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 29, 2001 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 December 11, 2001 was $3,991,102. The number of shares outstanding of the registrant's common stock as of December 11, 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 2002 Annual Meeting of Shareholders are incorporated by reference as set forth in Part III hereof.
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 and tire bead wire 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 focused on achieving leadership positions in its markets and operating 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. PRODUCTS CONCRETE REINFORCING PRODUCTS (67% of 2001 consolidated net sales) include welded wire fabric and prestressed concrete strand ("PC strand"). Welded wire fabric is produced as both a standard and specially engineered reinforcing product 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 (14% of 2001 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. NAILS (8% of 2001 consolidated net sales) consist of a wide variety of products such as common nails, finishing nails, box nails, sinkers, duplex nails and galvanized nails. The Company also produces a broad range of brite and galvanized collated nails that are used by pneumatic nailing tools. In December 2001, the Company announced plans to exit the collated nail business (2% of 2001 consolidated net sales). The Company's nail products are sold to wholesalers, distributors and original equipment manufacturers ("OEMs") primarily for construction-related applications. GALVANIZED AND OTHER PRODUCTS (6% of 2001 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. In May 2001, the Company exited the galvanized strand business and no longer manufactures or markets these products. TIRE BEAD WIRE (5% of 2001 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. 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 2001, 2000 or 1999. 2
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. 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"), under which imported rod would be subject to duties once the imported quantities exceeded certain levels. In 2001, demand for wire rod in the United States fell by approximately 20% from the prior year. This reduction in demand was primarily related to the weakening in the domestic economy. In spite of reductions in wire rod production capacity due to mill closures during the year, domestic production together with the availability of imported material resulted in sufficient supply to wire rod consuming industries and a relatively stable pricing environment. The TRQ framework that was implemented in February 2000 provides for a gradual increase in the annual tonnage that may enter the domestic market each year as well as a gradual reduction in the applicable tariff for imports in excess of the quota. For the final year of the quota program, which is March 2002 to February 2003, the duty rate for imports in excess of the quota decreases to 5.0% from 7.5%. In November 2001, President Bush amended the terms of the TRQ by changing the administration of the quota system to a regional approach from the previous worldwide structure. In addition, administrative changes were made that are intended to balance the flow of imported material into the market. At this point in time, the Company is not able to determine the effect of these changes on the future supply of imported wire rod or the impact on pricing. In addition to the TRQ limitations, in August 2001, four domestic producers of wire rod filed anti-dumping and countervailing duty complaints against twelve wire rod exporting countries. These countries accounted for over 80% of the imported wire rod that entered the domestic market during the year preceding the filing. In recent years, the Company has relied on imported wire rod to satisfy between 10% and 40% of its total requirements. During 2001, purchases of imported wire rod accounted for approximately 32% of the Company's total wire rod purchases, all of which were subject to the TRQ. Approximately 24% of the Company's total wire rod purchases in 2001 originated in countries against which anti-dumping or countervailing duty petitions were filed in August 2001. The Company believes that these trade cases could result in a significant reduction in availability of imported wire rod from the affected countries and is pursuing alternative sources of supply. Although the Company believes that it will be able to locate alternative sources of supply that are sufficient to support the requirements of its markets, wire rod prices are expected to rise, particularly if domestic demand recovers. 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. 3
EMPLOYEES As of September 29, 2001, the Company employed 968 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 72 employees were covered by these agreements and were eligible for union membership of which all were union members. The Company believes that its relations with the labor unions and its employees are satisfactory. 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: <TABLE> <CAPTION> Name Age Position with the Company - ---- --- ------------------------- <S> <C> <C> Howard O. Woltz, Jr. 76 Chairman of the Board and a director H.O. Woltz III 45 President, Chief Executive Officer and a director Gary D. Kniskern 56 Vice President - Administration and Secretary Michael C. Gazmarian 42 Chief Financial Officer and Treasurer </TABLE> Howard O. Woltz, Jr., has been a director and Chairman of the Board since 1958 and has served in various capacities for more than 46 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 23 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, from 1981 to 1989. 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 21 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 16, 2001 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 19, 2002. 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. In connection with the Company's exit from the galvanized strand business in May 2001, and its plans to exit the collated nail business, the Company is pursuing a sale of the Jacksonville, Florida facility and one of the Andrews, South Carolina facilities. 4
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. 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 2001. 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 ("NYSE") under the symbol III. At December 11, 2001, there were 626 shareholders of record. Selected quarterly financial data appears under the caption "Financial Information by Quarter (Unaudited)" in Item 8(b) of this report. In June 2001, the Company announced that it had been notified by the NYSE that it had fallen below the continued listing criteria requiring total market capitalization of not less than $15.0 million over a 30 trading-day period. As required by the NYSE, the Company submitted a business plan to the Listings and Compliance Committee of the NYSE demonstrating how the Company intended to comply with the continued listing standards within eighteen months of the NYSE's notification. Following the NYSE's acceptance of the plan in August 2001, the Company's listing was continued, subject to quarterly monitoring by the Listings and Compliance Committee for compliance with the goals and initiatives as outlined in the plan. Failure to achieve the plan's financial and operational goals will likely result in the Company being subject to NYSE trading suspension and delisting. In November 2001, the Company announced that it had been notified by the NYSE that its share price had fallen below the continued listing criteria requiring an average closing price of not less than $1.00 over a consecutive 30 trading-day period. Following notification by the NYSE, the Company has up to six months by which time its share price and average share price over a consecutive 30 trading-day period may not be less than $1.00. The Company is currently considering alternatives to bring its average share price back into compliance with NYSE requirements. In the event that these requirements are not met by the end of the six-month period, the Company would be subject to NYSE trading suspension and delisting. In the event that trading in the Company's shares were suspended and the Company's shares were delisted from the NYSE, the Company believes that an alternative trading venue would be available. In November 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, 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 - Credit 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. 5
ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED ----------------------------------------------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 2001 2000 1999 1998 1997 ------------- ------------- ---------- ---------- ------------- <S> <C> <C> <C> <C> <C> Net sales $ 299,798 $ 315,285 $ 270,992 $ 266,147 $ 262,325 Restructuring charges 28,299 -- -- -- -- Earnings (loss) from continuing operations before extraordinary loss (23,754) 2,121 9,986 328 2,536 Net earnings (loss) (23,754) 2,121 9,986 (80) (341) Earnings (loss) per share from continuing operations before extraordinary loss (basic and diluted) (2.81) 0.25 1.18 0.04 0.03 Net earnings (loss) per share (basic and diluted) (2.81) 0.25 1.18 (0.01) (0.04) Cash dividends per share -- 0.24 0.24 0.24 0.24 Total assets 198,846 245,784 167,896 147,131 171,476 Total debt 100,705 105,000 46,817 36,363 52,293 Shareholders' equity 50,064 77,439 77,329 69,260 71,322 </TABLE> 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 the Company'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 and competitive 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 from domestic and foreign suppliers; 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; 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 in a timely manner and on favorable terms. RESULTS OF OPERATIONS STATEMENTS OF OPERATIONS - SELECTED DATA (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ----------------------------------------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 CHANGE 2000 CHANGE 1999 ------------- -------- ------------- ------- ---------- <S> <C> <C> <C> <C> <C> Net sales $299,798 (5%) $315,285 16% $270,992 Gross profit 21,291 (33%) 32,002 (10%) 35,647 Percentage of net sales 7.1% 10.2% 13.2% Selling, general and administrative expense $ 17,145 (11%) $ 19,368 11% $ 17,429 Percentage of net sales 5.7% 6.1% 6.4% Restructuring charges $ 28,299 N/M $ -- N/M $ -- Operating income (loss) (24,153) N/M 12,634 N/M 18,218 Percentage of net sales (8.1%) 4.0% 6.7% Interest expense $ 14,767 65% $ 8,943 260% $ 2,482 Percentage of net sales 4.9% 2.8% 0.9% Effective income tax rate 37.7% 38.2% 36.3% Net earnings (loss) $(23,754) N/M $ 2,121 N/M $ 9,986 Percentage of net sales (7.9%) 0.7% 3.7% </TABLE> "N/M" = not meaningful 2001 COMPARED WITH 2000 Net Sales Net sales decreased 5% to $299.8 million in 2001 from $315.3 million in 2000. The decrease in net sales was due to lower shipments as well as reduced average selling prices. Shipments fell 1% as a result of weaker market conditions and lower order levels for most of the Company's product lines. Average selling prices declined 4% due to competitive pricing pressures together with weakening demand. Sales of the Company's concrete reinforcing products (welded wire fabric and PC strand) rose 4% compared with the prior year while sales of wire products (industrial wire, nails and tire bead wire) fell 20%. Sales of concrete reinforcing products rose to 67% of consolidated sales in 2001 from 62% in 2000, while sales of wire products fell to 27% of consolidated sales from 32% in 2000. The changes in product mix were primarily due to lower sales of nails and industrial wire in 2001 together with increased sales of PC strand generated by FWC in comparison to the eight months of sales contributed in 2000 subsequent to the January 2000 acquisition date. Following the Company's sale of its galvanized strand business in May 2001 and its planned exit from the collated nail business, the Company will no longer generate revenues from these product lines. 7
Gross Profit Gross profit decreased 33% to $21.3 million, or 7.1% of net sales in 2001 from $32.0 million, or 10.2% of net sales in 2000. The decrease in gross profit was primarily due to the compression of spreads between average selling prices and raw material costs resulting from the competitive pricing pressures and lower average selling prices. Selling, General and Administrative Expense Selling, general and administrative expense ("SG&A expense") decreased 11% to $17.1 million, or 5.7% of net sales in 2001 from $19.4 million, or 6.1% of net sales in 2000. The decrease was primarily related to the cost reduction measures that have been implemented by the Company. Restructuring Charges The Company recorded $28.3 million of restructuring charges (pre-tax) in the third quarter of 2001. The charges consisted of non-cash impairment losses totaling $26.2 million associated with write-downs in the carrying values of the Company's tire bead wire and galvanized strand manufacturing facilities, and estimated plant closure costs of $2.1 million associated with the sale of the galvanized strand business located at the Jacksonville Florida facility. The $16.1 million impairment loss recorded on the tire bead wire facility was primarily related to unfavorable changes in the market that have occurred since the Company entered the business. The $10.1 million impairment loss recorded on the galvanized strand facility was due to the change in circumstances resulting from the sale of certain assets of the galvanized strand business and the planned closure and liquidation of the remaining assets of the facility. Interest Expense Interest expense increased $5.8 million to $14.8 million in 2001 from $8.9 million in 2000. The rise in interest expense was due to increases in amortization expense associated with capitalized financing costs ($2.5 million), average interest rates ($2.3 million) and average borrowing levels ($1.0 million). The increase in amortization expense was principally related to the acceleration in the original maturity date of the Company's senior secured credit facility and associated reduction in the period over which the capitalized financing costs are amortized together with additional lender fees. In addition, $1.0 million of amortization expense was recorded in 2001 to write off a portion of the capitalized financing costs as a result of the reduction in the amount of the revolving credit facility and the acceleration of the original maturity date. Income Taxes The Company's effective income tax rate was 37.7% in 2001 compared to 38.2% in 2000. Net Earnings (Loss) The Company's net loss for 2001 was $23.8 million, or $2.81 per share, compared with net earnings of $2.1 million, or 25 cents per share, in 2000. Excluding the restructuring charges (after-tax), the 2001 net loss was $6.4 million, or 76 cents per share. 2000 COMPARED WITH 1999 Net Sales Net sales increased 16% to $315.3 million in 2000 from $271.0 million in 1999 as a result of the revenues contributed by FWC, which was acquired in January 2000. On a comparable basis, excluding the sales of FWC, net sales decreased 7% primarily due to lower sales of industrial wire. Shipments rose 9% as a result of the additional volume provided by FWC, which offset an 8% decrease in the remainder of the Company's business. Average selling prices increased 6% primarily due to changes in the Company's product mix associated with the higher average selling prices for FWC's product lines. Sales of the Company's concrete reinforcing products (welded wire fabric and PC strand) rose 33% compared with the prior year while sales of wire products (industrial wire, nails and tire bead wire) fell 19%. Sales of concrete reinforcing products rose to 62% of consolidated sales in 2000 from 54% in 1999, while sales of wire products fell to 32% of consolidated sales from 46% in 1999. 8
