1 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 OCTOBER 3, 1998 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 1, 1998 was $36,883,449. The number of shares outstanding of the registrant's common stock as of December 1, 1998 was 8,442,512. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement to be delivered to shareholders in connection with the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III.
2 PART I ITEM 1. BUSINESS. GENERAL Insteel Industries, Inc. ("Insteel" or "the Company") is a leading manufacturer of wire products that serves a broad range of markets nationwide. The Company's wholly-owned subsidiary, Insteel Wire Products Company ("IWP"), manufactures and markets concrete reinforcing products, industrial wire, nails, tire bead wire and welding wire for a multitude of construction and industrial applications. Insteel's business strategy is to attain leadership positions in the markets that it serves and continue expanding into higher value products that offer the potential to generate returns that exceed the Company's cost of capital. Future growth will leverage off of the Company's core competencies in the manufacture and sales of wire products. During 1998, the Company sold the inventory and equipment related to its agricultural fencing product line to Keystone Consolidated Industries, Inc. and exited the fencing business. Under the terms of the sale, the Company agreed to manufacture fencing products for Keystone until the equipment was relocated to its facilities. The Company expects to cease the remainder of its agricultural fencing activities by the end of the calendar year. PRODUCTS CONCRETE REINFORCING PRODUCTS include welded wire fabric and PC strand. Welded wire fabric is produced as both a commodity 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 post-tensioning suppliers that is used for both pretensioned and post-tensioned prestressed concrete construction. INDUSTRIAL WIRE PRODUCTS are primarily sold to manufacturers of springs for bedding, furniture, automotive seating and other applications, appliances, display racks and a multitude of other products. Product attributes vary with the end use and can include galvanizing for corrosion resistance and intermediate heat-treating, in addition to stringent tolerance requirements and mechanical properties. BULK NAILS consist of a wide variety of products such as common nails, finishing nails, box nails, sinkers, duplex nails and galvanized nails sold to wholesalers and distributors primarily for construction-related applications. COLLATED FASTENERS are comprised of a broad range of collated nails that are used by a variety of pneumatic nailing tools. The products are sold to distributors and original equipment manufacturers ("OEMs") primarily for construction-related applications. TIRE BEAD WIRE 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. WELDING WIRE is a copper-plated steel wire sold to distributors and OEMs that is used as a filler metal material in GMAW welding applications. 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 primarily in the eastern part of the U.S. as well as portions of the Southwest and West Coast. Insteel delivers its products using either its own trucking fleet, or via common or contract carriers, depending upon comparative costs and scheduling requirements. In order to minimize freight costs, the Company backhauls raw materials on its fleet whenever customer locations are in proximity to its suppliers. 2
3 CUSTOMERS The Company sells its products to a broad range of customers including original equipment manufacturers, distributors, wholesalers and retailers. Sealy Corporation accounted for approximately 11% of the Company's net sales in 1998 and 10% in 1997. There were no customers that represented 10% or more of the Company's net sales in 1996. RAW MATERIALS The primary raw material required in the production of Insteel's wire products is hot rolled carbon steel wire rod. The Company purchases wire rod from both domestic and foreign suppliers. Domestic wire rod market conditions tightened during 1997 and prices escalated due to actual and expected production outages at some of the major producers together with the filing of petitions alleging subsidized imports and dumping against certain countries exporting into the U.S.. In November 1997, the U.S. International Trade Commission ("ITC") ruled that while imports from certain countries were subsidized, such subsidies did not cause or threaten to cause material injury to domestic producers of wire rod. In March 1998, the ITC ruled against the domestic wire rod producers on the dumping allegations as well. The resolution of the ITC filing together with recent expansions in domestic production