of options granted during 2000, 1999 and 1998 were $2.85, $2.75 and $1.61 per share, respectively. The above pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on net earnings and net earnings per share in future years, because they do not take into consideration pro forma compensation expense related to grants made prior to 1996. 20
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (10) INCOME TAXES The provision for income taxes for continuing operations consists of: <TABLE> <CAPTION> YEAR ENDED ------------------------------------------ SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Current: Federal $ 60 $ 3,488 $ 373 State 113 471 (5) -------- -------- -------- 173 3,959 368 Deferred: Federal 967 1,569 10 State 172 163 (198) -------- -------- -------- 1,139 1,732 (188) -------- -------- -------- Provision for income taxes $ 1,312 $ 5,691 $ 180 ======== ======== ======== </TABLE> The provision for income taxes for continuing operations differs from the amount computed by applying the federal statutory rate to the Company's earnings from continuing operations before taxes as a result of the following differences: <TABLE> <CAPTION> YEAR ENDED ---------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Provision for income taxes at federal statutory rate $ 1,167 $ 5,409 $ 173 State income taxes, net of federal income tax benefit 74 308 (3) Other, net 71 (26) 10 ------- ------- ----- Provision for income taxes $ 1,312 $ 5,691 $ 180 ======= ======= ===== </TABLE> Deferred tax assets and liabilities are recognized for the differences between the tax basis of assets and liabilities and their reported financial statement amounts. Significant components of deferred tax assets and liabilities are as follows: <TABLE> <CAPTION> SEPTEMBER 30, OCTOBER 2, 2000 1999 ------------- ---------- <S> <C> <C> DEFERRED TAX ASSETS: Accrued expenses or asset reserves for financial statements not yet deductible for tax purposes $ 6,158 $ 3,493 Alternative minimum tax credit carryforwards 400 516 --------- -------- Gross deferred tax assets 6,558 4,009 DEFERRED TAX LIABILITIES: Plant and equipment principally due to differences in depreciation and capitalized interest (10,844) (9,426) Other reserves (11) (399) Prepaid expenses for financial statements that were deducted for tax purposes (361) (149) Gross deferred tax liabilities (11,216) (9,974) --------- -------- Net deferred tax liability $ (4,658) $ (5,965) ========= ======== </TABLE> The Company has recorded a current deferred tax asset of $4,276 at September 30, 2000 and $1,769 at October 2, 1999 in prepaid expenses and other on its consolidated balance sheet. (11) EMPLOYEE BENEFIT PLANS RETIREMENT PLANS. The Company has one defined benefit pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware, ("the Delaware Plan"). The Delaware Plan provides benefits for eligible employees based primarily upon years of service and compensation levels. The Company's funding policy is to 21
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) contribute amounts at least equal to those required by law. Prior to September 1999, the Company had another defined benefit pension plan, the Pension Plan of Insteel Industries, Inc. ("the Insteel Plan"). In October 1997, the Company froze all benefit accruals for additional years of credited service for plan participants. In August 1998, the Company terminated the plan, recognizing a gain based upon the curtailment of plan benefits and settlements that had been made to date. The Company recorded a $1.2 million gain in other income relating to the plan termination. The settlement of the plan was completed in September 1999 and $401 was recorded as a settlement loss. The following table provides a reconciliation of the projected benefit obligation, a reconciliation of plan assets, the funded status of the plans, and the amounts recognized in the Company's consolidated balance sheets at September 30, 2000 and October 2, 1999: <TABLE> <CAPTION> INSTEEL PLAN DELAWARE PLAN YEAR ENDED YEAR ENDED ------------------------- --------------------------- SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2, 2000 1999 2000 1999 ------------- ---------- ------------- ---------- <S> <C> <C> <C> <C> Change in benefit obligation: Benefit obligation at beginning of year $ -- $ (4,960) $ (3,939) $ (3,728) Service cost -- -- (58) (97) Interest cost -- (316) (250) (240) Amendments -- -- (6) -- Actuarial gain (loss) -- (52) 273 (30) Effect of settlement -- 5,328 -- -- Benefits paid -- -- 184 156 --------- --------- --------- --------- Benefit obligation at end of year $ -- $ -- $ (3,796) $ (3,939) ========= ========= ========= ========= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year -- $ 5,168 $ 3,080 $ 2,806 Change in assets from disclosure to beginning of year -- (216) -- -- Actual return on plan assets -- 312 743 398 Employer contributions -- 64 33 32 Effect of settlement -- (5,328) -- -- Benefits paid -- -- (184) (156) --------- --------- --------- --------- Fair value of plan assets at end of year $ -- $ -- $ 3,672 $ 3,080 ========= ========= ========= ========= RECONCILIATION OF FUNDED STATUS TO NET AMOUNT RECOGNIZED: Funded status $ -- $ -- $ (124) $ (859) Unrecognized net loss -- -- (171) (30) Unrecognized prior service cost -- -- 15 12 Unrecognized transition obligation -- -- 6 18 --------- --------- --------- --------- Net amount recognized $ -- $ -- $ (274) $ (859) ========= ========= ========= ========= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF: Accrued benefit liability $ -- $ -- $ (274) $ (859) --------- --------- --------- --------- Net amount recognized $ -- $ -- $ (274) $ (859) ========= ========= ========= ========= </TABLE> 22
23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) Net periodic pension cost includes the following components: <TABLE> <CAPTION> INSTEEL PLAN DELAWARE PLAN YEAR ENDED YEAR ENDED -------------------------------------- ---------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 2000 1999 1998 ------------- ---------- ---------- ------------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Components of net periodic pension cost: Service cost $ -- $ -- $ -- $ 58 $ 97 $ 93 Interest cost -- 316 722 250 240 225 Actual return on plan assets -- (312) (776) (743) (398) 445 Deferred asset loss (gain) -- (94) (6) 508 178 (708) Amortization of prior service cost -- -- 25 3 3 3 Amortization of transition asset -- (49) (79) 12 12 11 Recognized net actuarial loss (gain) -- 10 (103) 3 52 (2) Curtailment gain -- -- (1,200) -- -- -- Settlement loss -- 401 -- -- -- -- --------- --------- --------- --------- --------- --------- Net periodic pension cost $ -- $ 272 $ (1,417) $ 91 $ 184 $ 67 ========= ========= ========= ========= ========= ========= </TABLE> The assumptions used for the calculations for both plans are as follows: <TABLE> <CAPTION> YEAR ENDED ------------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Assumptions at year-end: Discount rate 7.0% 5.9% - 6.5% 5.9% - 6.5% Rate of increase in compensation levels N/A N/A 5.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0% </TABLE> PROFIT-SHARING AND INCENTIVE PLANS. The Company has a profit-sharing plan and various incentive plans covering substantially all hourly and salary employees. Profit-sharing and incentive plan expense was $2,775 in 2000, $3,955 in 1999 and $826 in 1998. RETIREMENT SAVINGS PLAN. In 1996, the Company adopted the Retirement Savings Plan of Insteel Industries, Inc. ("the Plan") to provide retirement benefits and stock ownership for its employees. The Plan is an amendment and restatement of the Company's Employee Stock Ownership Plan ("ESOP"). As allowed under Sections 401(a) and 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary deductions for eligible employees. Employees may contribute up to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Code. For 2000, the Company provided a matching contribution of 50% of the first 5% of employee compensation paid to the Plan. In addition, the Plan allows for discretionary contributions to be made by the Company as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their compensation to the total compensation of all participants. Company contributions to the Plan were $400 in 2000, $405 in 1999 and $496 in 1998. SUPPLEMENTAL RETIREMENT PLAN. The Company has a supplemental retirement plan for certain employees. Under the plan, participants are entitled to cash benefits upon retirement at age 65, payable annually for 15 years. The plan is funded by life insurance policies on the participants purchased by the Company. Supplemental retirement plan expense was $66 in 2000, $52 in 1999 and $37 in 1998. VEBA. The Company has a Voluntary Employee Beneficiary Association ("VEBA"). Under the plan, both employees and the Company may make contributions to pay for medical benefits. Company contributions to the VEBA were $1,000 in 2000, $410 in 1999 and $0 in 1998. 23