The changes in product mix were primarily due to lower sales of industrial wire in 2000 together with increased sales of PC strand generated by FWC, which was acquired in January 2001, and increased sales of welded wire fabric contributed by the Hickman, Kentucky facility, which was acquired in April 1999. Gross Profit Gross profit decreased 10% to $32.0 million, or 10.2% of net sales in 2000 from $35.6 million, or 13.2% of net sales in 1999. The decrease in gross profit was primarily due to operating inefficiencies associated with the reconfiguration of the industrial wire business, which resulted in unfavorable manufacturing costs as well as reduced sales. Gross profit was also negatively impacted by the compression in spreads between average selling prices and raw material costs in certain product lines. These unfavorable factors were partially offset by the incremental contribution from the FWC acquisition. Selling, General and Administrative Expense SG&A expense rose 11% to $19.4 million, or 6.1% of net sales in 2000, from $17.4 million, or 6.4% of net sales in 1999. The increase was primarily due to the incremental expenses associated with FWC that were partially offset by lower incentive plan expenses. Interest Expense Interest expense increased $6.5 million to $8.9 million in 2000 from $2.5 million in 1999. The increase in interest expense was due to the additional debt associated with the acquisition of FWC and the refinancing of the Company's credit facility, and resulted from increases in the Company's average borrowing levels ($3.2 million), average interest rates ($2.6 million) and the amortization expense associated with capitalized financing costs ($0.6 million). Income Taxes The Company's effective income tax rate was 38.2% in 2000 compared to 36.3% in 1999. Net Earnings Net earnings fell to $2.1 million, or 25 cents per share, in 2000 from $10.0 million, or $1.18 per share in 1999. LIQUIDITY AND CAPITAL RESOURCES SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED --------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Net cash provided by (used for) operating activities $ (733) $ 24,515 $ 13,708 Net cash provided by (used for) investing activities 5,981 (74,088) (21,840) Net cash provided by (used for) financing activities (4,295) 51,976 8,537 Working capital 42,411 38,336 35,633 Total debt 100,705 105,000 46,817 Percentage of total capital 67% 58% 38% Shareholders' equity $ 50,064 $ 77,439 $ 77,329 Percentage of total capital 33% 42% 62% Total capital $ 150,769 $ 182,439 $ 124,146 </TABLE> CASH FLOW ANALYSIS Operating activities used $0.7 million of cash in 2001 while providing $24.5 million and $13.7 million in 2000 and 1999, respectively. The decrease in 2001 was primarily due to the current year loss and associated change in deferred income taxes partially offset by the non-cash restructuring charges, compared with the prior year net earnings. In addition, the net 9
change in the working capital components of receivables, inventories and accounts payable and accrued expenses used $1.0 million in the current year while providing $11.8 million in 2000. Depreciation and amortization rose by $1.8 million, or 16%, due to a $2.5 million increase in amortization expense associated with the capitalized financing costs related to the Company's senior secured credit facility. In 2000, reductions in inventories and receivables relative to the prior year (excluding the FWC-related additions) offset the decrease in net earnings. In addition, depreciation and amortization rose by $2.3 million, or 26%, due to depreciation and goodwill amortization related to the FWC acquisition together with the amortization of capitalized financing costs associated with the Company's 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. Investing activities provided $6.0 million of cash in 2001 while using $74.1 million and $21.8 million in 2000 and 1999, respectively. The cash provided in 2001 was principally related to the proceeds from the sale of certain of the assets of the Company's galvanized strand and nail businesses. In 2000, investing activities include the $66.6 million acquisition of FWC, and in 1999, the investments totaling $6.6 million associated with SRP and the $8.4 million acquisition of a concrete reinforcing business. Capital expenditures amounted to $2.3 million, $9.2 million and $7.3 million in 2001, 2000 and 1999, respectively. The decrease in capital expenditures for 2001 was primarily related to the curtailment of the Company's capital outlays in connection with its efforts to reduce debt. The Company expects that capital expenditures will remain at reduced levels in 2002 in comparison to the recent historical levels prior to 2001 Financing activities used $4.3 million of cash in 2001 while providing $52.0 million and $8.5 million in 2000 and 1999, respectively. The reduction in financing requirements in 2001 was primarily related to the Company's debt reduction efforts in the current year. In 2000, the Company entered into a new senior secured credit facility which was used to fund the acquisition of FWC and pay off the balances outstanding on its previous unsecured revolving credit facility. 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 the 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. As required by its lenders under the terms of its senior secured credit facility, 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 fixed rate debt. 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 29, 2001, the fair value of these swap agreements was ($5.0 million) and was recorded in other liabilities on the Company's consolidated balance sheet. The Company's total debt to capital ratio increased to 67% at September 29, 2001 compared with 58% and 38% at September 30, 2000 and October 2, 1999, respectively. The increase was primarily related to the net loss of $23.8 million in 2001 and related reduction in shareholder's equity together with the additional debt employed to finance the $66.6 million acquisition of FWC in January 2000. CREDIT 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. Through a series of amendments to the credit agreement, the most recent which was executed in November 2001, the Company and its senior lenders agreed to certain modifications in the senior secured credit facility. Under the terms of these amendments, the maturity date of the credit facility was accelerated from January 31, 2005 to October 15, 2002 and the amount of the revolving credit facility was reduced from $60.0 million to $50.0 million. In addition, the Company is subject to financial covenants that require the maintenance of earnings before interest, taxes, depreciation and amortization ("EBITDA") and net worth above specified levels. The amendments also provided for certain other terms and conditions, including: (1) a deferral in the payment dates and reduction in the amounts of the principal payments on the term loan; and (2) restrictions that prevent the payment of dividends or the repurchase of shares of the Company's common stock. 10
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. As of September 29, 2001, the interest rate on the senior secured credit facility was 8.50%. In addition, a commitment fee is payable on the unused portion of the revolving credit facility. The amendments have significantly increased the Company's interest expense as a result of: (1) scheduled increases in the applicable interest rate margins; (2) additional fees, a portion of which are calculated based upon the Company's stock price, payable to the lenders on certain dates and in increasing amounts based upon the timing of the completion of a refinancing of the credit facility; and (3) higher amortization expense due to the acceleration of the original maturity date of the credit facility and associated reduction in the period over which the capitalized financing costs are amortized. Upon an event of default, the lenders would be entitled to the right to payment of that portion of the fees that are calculated based upon the Company's stock price. 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 29, 2001, approximately $5.0 million was available under the revolving credit facility and $57.5 million was outstanding on the term loan. The senior secured credit facility is collateralized by all of the Company's assets. The Company intends to refinance the senior secured credit facility prior to its amended maturity date of October 15, 2002. In the event that such efforts are unsuccessful, the Company believes that it would likely experience a material adverse impact on its financial condition, liquidity and results of operation. OUTLOOK The Company believes that the general weakening in the economy together with the increased uncertainty and volatility in demand will continue to create challenging business conditions in 2002. In addition, reduced domestic capacity together with the pending antidumping and countervailing duty actions could significantly reduce the supply of hot rolled carbon steel wire rod, the Company's primary raw material, to domestic producers of steel wire products, leading to higher prices and compressed profit margins. In view of the Company's recent financial performance and the expected continuation of difficult market conditions, it is continuing to pursue a range of initiatives to reduce operating costs and debt. During 2001, the Company completed staffing reductions, curtailed discretionary spending, and achieved higher productivity levels at its manufacturing facilities in reducing operating costs. The Company anticipates that the reductions in operating costs together with the suspension of its cash dividend, curtailment of capital outlays, improved management of working capital and disposal of excess assets 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 for 2002 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements"). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's cash flows and earnings are subject to fluctuations resulting from changes in commodity prices, interest rates and foreign exchange rates. The Company manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. The Company monitors its underlying market risk exposures on an ongoing basis and believes that it can modify or adapt its hedging strategies as necessary. COMMODITY PRICES The Company does not generally use derivative commodity instruments to hedge its exposures to changes in commodity prices. The principal commodity price exposure is hot rolled carbon steel wire rod, the Company's primary raw material, which is purchased from both domestic and foreign suppliers. The Company has purchasing procedures and arrangements in place with customers to manage its exposure to changes in wire rod prices. INTEREST RATES 11
The Company has debt obligations that are sensitive to changes in interest rates under its senior secured credit facility. As required by its lenders under the terms of its senior secured credit facility, 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 fixed rate debt. 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. FOREIGN EXCHANGE EXPOSURE The Company has not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, although such transactions have not been material in the past. The Company will occasionally hedge firm commitments for certain equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by the Company on a case-by-case basis. There were no forward contracts outstanding as of September 29, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (A) FINANCIAL STATEMENTS <TABLE> <S> <C> Consolidated Balance Sheets as of September 29, 2001 and September 30, 2000 13 Consolidated Statements of Operations for the three years ended September 29, 2001, September 30, 2000 and October 2, 1999 14 Consolidated Statements of Shareholders' Equity for the three years ended September 29, 2001, September 30, 2000 and October 2, 1999 15 Consolidated Statements of Cash Flows for the three years ended September 29, 2001, September 30, 2000 and October 2, 1999 16 Notes to Consolidated Financial Statements 17 Report of Management 31 Report of Independent Public Accountants 32 Schedule II - Valuation and Qualifying Accounts for the three years ended September 29, 2001, September 30, 2000 and October 2, 1999 33 Report of Independent Public Accountants on Schedule 34 </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 ------------------------------------------------------------ DECEMBER 30 MARCH 31 JUNE 30 SEPTEMBER 29 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> 2001 OPERATING RESULTS Net sales $68,939 $70,834 $82,418 $77,607 Gross profit 2,915 3,078 8,369 6,929 Restructuring charges -- -- 28,299 -- Net earnings (loss) (3,560) (4,187) (16,445) 438 PER SHARE DATA Net earnings (loss) (basic and (0.42) (0.49) (1.94) 0.05 diluted) Cash dividends -- -- -- -- Stock prices High 4.50 3.38 2.04 1.50 Low 0.94 1.65 1.13 0.65 </TABLE> <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 </TABLE> 12
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> SEPTEMBER 29, SEPTEMBER 30, 2001 2000 --------------- -------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 4,183 $ 3,230 Accounts receivable, net 43,912 42,614 Inventories 34,576 48,475 Prepaid expenses and other 4,645 7,515 --------- --------- Total current assets 87,316 101,834 Property, plant and equipment, net 74,234 110,191 Other assets 37,296 33,759 --------- --------- Total assets $ 198,846 $ 245,784 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 32,293 $ 43,466 Accrued expenses 9,692 9,912 Current portion of long-term debt 2,920 10,120 --------- --------- Total current liabilities 44,905 63,498 Long-term debt 97,785 94,880 Deferred income taxes -- 8,934 Other liabilities 6,092 1,033 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: 2001, 8,460; 2000, 8,460 16,920 16,920 Additional paid-in capital 38,327 38,327 Retained earnings (deficit) (1,562) 22,192 Accumulated other comprehensive loss (3,621) -- --------- --------- Total shareholders' equity 50,064 77,439 --------- --------- Total liabilities and shareholders' equity $ 198,846 $ 245,784 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 13
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED ------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ----------- <S> <C> <C> <C> Net sales $ 299,798 $ 315,285 $ 270,992 Cost of sales 278,507 283,283 235,345 --------- --------- --------- Gross profit 21,291 32,002 35,647 Selling, general and administrative expense 17,145 19,368 17,429 Restructuring charges 28,299 -- -- --------- --------- --------- Operating income (loss) (24,153) 12,634 18,218 Interest expense 14,767 8,943 2,482 Other expense (income) (802) 258 59 --------- --------- --------- Earnings (loss) before income taxes (38,118) 3,433 15,677 Provision (benefit) for income taxes (14,364) 1,312 5,691 --------- --------- --------- Net earnings (loss) $ (23,754) $ 2,121 $ 9,986 ========= ========= ========= Net earnings (loss) per share (basic and diluted) $ (2.81) $ 0.25 $ 1.18 ========= ========= ========= Cash dividends per share $ -- $ 0.24 $ 0.24 ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 14
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ------------------------------------------ SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> COMMON STOCK: Balance, beginning of year $ 16,920 $ 16,914 $ 16,885 Stock options exercised -- 6 29 -------- -------- -------- Balance, end of year $ 16,920 $ 16,920 $ 16,914 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL: Balance, beginning of year $ 38,327 $ 38,314 $ 38,232 Stock options exercised -- 13 82 -------- -------- -------- Balance, end of year $ 38,327 $ 38,327 $ 38,314 ======== ======== ======== RETAINED EARNINGS (DEFICIT): Balance, beginning of year $ 22,192 $ 22,101 $ 14,143 Cash dividends declared -- (2,030) (2,028) Net earnings (loss) (23,754) 2,121 9,986 -------- -------- -------- Balance, end of year $ (1,562) $ 22,192 $ 22,101 ======== ======== ======== ACCUMULATED OTHER COMPREHENSIVE LOSS $ (3,621) $ -- $ -- ======== ======== ======== Total shareholders' equity $ 50,064 $ 77,439 $ 77,329 ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 15
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (23,754) $ 2,121 $ 9,986 Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities (net of effect of acquisitions): Depreciation and amortization 13,000 11,203 8,908 Loss (gain) on sale of assets (67) 774 (75) Restructuring charges 28,299 -- -- Deferred income taxes (11,379) 1,139 1,732 Net changes in assets and liabilities: Accounts receivable, net (2,619) 3,862 (2,338) Inventories 12,534 8,371 (4,168) Accounts payable and accrued expenses (11,702) (381) 217 Other changes (5,045) (2,574) (554) --------- --------- --------- Total adjustments 23,021 22,394 3,722 --------- --------- --------- Net cash provided by (used for) operating activities (733) 24,515 13,708 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,257) (9,230) (7,344) Acquisitions of businesses -- (66,594) (11,647) Payment of acquisition-related costs -- (1,453) -- Dispositions of businesses 8,078 -- -- Purchases of short-term investments -- -- (1,875) Proceeds from (issuance of) notes receivable (442) 173 (1,290) Proceeds from sale of property, plant and equipment 602 3,016 316 --------- --------- --------- Net cash provided by (used for) investing activities 5,981 (74,088) (21,840) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 81,100 197,458 106,435 Principal payments on long-term debt (85,395) (139,275) (95,981) Payment of debt issuance costs -- (4,196) -- Proceeds from exercise of stock options -- 19 111 Cash dividends paid -- (2,030) (2,028) --------- --------- --------- Net cash provided by (used for) financing activities (4,295) 51,976 8,537 --------- --------- --------- Net increase in cash and cash equivalents 953 2,403 405 Cash and cash equivalents at beginning of period 3,230 827 422 --------- --------- --------- Cash and cash equivalents at end of period $ 4,183 $ 3,230 $ 827 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 12,205 $ 8,363 $ 1,947 Income taxes 5 2,261 3,723 </TABLE> See accompanying notes to consolidated financial statements. 16