capacity have increased the availability of wire rod to the Company, driving rod prices lower as supplier competition has intensified. The Company expects that these developments will alleviate the supply constraints that have characterized the market over the past year. The Company believes that raw materials and supplies are available in quantities adequate to meet its current and foreseeable needs and that alternative sources of supply are available to ensure its ability to service its customers should rod production be interrupted. COMPETITION The markets in which the Company's business is conducted are highly competitive. Insteel faces formidable competition in most of its market segments, 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. 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 offers a broader range of products through more diverse distribution channels than any of its competitors. The Company believes that it is well-positioned to compete favorably on the industry's critical success factors. EMPLOYEES As of October 3, 1998, the Company employed 1,056 people. The Company has a collective bargaining agreement with a labor union at its Delaware plant covering its hourly employees. The Company believes that relations with the labor union and 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. 3
4 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. 73 Chairman of the Board and a Director H.O. Woltz III 42 President, Chief Executive Officer and a Director Gary D. Kniskern 53 Vice President - Administration and Secretary Michael C. Gazmarian 39 Chief Financial Officer and Treasurer </TABLE> Howard O. Woltz, Jr., has been Chairman of the Board since 1958 and has served in various capacities for more than 40 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 20 years. He was named President and Chief Operating Officer in 1989. He had been Vice President of the Company since 1988 and, previously, President of Rappahannock Wire Company, formerly a subsidiary of the Company, since 1981. Mr. Woltz has been a director of the Company since 1986 and also serves as President of Insteel Wire Products Company. Gary D. Kniskern was elected Vice President - Administration in 1994 and has served in various capacities for more than 19 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, including most recently as Vice President - Finance and Administration for Consolidated Glass & Mirror Corp., a Guardian subsidiary. The executive officers listed above were elected by the Board of Directors at its annual meeting held February 3, 1998 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 9, 1999. ITEM 2. PROPERTIES. Insteel's corporate headquarters and IWP's divisional office are located in Mount Airy, North Carolina. IWP has eight manufacturing facilities located in Andrews, South Carolina (2 plants); Gallatin, Tennessee (2 plants); Dayton, Texas; Fredericksburg, Virginia; Mount Airy, North Carolina; and Wilmington, Delaware. The Company owns all of its properties with the exception of the land at its Wilmington facility, which is leased. The Dayton and Fredericksburg plants are pledged as security under long-term financing agreements. The Company owns and leases a fleet of trucks and trailers for the delivery of its products. 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. 4
5 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 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT?S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. The Company's common stock is listed on the New York Stock Exchange under the symbol III. At December 1, 1998, there were 641 shareholders of record. Selected quarterly financial data appears under the caption "Financial Information by Quarter (Unaudited)" in Item 8(b) of this report. ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED -------------------------------------------------------------------------------- OCTOBER 3, SEPTEMBER 30, -------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Net sales $ 266,147 $ 262,325 $ 264,382 $ 258,582 $ 245,621 Earnings from continuing operations before extraordinary loss and 328 2,536 5,237 5,344 5,230 cumulative effect of change in accounting principle Net earnings (loss) (80) (341) 4,243 6,336 5,097 Earnings per share from continuing operations before extraordinary loss and cumulative effect of change in accounting principle (basic and diluted) .04 .30 .62 .64 .63 Net earnings (loss) per share (basic and diluted) (.01) (.04) .50 .76 .61 Cash dividends per share .24 .24 .24 .24 .24 Total assets 147,131 171,476 146,122 148,920 138,548 Long-term debt 35,743 49,673 29,655 21,451 26,215 Shareholders' equity 69,260 71,322 73,677 71,212 66,461 </TABLE> 5