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (12) COMMITMENTS AND CONTINGENCIES LEASES. The Company leases a portion of its property, plant and equipment under operating leases that expire at various dates through 2026. Under most lease agreements, the Company pays insurance, taxes and maintenance. Rental expense for operating leases was $1,330 in 2000, $643 in 1999 and $932 in 1998. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 2001, $1,362; 2002, $829; 2003, $642; 2004, $405; 2005, $380; beyond, $2,153. LEGAL PROCEEDINGS. The Company is involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. Management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's financial position, results of operations or cash flows. (13) EARNINGS PER SHARE The reconciliation of basic and diluted EPS as required under SFAS No. 128 is as follows: <TABLE> <CAPTION> YEAR ENDED --------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Earnings before extraordinary loss $ 2,121 $ 9,986 $ 328 Extraordinary loss -- -- (408) --------- --------- --------- Net earnings (loss) $ 2,121 $ 9,986 $ (80) ========= ========= ========= Weighted average shares outstanding: Weighted average shares outstanding (basic) 8,460 8,449 8,442 Dilutive effect of stock options 49 38 -- --------- --------- --------- Weighted average shares outstanding (diluted) 8,509 8,487 8,442 ========= ========= ========= Earnings (loss) per share (basic and diluted): Earnings before extraordinary loss $ 0.25 $ 1.18 $ 0.04 Extraordinary loss -- -- (0.05) --------- --------- --------- Net earnings (loss) $ 0.25 $ 1.18 $ (0.01) ========= ========= ========= </TABLE> Options to purchase 391 shares in 2000, 273 shares in 1999 and 523 shares in 1998 were antidilutive and were not included in the diluted EPS computation. (14) BUSINESS SEGMENT INFORMATION During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected information about operating segments and related disclosures about products and services, major customers and geographic areas. The adoption of SFAS No. 131 did not affect the Company's financial position, results of operations or financial statement disclosures as the Company operates exclusively in the wire products industry and currently reports as a single industry segment. There were no customers that accounted for 10% or more of the Company's net sales in 2000 and 1999. One customer accounted for 11% of the Company's net sales in 1998. (15) RELATED PARTY TRANSACTIONS In September 1998, the Company entered into a Conversion Agreement with SRP, an affiliated company, whereby SRP will produce welded wire fabric for the Company for a specified conversion fee. The Company paid SRP approximately $2.3 million in 2000 and $1.6 million in 1999 for the services provided under this agreement. 24
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (16) OTHER FINANCIAL DATA Balance sheet information: <TABLE> <CAPTION> SEPTEMBER 30, OCTOBER 2, 2000 1999 ------------- ---------- <S> <C> <C> Accounts receivable, net: Accounts receivable $ 43,974 $ 31,429 Less allowance for doubtful accounts (1,360) (375) ---------- ---------- Total $ 42,614 $ 31,054 ========== ========== Inventories: Raw materials $ 21,010 $ 20,414 Supplies 2,276 2,601 Work in process 2,449 1,578 Finished goods 22,740 11,767 ---------- ---------- Total $ 48,475 $ 36,360 ========== ========== Other assets: Goodwill $ 19,845 $ -- Less accumulated amortization (838) -- ---------- ---------- Goodwill, net 19,007 -- Capitalized financing costs, net 3,717 238 Equity investment 3,241 3,101 Other 7,794 7,775 ---------- ---------- Total $ 33,759 $ 11,114 ========== ========== Property, plant and equipment, net: Land and land improvements $ 7,550 $ 5,360 Buildings 48,148 38,741 Machinery and equipment 114,972 102,829 Construction in progress 4,692 3,021 ---------- ---------- 175,362 149,951 Less accumulated depreciation (65,171) (64,422) ---------- ---------- Total $ 110,191 $ 85,529 ========== ========== </TABLE> 25
26 REPORT OF MANAGEMENT The management of Insteel Industries, Inc. is responsible for preparing the consolidated financial statements and all related financial information that appears in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management's best estimates and judgments. The Company maintains a system of internal accounting policies, procedures and controls intended to provide reasonable assurance, at appropriate cost, that assets are safeguarded, and that transactions are properly executed and recorded in accordance with management's authorization and are properly recorded and reported in the financial statements. Arthur Andersen LLP audits the Company's financial statements in accordance with auditing standards generally accepted in the United States and provides an objective, independent review of the Company's internal controls and the fairness of its reported financial condition and results of operations. The Audit Committee of the Board of Directors, composed of outside directors, meets periodically with management, the Company's internal auditor, and the independent public accountants to review internal accounting controls and accounting, auditing, and financial reporting matters. Both Arthur Andersen LLP and the internal auditor have unrestricted access to the Audit Committee. H. O. WOLTZ III MICHAEL C. GAZMARIAN - ------------------------------------- ------------------------------------- H. O. WOLTZ III MICHAEL C. GAZMARIAN President and Chief Executive Officer Chief Financial Officer and Treasurer 26