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 29, 2001, SEPTEMBER 30, 2000 AND OCTOBER 2, 1999 (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 and tire bead wire 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. The Company's fiscal year is the 52 or 53 weeks ending on the Saturday closest to September 30. Fiscal years 2001, 2000 and 1999 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. SHIPPING AND HANDLING COSTS. Costs incurred in the shipping and handling of customers' goods are included in cost of sales. Revenues derived from billings to customers for shipping and handling costs are included in net sales. 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 or otherwise stated at reduced values to the extent of asset impairment write-downs. 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 2001, 2000 or 1999. OTHER ASSETS. Other assets consist principally of goodwill, non-current deferred tax assets, assets held for sale, investments in affiliated companies, the cash surrender value of life insurance policies, capitalized financing costs, long-term notes receivable 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. 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) 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 5 - Credit Facilities). 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. Basic earnings per share ("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. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS No. 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill and certain intangible assets to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been previously issued. The discontinuation of goodwill and intangibles amortization as required under SFAS 142 will increase earnings before taxes by approximately $711 over each of the next 18.25 years. The Company is currently assessing whether to adopt the new standard in fiscal 2002 or fiscal 2003 and is uncertain at this time if an impairment charge will be required upon adoption. RECLASSIFICATIONS. Certain 2000 amounts in the accompanying consolidated balance sheet have been reclassified in order to conform with their 2001 presentation. (3) ACQUISITIONS AND DIVESTITURES DIVESTITURE OF GALVANIZED STRAND BUSINESS. In May 2001, the Company sold certain assets related to its galvanized strand business for $8.1 million and recorded a gain of $0.3 million in other income on its consolidated statement of operations. Under the terms of the agreement, the Company agreed to continue to manufacture galvanized strand for the acquirer of the business until equipment was relocated to the acquirer's production facilities. Following the completion of the transition period with the acquirer in October 2001, the Company ceased the operations of the galvanized strand facility and is pursuing a sale of the remaining assets. 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. 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) 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. A summary of the purchase price and the purchase price allocation based on the net assets as of January 31, 2000 is as follows: <TABLE> <CAPTION> PURCHASE PRICE -------------- <S> <C> Cash paid to GSTOC $ 66,600 Financial advisors, accounting, legal and other direct acquisition costs 1,453 -------- Total purchase price $ 68,053 ======== 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 2,441 Other 11 -------- Total adjustments (13,803) -------- Goodwill and other intangibles $ 19,882 ======== </TABLE> Following the acquisition of FWC, the Company relocated certain FWC administrative activities to the Company's headquarters, terminated certain management and administrative support employees of FWC, and exited certain facility leases. Additional purchase price liabilities of approximately $2.0 million were recorded for severance and other exit costs related to these plans. As of September 29, 2001, the remaining estimated severance and other exit costs to be paid were $426. A reconciliation of activity with respect to these liabilities, which are included in accrued expenses on the consolidated balance sheet as of September 29, 2001 and September 30, 2000, is as follows: <TABLE> <CAPTION> YEAR ENDED ------------------------------------------------------------------------------- SEPTEMBER 29, 2001 SEPTEMBER 30, 2000 ------------------------------------- ------------------------------------- OTHER EXIT OTHER EXIT SEVERANCE COSTS TOTAL SEVERANCE COSTS TOTAL --------- ---------- -------- --------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> Recognized as liabilities assumed and included in purchase price allocation $ 740 $ 2 $ 742 $ 1,857 $ 142 $ 1,999 Payments made or reserve utilized (314) (2) (316) (1,117) (140) (1,257) ------- ------- ------- ------- ------- ------- Balance, end of year $ 426 $ -- $ 426 $ 740 $ 2 $ 742 ======= ======= ======= ======= ======= ======= </TABLE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) 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> 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. 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. 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 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 $160 in 2001 and $140 in 2000, and an equity loss of $149 in 1999 in other expense on its consolidated statement of operations. (4) RESTRUCTURING CHARGES The Company recorded $28.3 million of restructuring charges (pre-tax) in the third quarter of 2001. The charges consisted of non-cash impairment losses totaling $26.2 million associated with write-downs in the carrying values of the Company's tire bead wire and galvanized strand manufacturing facilities, and estimated plant closure costs of $2.1 million associated with the sale of the galvanized strand business. The $16.1 million impairment loss recorded on the tire bead wire facility was primarily related to unfavorable changes in the market that have occurred since the Company entered the business. In determining the impairment loss, the Company considered historical performance and future estimated results in the evaluation of potential impairment. This analysis indicated that the carrying amount of the assets was not recoverable through the future undiscounted cash flows expected to result from the use of the assets. The $10.1 million impairment loss on the galvanized strand facility was due to the change in circumstances resulting from the sale of certain assets of the galvanized strand business and the planned closure and liquidation of the remaining assets of the facility. The impairment charges on the tire bead wire and galvanized strand facilities reflect a reduction in the carrying value of the property, plant and equipment to their estimated fair market value based on estimates of current selling prices less the associated selling costs. The $2.1 million of estimated plant closure costs associated with the sale of the galvanized strand business consisted of $1.1 million for estimated losses through the completion of contractual obligations with the acquirer, $0.6 million for employee separation costs, and $0.4 million for the early termination of contractual obligations and inventory valuation adjustments. 