6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS STATEMENTS OF EARNINGS - SELECTED DATA (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED --------------------------------------------------------------------------- OCTOBER 3, SEPTEMBER 30, -------------------------------------------- 1998 CHANGE 1997 CHANGE 1996 -------------- --------- ------------- -------- -------------- <S> <C> <C> <C> <C> <C> Net sales $ 266,147 1% $ 262,325 (1%) $ 264,382 Gross profit 13,353 (29%) 18,852 (15%) 22,224 Percentage of net sales 5.0% 7.2% 8.4% Selling, general and administrative expense $ 13,410 8% $ 12,395 4% $ 11,973 Percentage of net sales 5.0% 4.7% 4.5% Operating income (loss) $ (57) N/M $ 6,457 (37%) $ 10,251 Percentage of net sales -- 2.5% 3.9% Interest expense $ 3,810 67% $ 2,276 18% $ 1,923 Percentage of net sales 1.4% 0.9% 0.7% Effective income tax rate 35.4% 36.4% 35.4% Earnings from continuing operations $ 328 (87%) $ 2,536 (52%) $ 5,237 Percentage of net sales 0.1% 1.0% 2.0% </TABLE> 1998 COMPARED WITH 1997 Net sales rose 1% to $266.1 million in 1998 from $262.3 million in 1997. The growth in sales was in spite of the sale of the Company's agricultural fencing product line, which reduced current year sales relative to the prior year. Excluding sales of agricultural fencing products, sales increased 8%. Sales of bulk nails rose sharply in 1998 as shipments reached a new record high while industrial wire sales were flat. Sales of concrete reinforcing products increased 7% primarily as a result of higher shipments of welded wire fabric. Tire bead wire and welding wire sales gradually increased during the year as the Company obtained customer approval on certain products and began to achieve consistent shipment levels. Gross margins fell to 5.0% of sales in 1998 from 7.2% in 1997. The reduction in margins was primarily caused by a narrowing in spreads between selling values and raw material costs in certain products and markets together with low operating volumes at the Company's recent expansions. The Virginia manufacturing facility continued to operate at a significant loss as revenues remained well below the levels required to cover the costs necessary to support the anticipated ramp-up of the tire bead wire and welding wire businesses. The Company's other new business initiative, collated fasteners, also operated at a loss due to insufficient sales volume and pricing pressure resulting from increased import competition. Selling, general and administrative expense ("SG&A expense") rose 8%, increasing to 5.0% of sales in 1998 from 4.7% in 1997. The increase in SG&A expense was primarily due to higher selling expenses to support the new businesses, rising employee benefit costs and expenditures related to the upgrade of the Company's management information system. These increases were partially offset by a decline in employee profit-sharing and incentive plan expenses. Interest expense rose sharply in 1998 compared with 1997 due to higher average borrowing levels on the Company's revolving credit facility. The increase in debt was primarily related to higher average inventory levels together with capital expenditures for the tire bead wire and welding wire expansion. During 1998, the Company sold the inventory and equipment related to its agricultural fencing product line. The Company's financial results reflect a pre-tax gain of $3.4 million, or 26 cents per share after-tax, on the sale of the assets in other income, net of a provision for the estimated transition-related costs. Under the terms of the sale, the Company agreed to manufacture fencing products for the buyer until the equipment was relocated to the buyer's facilities. The Company expects to cease the remainder of its agricultural fencing activities by the end of the calendar year. The Company terminated one of its pension plans during 1998, recognizing a pre-tax gain of $1.2 million, or 7 cents per share after-tax, in other income for the curtailment of plan benefits and settlements that had been made to date. The Company expects to complete the settlement of the plan by the end of 1999. Also in 1998, the Company retired its $10.0 million 8.25% senior secured notes, funding the prepayment under its 6