27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Shareholders Insteel Industries, Inc.: We have audited the accompanying consolidated balance sheets of Insteel Industries, Inc. (a North Carolina corporation) and subsidiaries as of September 30, 2000 and October 2, 1999 and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years ended September 30, 2000, October 2, 1999 and October 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insteel Industries, Inc. and subsidiaries as of September 30, 2000 and October 2, 1999, and the results of their operations and their cash flows for each of the years ended September 30, 2000, October 2, 1999 and October 3, 1998 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Charlotte, North Carolina October 13, 2000, except for Note 7, as to which the date is January 12, 2001. 27
28 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 2000, OCTOBER 2, 1999 AND OCTOBER 3, 1998 ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ---------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, 2000 1999 1998 ------------- ---------- ---------- <S> <C> <C> <C> Balance, beginning of year $ 375 $ 225 $ 242 Additions charged to earnings 458 150 19 Additions from acquisition 524 -- -- Accounts collected, net 3 -- -- --------- --------- --------- Balance, end of year $ 1,360 $ 375 $ 225 ========= ========= ========= </TABLE> 28
29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Shareholders Insteel Industries, Inc.: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheets of Insteel Industries, Inc. and subsidiaries as of September 30, 2000 and October 2, 1999, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years ended September 30, 2000, October 2, 1999 and October 3, 1998, and have issued our report thereon dated October 13, 2000, except for Note 7, as to which the date is January 12, 2001. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a)(2) of this Form 10-K is the responsibility of the Company's management and is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The information included in this schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Charlotte, North Carolina October 13, 2000. 29
30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information with respect to directors and nominees required for this item appears under the caption "Election of Directors" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is herein incorporated by reference. Information on executive officers appears under the caption "Executive Officers of the Company" in Item 1 of this report. ITEM 11. EXECUTIVE COMPENSATION. The information required for this item appears under the caption "Executive Compensation""in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is herein incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required for this item appears under the caption "Security Ownership of Principal Shareholders and Management" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is herein incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required for this item appears under the captions "Compensation Committee Interlocks and Insider Participation" and "Transactions with Management and Others" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is herein incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A)(1) FINANCIAL STATEMENTS The financial statements as set forth under Item 8 are filed as part of this report. (A)(2) FINANCIAL STATEMENT SCHEDULES Supplemental Schedule II - Valuation and Qualifying Accounts appears on page 28 of this report. All other schedules have been omitted because they are either not required or not applicable. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2000 (C) EXHIBITS See exhibit index on page 32. (D) FINANCIAL STATEMENT SCHEDULES See Item 14 (a)(2) above. 30