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) A reconciliation of the restructuring charge activity associated with the plant closure costs as of September 29, 2001 is as follows: <TABLE> <CAPTION> BALANCE AT TOTAL CASH SEPTEMBER 29, CHARGE PAYMENTS 2001 ------ -------- ------------- <S> <C> <C> <C> Severance costs $ 628 $ 220 $ 408 Estimated operating losses through the completion of contractual obligations 1,097 559 538 Other costs 350 160 190 ------ ------ ------ Total $2,075 $ 939 $1,136 ====== ====== ====== </TABLE> (5) CREDIT FACILITIES Scheduled maturity dates and interest rates (as of September 29, 2001 and September 30, 2000) related to the Company's debt are as follows: <TABLE> <CAPTION> SEPTEMBER 29, SEPTEMBER 30, INTEREST RATE MATURITY 2001 2000 ------------- -------- ------------- ------------- <S> <C> <C> <C> <C> Term loan 8.50% 2002 $ 57,535 $ 69,000 Revolving credit facility 8.50% 2002 40,490 32,700 Industrial revenue refunding bonds 7.63% - 7.75% 2005 1,400 1,680 Industrial development revenue refunding bonds 4.50% 2003 680 1,020 Mortgage note 600 600 -------- -------- Total long-term debt 100,705 105,000 Less current maturities 2,920 10,120 -------- -------- Long-term debt, excluding current maturities $ 97,785 $ 94,880 ======== ======== </TABLE> 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. Through a series of amendments to the credit agreement, the most recent which was executed in November 2001, the Company and its senior lenders agreed to certain modifications in the senior secured credit facility. Under the terms of these amendments, the maturity date of the credit facility was accelerated from January 31, 2005 to October 15, 2002 and the amount of the revolving credit facility was reduced from $60.0 million to $50.0 million. In addition, the Company is subject to financial covenants that require the maintenance of earnings before interest, taxes, depreciation and amortization ("EBITDA") and net worth above specified levels. The amendments also provided for certain other terms and conditions, including: (1) a deferral in the payment dates and reduction in the amounts of the principal payments on the term loan; and (2) restrictions that prevent the payment of dividends or the repurchase of shares of the Company's common stock. 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. As of September 29, 2001, the interest rate on the senior secured credit facility was 8.50%. In addition, a commitment fee is payable on the unused portion of the revolving credit facility. The amendments have significantly increased the Company's interest expense as a result of: (1) scheduled increases in the applicable interest rate margins; (2) additional fees, a portion of which are calculated based upon the Company's stock price, payable to the lenders on certain dates and in increasing amounts based upon the timing of the completion of a refinancing of the credit facility; and (3) higher amortization expense due to the acceleration of the original maturity date of the credit facility and associated reduction in the period over which the capitalized financing costs are amortized. Upon an event of default, the lenders would be entitled to the right to payment of that portion of the fees that are calculated based upon the Company's stock price. 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) 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 29, 2001, approximately $5.0 million was available under the revolving credit facility and $57.5 million was outstanding on the term loan. The senior secured credit facility is collateralized by all of the Company's assets. The Company intends to refinance the senior secured credit facility prior to its amended maturity date of October 15, 2002. In the event that such efforts are unsuccessful, the Company believes that it would likely experience a material adverse impact on its financial condition, liquidity and results of operation. As required by its lenders under the terms of its senior secured credit facility, 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 variable rate debt to fixed rate debt. 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 29, 2001, the fair value of these swap agreements was ($5.0 million) and was recorded in other liabilities on the Company's consolidated balance sheet. 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: 2002, $2.9 million; 2003, $96.3 million; 2004, $0.3 million; 2005, $0.3 million; 2006, $0.3 million. Capitalized financing costs associated with the senior secured facility were $1.8 million at September 29, 2001 and $4.3 million at September 30, 2000, and are being amortized on a straight-line basis over the remaining term of the facility. (6) SHAREHOLDERS' EQUITY Shares of common stock outstanding are as follows: <TABLE> <CAPTION> YEAR ENDED ------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Balance, beginning of year 8,460 8,457 8,443 Stock options exercised -- 3 14 ----- ----- ----- Balance, end of year 8,460 8,460 8,457 ===== ===== ===== </TABLE> (7) 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 these 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, 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 Granted 345 2.12 - 2.12 2.12 Cancelled (7) 8.63 - 8.63 8.63 ----- Balance, September 29, 2001 1,184 2.12 - 9.19 5.46 ===== </TABLE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The weighted average characteristics of outstanding stock options at September 29, 2001 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> $ 2.12 - $ 2.12 345 9.4 $ 2.12 80 $ 2.12 4.69 - 6.38 331 7.6 5.31 218 5.34 6.56 - 7.88 297 5.2 7.17 262 7.25 8.38 - 9.19 211 7.2 8.76 137 8.81 </TABLE> At September 29, 2001, 522 shares were available for future grants under the plans. Options exercisable were 697 at September 29, 2001 and 499 at September 30, 2000. The weighted average exercise price for these shares was $6.37 for 2001 and $7.00 for 2000. 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 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Net earnings (loss) - as reported $ (23,754) $ 2,121 $ 9,986 Net earnings (loss) - pro forma (24,107) 1,823 9,763 Basic net earnings (loss) per share - as reported (2.81) 0.25 1.18 Basic net earnings (loss) per share - pro forma (2.85) 0.22 1.16 Diluted net earnings (loss) per share - as reported (2.81) 0.25 1.18 Diluted net earnings (loss) per share - pro forma (2.85) 0.21 1.15 </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 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Expected life (in years) 5.0 5.0 5.0 Risk-free interest rate 5.1% 6.3% 5.4% Expected volatility 0.85 0.50 0.40 Expected dividend yield 0.0% 3.0% 3.0% </TABLE> The weighted average estimated fair values of options granted during 2001, 2000 and 1999 were $1.64, $2.85 and $2.75 per share, respectively. 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (8) INCOME TAXES The provision (benefit) for income taxes consisted of: <TABLE> <CAPTION> YEAR ENDED ------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Earnings (loss) before income taxes $(38,118) $ 3,433 $ 15,677 Provision (benefit) for income taxes: Current: Federal $ (3,034) $ 60 $ 3,488 State 49 113 471 -------- -------- -------- (2,985) 173 3,959 Deferred: Federal (10,149) 967 1,569 State (1,230) 172 163 -------- -------- -------- (11,379) 1,139 1,732 -------- -------- -------- Provision (benefit) for income taxes $(14,364) $ 1,312 $ 5,691 ======== ======== ======== Effective income tax rate 37.7% 38.2% 36.3% ======== ======== ======== </TABLE> The provision (benefit) for income taxes differs from the amount computed by applying the federal statutory rate to the Company's earnings (loss) before taxes as a result of the following differences: <TABLE> <CAPTION> YEAR ENDED ------------------------------------------ SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Provision (benefit) for income taxes at federal statutory rate $(13,341) $ 1,167 $ 5,409 State income taxes, net of federal income tax benefit (1,144) 74 308 Other, net 121 71 (26) -------- -------- -------- Provision (benefit) for income taxes $(14,364) $ 1,312 $ 5,691 ======== ======== ======== </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> YEAR ENDED ----------------------------- SEPTEMBER 29, SEPTEMBER 30, 2001 2000 ------------- ------------- <S> <C> <C> DEFERRED TAX ASSETS: Accrued expenses or asset reserves for financial statements, not yet deductible for tax purposes $ 5,163 $ 6,158 Alternative minimum tax credit carryforwards 2,201 400 Federal and state net operating loss carryforwards 2,047 0 Unrealized loss on hedge instruments 1,920 0 -------- -------- Gross deferred tax assets 11,331 6,558 DEFERRED TAX LIABILITIES: Plant and equipment principally due to differences in depreciation, impairment charges and capitalized interest (2,143) (10,844) Other reserves (220) (11) Prepaid expenses for financial statements that were deducted for tax purposes 0 (361) -------- -------- Gross deferred tax liabilities (2,363) (11,216) -------- -------- Net deferred tax asset (liability) $ 8,968 $ (4,658) ======== ======== </TABLE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The Company has recorded a current deferred tax asset of $3.2 million at September 29, 2001 and $4.3 million at September 30, 2000 in prepaid expenses and other on its consolidated balance sheet. In addition, the Company has recorded a current income tax refund receivable of $3.0 million in accounts receivable, net on its consolidated balance sheet. The Company has gross federal operating loss carryforwards of $3.5 million that will expire in 20 years and gross state operating loss carryforwards of $19.3 million that begin to expire in two years, but principally expire in 15 - 20 years. The Company also has federal alternative minimum tax credit carryforwards of $2.2 million that do not expire. The realization of the Company's deferred tax assets is entirely dependent upon the Company's ability to generate future taxable income. Generally accepted accounting principles require that the Company periodically assess the need to establish a valuation allowance against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized. Based on long-term historical financial performance and projections of future operations, the Company believes that the net deferred tax asset of $9.0 million will be fully realized and, as such, no valuation allowance has been recorded as of September 29, 2001. The need for a valuation allowance is subject to periodic review and adjustment based on changes in facts and circumstances, with any such changes reflected as adjustments to income tax expense in the period recorded. (9) 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 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 the Company recorded a settlement loss of $401. 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) 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 29, 2001 and September 30, 2000: <TABLE> <CAPTION> DELAWARE PLAN YEAR ENDED ----------------------------- SEPTEMBER 29, SEPTEMBER 30, 2001 2000 ------------- ------------- <S> <C> <C> CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 3,796 $ 3,939 Service cost 67 58 Interest cost 255 250 Amendments -- 6 Actuarial gain (42) (273) Benefits paid (338) (184) ------- ------- Benefit obligation at end of year $ 3,738 $ 3,796 ======= ======= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 3,672 $ 3,080 Actual return on plan assets (769) 743 Employer contributions 65 33 Other (112) -- Benefits paid (338) (184) ------- ------- Fair value of plan assets at end of year $ 2,518 $ 3,672 ======= ======= RECONCILIATION OF FUNDED STATUS TO NET AMOUNT RECOGNIZED: Funded status $(1,220) $ (124) Unrecognized net gain (loss) 946 (171) Unrecognized prior service cost 13 15 Unrecognized transition obligation -- 6 ------- ------- Net amount recognized $ (261) $ (274) ======= ======= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF: Accrued benefit liability $(1,220) $ (274) Accumulated other comprehensive loss 959 -- ------- ------- Net amount recognized $ (261) $ (274) ======= ======= </TABLE> Net periodic pension cost includes the following components: <TABLE> <CAPTION> INSTEEL PLAN DELAWARE PLAN YEAR ENDED YEAR ENDED ------------------------------------------- ------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 2001 2000 1999 ------------- ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> COMPONENTS OF NET PERIODIC PENSION COST: Service cost $-- $-- $ -- $ 67 $ 58 $ 97 Interest cost -- -- 316 255 250 240 Expected return on plan assets -- -- (312) (279) (235) (220) Deferred asset gain -- -- (94) -- -- -- Amortization of prior service cost -- -- -- 3 3 3 Amortization of transition asset -- -- (49) 6 12 12 Recognized net actuarial loss (gain) -- -- 10 -- 3 52 Curtailment gain -- -- -- -- -- -- Settlement loss -- -- 401 -- -- -- --- --- ----- ----- ----- ----- Net periodic pension cost $-- $-- $ 272 $ 52 $ 91 $ 184 === === ===== ===== ===== ===== </TABLE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The assumptions used for the calculations for both plans are as follows: <TABLE> <CAPTION> YEAR ENDED ---------------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Assumptions at year-end: Discount rate 7.0% 7.0% 5.9%-6.5% Rate of increase in compensation levels N/A N/A N/A Expected long-term rate of return on assets 8.0% 8.0% 8.0% </TABLE> 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 2001, 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 $515 in 2001, $400 in 2000 and $405 in 1999. 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 $84 in 2001, $66 in 2000 and $52 in 1999. 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 $0 in 2001, $1,000 in 2000 and $410 in 1999. (10) 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 $1,482 in 2001, $1,330 in 2000 and $643 in 1999. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 2002, $697; 2003, $487; 2004, $153; 2005, $47; 2006, $35; beyond, $494. 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. The Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its financial position, results of operations or cash flows. 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (11) EARNINGS PER SHARE The reconciliation of basic and diluted EPS is as follows: <TABLE> <CAPTION> YEAR ENDED ----------------------------------------- SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Net earnings (loss) $(23,754) $ 2,121 $ 9,986 -------- -------- -------- Weighted average shares outstanding: Weighted average shares outstanding (basic) 8,460 8,460 8,449 Dilutive effect of stock options -- 49 38 -------- -------- -------- Weighted average shares outstanding (diluted) 8,460 8,509 8,487 -------- -------- -------- Net earnings (loss) (basic and diluted) $ ($2.81) $ 0.25 $ 1.18 ======== ======== ======== </TABLE> Options to purchase 1,184 shares in 2001, 391 shares in 2000 and 273 shares in 1999 were antidilutive and were not included in the diluted EPS computation. (12) BUSINESS SEGMENT INFORMATION Insteel's operations involve the manufacturing and marketing of wire products. The Company is organized into two business units: Concrete Reinforcing Products, which consists of the welded wire fabric and PC strand product lines, and Wire Products, which consists of the industrial wire, nail and tire bead wire product lines. The Company's business unit structure was primarily established for purposes of administrative oversight for the plants and selling activities associated with the business unit's product lines. This business unit structure is consistent with the way in which the Company is managed, both organizationally and from a internal financial reporting standpoint. Each of the business units is headed by general managers who report directly to the Chief Executive Officer ("CEO"). As defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the CEO is the Company's chief operating decision maker. The CEO evaluates performance and allocates resources to the plants and business units using information about their revenues and gross profit. Based upon the criteria specified in SFAS 131, the Company has one reportable segment. There were no customers that accounted for 10% or more of the Company's net sales in 2001, 2000 or 1999. (13) RELATED PARTY TRANSACTIONS In September 1998, the Company entered into a Conversion Agreement with SRP, an affiliated company, whereby SRP would produce welded wire fabric for the Company for a specified conversion fee. The Company paid SRP approximately $2.5 million in 2001 and $2.3 million in 2000 for the services provided under this agreement. (14) COMPREHENSIVE GAIN (LOSS) The components of comprehensive gain (loss), net of tax, are as follows: <TABLE> <CAPTION> YEAR ENDED ---------------------------- SEPTEMBER 29, SEPTEMBER 30, 2001 2000 ------------- ------------- <S> <C> <C> Net earnings (loss) $(23,754) $ 2,121 Change in fair market value of financial instruments (net of tax of $1,920 in 2001) (3,106) -- Recognition of additional pension plan liability (net of tax of $316 in 2001) (515) -- -------- -------- Total comprehensive gain (loss) $(27,375) $ 2,121 ======== ======== </TABLE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The changes in the accumulated other comprehensive loss for 2001 is as follows: <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 29, 2001 ------------- <S> <C> Balance, September 30, 2000 $ -- Cumulative effect of change in accounting principle (604) Change in fair market value of financial instruments (2,502) Recognition of additional pension plan liability (515) ------- Balance, September 29, 2001 $(3,621) ======= </TABLE> (15) OTHER FINANCIAL DATA Balance sheet information: <TABLE> <CAPTION> SEPTEMBER 29, SEPTEMBER 30, 2001 2000 ------------- ------------- <S> <C> <C> Accounts receivable, net: Accounts receivable $ 41,810 $ 43,974 Less allowance for doubtful accounts (932) (1,360) Other receivables - income tax refund 3,034 -- --------- --------- Total $ 43,912 $ 42,614 ========= ========= Inventories: Raw materials $ 16,514 $ 21,010 Supplies 1,901 2,276 Work in process 1,791 2,449 Finished goods 14,370 22,740 --------- --------- Total $ 34,576 $ 48,475 ========= ========= Other assets: Goodwill $ 16,132 $ 19,845 Less accumulated amortization (1,774) (838) --------- --------- Goodwill, net 14,358 19,007 Non-current deferred tax asset 5,806 -- Assets held for sale 4,724 -- Equity investment 3,401 3,241 Cash surrender value of life insurance policies 2,380 2,270 Capitalized financing costs, net 1,771 3,717 Other 4,856 5,524 --------- --------- Total $ 37,296 $ 33,759 ========= ========= Property, plant and equipment, net: Land and land improvements $ 6,708 $ 7,550 Buildings 40,239 48,148 Machinery and equipment 97,446 114,972 Construction in progress 1,444 4,692 --------- --------- 145,837 175,362 Less accumulated depreciation (71,603) (65,171) --------- --------- Total $ 74,234 $ 110,191 ========= ========= </TABLE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (16) SUBSEQUENT EVENTS In December 2001, the Company reached an agreement with its insurance company on the settlement of a property damage and business interruption claim associated with an accident that occurred at its Fredericksburg, Virginia facility in August 1999. Under the terms of the agreement, the Company expects to receive payment of $1.3 million in 2002 as final settlement of the claim. In connection with the proceeds from the settlement less the associated expenses, the Company will record a pre-tax gain of $1.0 million in the first quarter of 2002. Also in December 2001, the Company announced plans to exit the collated nail business and dispose of the collated nail manufacturing facility located in Andrews, South Carolina. In connection with the planned sale, the Company will compile and review information that is currently available from internal and third-party sources to determine the estimated fair market value of the long-lived assets to be disposed of based upon estimates of current selling prices less the associated selling costs. If the estimated fair market value is less than the carrying amount of the assets (approximately $4.6 million at September 29, 2001), the Company will record an impairment loss in the first quarter of 2002. 30
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. /s/ H. O. WOLTZ III /s/ MICHAEL C. GAZMARIAN ----------------------- --------------------------- H. O. WOLTZ III MICHAEL C. GAZMARIAN President and Chief Executive Officer Chief Financial Officer and Treasurer 31
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 29, 2001 and September 30, 2000 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years ended September 29, 2001, September 30, 2000 and October 2, 1999. 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 29, 2001 and September 30, 2000, and the results of their operations and their cash flows for each of the years ended September 29, 2001, September 30, 2000 and October 2, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Charlotte, North Carolina October 12, 2001, Except for Notes 5 and 16, as to which the dates are November 19, 2001 and December 4, 2001, respectively. 32
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 29, 2001, SEPTEMBER 30, 2000 AND OCTOBER 2, 1999 ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ------------------------------------------------ SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, 2001 2000 1999 ------------- ------------- ---------- <S> <C> <C> <C> Balance, beginning of year $ 1,360 $ 375 $ 225 Additions charged to earnings 137 458 150 Additions from acquisition -- 524 -- Write-offs, net of recoveries (565) 3 -- ------- ------- ------- Balance, end of year $ 932 $ 1,360 $ 375 ======= ======= ======= </TABLE> 33
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 29, 2001 and September 30, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years ended September 29, 2001, September 30, 2000 and October 2, 1999, and have issued our report thereon dated October 12, 2001 except for Notes 5 and 16, as to which the dates are November 19, 2001 and December 4, 2001, respectively. 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 12, 2001, Except for Notes 5 and 16, as to which the dates are November 19, 2001 and December 4, 2001, respectively. 34
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 2002 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 2002 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 2002 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 2002 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 33 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 29, 2001. (C) EXHIBITS See exhibit index on page 37. (d) FINANCIAL STATEMENT SCHEDULES 35
See Item 14 (a)(2) above. 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: December 13, 2001 By: /s/ 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 December 13, 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> /s/ HOWARD O. WOLTZ, JR. Chairman of the Board - --------------------------------- HOWARD O. WOLTZ, JR. /s/ H. O. WOLTZ III President, Chief Executive Officer and a Director - --------------------------------- H. O. WOLTZ III /s/ MICHAEL C. GAZMARIAN Chief Financial Officer and Treasurer (Principal - --------------------------------- Financial and Accounting Officer) MICHAEL C. GAZMARIAN /s/ LOUIS E. HANNEN Director - --------------------------------- LOUIS E. HANNEN /s/ FRANCES H. JOHNSON Director - --------------------------------- FRANCES H. JOHNSON /s/ CHARLES B. NEWSOME Director - --------------------------------- CHARLES B. NEWSOME /s/ GARY L. PECHOTA Director - --------------------------------- GARY L. PECHOTA /s/ W. ALLEN ROGERS II Director - --------------------------------- W. ALLEN ROGERS II /s/ WILLIAM J. SHIELDS Director - --------------------------------- WILLIAM J. SHIELDS /s/ C. RICHARD VAUGHN Director - --------------------------------- C. RICHARD VAUGHN </TABLE> 36
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED SEPTEMBER 29, 2001 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------ ----------- <C> <C> <S> 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 (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, 2000. Portions of this exhibit have been omitted pursuant to a request for confidential treatment). 4.1(b) Amendment Agreement No. 2 dated May 21, 2001 to Credit Agreement between Insteel Industries, Inc., Bank of America, N.A. and Lenders dated January 31, 2000, as amended January 12, 2001 (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 March 31, 2001. Portions of this exhibit have been omitted pursuant to a request for confidential treatment). 4.1(c) Amendment Agreement No. 3 dated August 9, 2001 to Credit Agreement between Insteel Industries, Inc., Bank of America, N.A. and Lenders dated January 31, 2000, as amended January 12, 2001 and May 21, 2001 (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, 2001. Portions of this exhibit have been omitted pursuant to a request for confidential treatment). 4.1(d) Amendment Agreement No. 4 dated November 16, 2001 to Credit Agreement between Insteel Industries, Inc., Bank of America, N.A. and Lenders dated January 31, 2000 as amended January 12, 2001, May 21, 2001 and August 9, 2001. (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. </TABLE> 37
EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED SEPTEMBER 29, 2001 <TABLE> <C> <S> * 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. # 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. </TABLE> 38
EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED SEPTEMBER 29, 2001 <TABLE> <C> <C> <S> 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. 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 29, 2001. 23- Consent of Arthur Andersen LLP * 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. </TABLE> 39
EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED SEPTEMBER 29, 2001 <TABLE> <C> <S> *** 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> 40