31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSTEEL INDUSTRIES, INC. Dated: January 12, 2001 By: H. O. WOLTZ III ------------------------------------- H. O. WOLTZ III Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on January 12, 2001 below by the following persons on behalf of the registrant and in the capacities indicated: <TABLE> <CAPTION> Name and Signature Position(s) - ----------------------------- ------------------------------------------------- <S> <C> HOWARD O. WOLTZ, JR. Chairman of the Board - ----------------------------- HOWARD O. WOLTZ, JR. H. O. WOLTZ III President, Chief Executive Officer and a Director - ----------------------------- H. O. WOLTZ III MICHAEL C. GAZMARIAN Chief Financial Officer and Treasurer (Principal - ----------------------------- Financial and Accounting Officer) MICHAEL C. GAZMARIAN LOUIS E. HANNEN Director - ----------------------------- LOUIS E. HANNEN FRANCES H. JOHNSON Director - ----------------------------- FRANCES H. JOHNSON CHARLES B. NEWSOME Director - ----------------------------- CHARLES B. NEWSOME GARY L. PECHOTA Director - ----------------------------- GARY L. PECHOTA W. ALLEN ROGERS II Director - ----------------------------- W. ALLEN ROGERS II WILLIAM J. SHIELDS Director - ----------------------------- WILLIAM J. SHIELDS C. RICHARD VAUGHN Director - ----------------------------- C. RICHARD VAUGHN </TABLE> 31
32 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED SEPTEMBER 30, 2000 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 3- ARTICLES OF INCORPORATION AND BYLAWS 3.1 Restated articles of incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated May 3, 1988). 3.2 Bylaws of the Company (as last amended April 26, 1999) (incorporated by reference to the exhibit of the same number contained in the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999). 3.3 Articles of Amendment to the restated articles of incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999). 4- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES ++++ 4.1 Credit Agreement by and among Insteel Industries, Inc., as borrower, Bank of America, N.A., as Administrative Agent and as Lender, and The Lenders Party Hereto From Time to Time dated January 31, 2000 providing for a $80,000,000 term loan and a $60,000,000 revolving credit loan, including Forms of Facility Guaranty, Security Agreement, Intellectual Property Security Agreement and Pledge Agreement. 4.1(a) Amendment Agreement No. 1 dated January 12, 2001 to Credit Agreement between Insteel Industries, Inc., Bank of America, N.A. and Lenders dated January 31, 2000. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). 4.2 Articles IV and VI of the Company's restated articles of incorporation, which are incorporated herein by reference to Exhibit 3.3. 4.3 Article 2, Section 8, of the registrant's bylaws, which is incorporated herein by reference to Exhibit 3.2. 4.4 Rights Agreement dated April 27, 1999 between Insteel Industries, Inc. and First Union National Bank (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 7, 1999). * 4.13 Loan Agreement dated as of September 1, 1988, between Liberty County Industrial Development Corporation ("Issuer") and Insteel Industries, Inc. pursuant to which the Issuer agreed to loan the proceeds from its $3,400,000 Industrial Development Revenue Refunding Bonds, Series 1988 (Insteel Industries, Inc. Project) (the "Bonds") to the Company and the Company agreed to repay such loan to the Issuer. * 4.14 Promissory Note dated October 26, 1988 and issued by the Company to the Issuer in the principal amount of $3,400,000, which note evidences the loan from the Issuer to the Company under the Loan Agreement (Exhibit 4.13). * 4.15 Purchase Contract dated October 26, 1988, among the Issuer, the Company, Texas Department of Commerce and Federated Tax-Free Trust ("Purchaser") pursuant to which the Purchaser agreed to purchase the Bonds issued by the Issuer. * 4.16 Letter of Credit and Reimbursement Agreement dated as of September 1, 1988, by and between the Company and First Union National Bank of North Carolina ("Bank") pursuant to which the Bank agreed to issue its Letter of Credit to secure payment of the Bonds and the Company agreed to reimburse the Bank for any and all drawings made under the Letter of Credit. # 4.24 Indenture of Trust between Industrial Development Authority of the City of Fredericksburg, Virginia and Crestar Bank as Trustee, dated as of September 1, 1990, relating to $4,205,000 Industrial Development Authority of the City of Fredericksburg, Virginia Industrial Development First Mortgage Revenue Refunding Bonds (Insteel Industries, Inc./Rappahannock Wire Company Project) Series of 1990. </TABLE> 32
33 EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED SEPTEMBER 30, 2000 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> # 4.25 Refunding Agreement between Industrial Development Authority of the City of Fredericksburg, Virginia ("Issuer") and Insteel Industries, Inc., and Rappahannock Wire Company (since renamed Insteel Wire Products Company) (together, the "Companies"), dated as of September 1, 1990 pursuant to which the Issuer agreed to loan the proceeds from its $4,205,000 Industrial Development First Mortgage Revenue Refunding Bonds (Insteel Industries, Inc./Rappahannock Wire Company Project), Series of 1990 to the Companies and the Companies agreed to repay such loan to the Issuer. ## 4.41 Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996 providing for a $35,000,000 revolving line of credit and a $17,500,000 letter of credit and banker's acceptance facility. *** 4.42 First Amendment dated April 11, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. *** 4.43 Second Amendment dated April 30, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. +++ 4.44 Third Amendment dated November 17, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.45 Fourth Amendment dated January 6, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.46 Fifth Amendment dated March 27, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.47 Sixth Amendment dated August 7, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.48 Seventh Amendment dated October 27, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. **** 4.49 Eighth Amendment dated April 6, 1999 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. UNDERTAKING: The Company agrees to file upon request of the Commission any instrument with respect to long-term debt not registered for which the total amount authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 10- MATERIAL CONTRACTS ++++ 10.1 Stock Purchase Agreement between GS Technologies Operating Co., Inc., and Insteel Industries, Inc. dated November 19, 1999. ++++ 10.2 Rod Supply Agreement by and between GS Industries, Inc., and Florida Wire and Cable, Inc. dated November 19, 1999. + 10.5 Employee Stock Ownership Plan of Insteel Industries, Inc., including Employee Stock Ownership Plan Trust Agreement. </TABLE> 33
34 EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED SEPTEMBER 30, 2000 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 10.6 1990 Director Stock Option Plan of Insteel Industries, Inc. (incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1991). ** 10.7 Profit Sharing Plan of Insteel Wire Products Company. ** 10.8 Profit Sharing Plan of Insteel Industries, Inc. ++ 10.9 1994 Employee Stock Option Plan of Insteel Industries, Inc. 10.11 Nonqualified Stock Option Plan (incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1995). ### 10.12 1994 Director Stock Option Plan of Insteel Industries, Inc. as Amended and Restated Effective as of April 28, 1998. +++ 10.21 Insteel Industries, Inc. Return on Capital Incentive Compensation Plan for Key Members of Management +++ 10.22 1997 Declaration of Amendment to Insteel Industries, Inc. Return on Capital Incentive Compensation Plan for Key Members of Management +++ 10.30 Insteel Industries, Inc. Director Compensation Plan **** 10.50 Stock Purchase Agreement dated January 15, 1999 between H.A. Schlatter, Quilni B.V., Structural Reinforcement Products, Inc. and Insteel Industries, Inc. **** 10.51 Asset Purchase Agreement dated April 6, 1999 between Insteel Industries, Inc. and Northwestern Steel and Wire Company and Northwestern Steel and Wire Company - Kentucky. 21- List of Subsidiaries of Insteel Industries, Inc., at September 30, 2000. 23- Consents of Experts and Counsel: Independent Auditors' Consent. 23.1 Consent of Arthur Andersen LLP 27- Financial Data Schedule (for SEC use only) * Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1988. + Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1989. # Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1990. ** Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1993. ++ Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1994. ## Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. *** Incorporated by reference to the exhibit of the same number contained in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. +++ Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. ### Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended October 3, 1998. **** Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended October 2, 1999. ++++ Incorporated by reference to the exhibit of the same number contained in the Company's Quarterly Report on Form 10-Q for the quarter ended January 1, 2000. </TABLE> 34