7 unsecured revolving credit facility. The Company's financial results reflect an extraordinary loss of $408,000 after income taxes, or approximately 5 cents per share, related to the early extinguishment of debt. The Company's 1997 financial statements reflect the disposal of its Insteel Construction Systems division ("ICS") and the reclassification of the segment as discontinued operations. ICS manufactured and marketed the Insteel 3-D(R) building panel. The Company recorded a provision of $2.2 million for the estimated loss on disposal of ICS (net of a $1.2 million tax benefit) which included a $400,000 provision for anticipated operating losses prior to disposal. 1997 COMPARED WITH 1996 Net sales declined 1% to $262.3 million in 1997 from $264.4 million in 1996. Sales of bulk nails and agricultural products fell by 12% and 10%, respectively, from 1996 due to weak market conditions and unusually low order levels during the second half of 1997. Sales of concrete reinforcing products increased significantly in 1997 driven by the ramp-up of PC strand operating volume following the completion of the expansion to the facility. Gross margins fell to 7.2% of sales in 1997 from 8.4% in 1996. Gross margins were negatively impacted by pre-operating costs related to the tire bead wire and welding wire expansion together with start-up inefficiencies associated with the transfer of industrial wire capacity from the Virginia plant to other manufacturing facilities within the Company. The combined impact of these start-up expenses reduced 1997 net earnings by 20 cents per share. Additionally, the decline in sales of bulk nails and agricultural products had an unfavorable effect on margins. Spreads between selling values and raw material costs widened in 1997 compared with 1996, but declined in the second half of the year relative to the first half. SG&A expense increased 4%, rising to 4.7% of sales in 1997 from 4.5% in 1996. The Company is undertaking a major upgrade of its management information systems that will enhance its manufacturing, customer service and administrative processes. The increase in SG&A expense was primarily driven by expenditures related to this project. Interest expense rose 18% in 1997 from 1996. Borrowings on the Company's revolving credit facility increased primarily due to capital expenditures related to the tire bead wire and welding wire expansion together with the rise in inventories. The higher debt levels were partially offset by a decrease in the Company's average borrowing rates. The Company's 1997 financial statements reflect the disposal of ICS and the reclassification of the segment as discontinued operations. ICS manufactured and marketed the Insteel 3-D(R) building panel. The Company recorded a provision of $2.2 million for the estimated loss on disposal of ICS (net of a $1.2 million tax benefit) which included a $400,000 provision for anticipated operating losses prior to disposal. 7
8 LIQUIDITY AND CAPITAL RESOURCES SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ------------------------------------------------------- OCTOBER 3, SEPTEMBER 30, ----------------------------------- 1998 1997 1996 ---------------- --------------- --------------- <S> <C> <C> <C> Net cash provided by continuing operating activities $ 14,517 $ 7,277 $ 15,729 Net cash provided by (used for) investing activities 2,372 (26,438) (12,804) Net cash provided by (used for) financing activities (17,912) 17,717 (3,744) Working capital 26,307 36,687 37,489 Turnover ratios: (1) Working capital (2) 8.9 8.2 9.9 Receivables 8.9 8.2 8.4 Inventories 6.7 6.4 6.7 Total debt $ 36,363 $ 52,293 $ 32,843 Percentage of total capitalization 34% 42% 31% Shareholders' equity $ 69,260 $ 71,322 $ 73,677 Percentage of total capitalization 66% 58% 69% Total capital $ 105,623 $ 123,615 $ 106,520 </TABLE> (1) Based upon average year-end balances (2) Excluding cash and cash equivalents and net assets of discontinued operations Continuing operating activities generated $14.5 million of cash in 1998 compared with $7.3 million and $15.7 million in 1997 and 1996, respectively. The fluctuations were primarily due to changes in the Company's inventory levels. Inventories decreased during 1998 due to a substantial reduction in raw material inventories together with the sale of the finished goods inventories associated with the agricultural fencing product line. In 1997, inventories were increased in anticipation of rising raw material prices together with potential supply disruptions resulting from labor contract negotiations at two major wire rod producers. Inventories declined in 1996 from the escalated levels of 1995 when weak market conditions and depressed shipment volumes had resulted in a sharp increase in inventories. Cash generated from the inventory reductions during 1998 and 1996 was partially offset by a decline in accounts payable related to lower raw material purchases. During 1997, accounts payable increased as a result of higher purchase volumes required to build inventories. In 1998 and 1997, cash generated from continuing operating activities was unfavorably impacted by the deterioration in the Company's financial results in comparison to the earnings level of 1996. Investing activities provided $2.4 million of cash in 1998 while using $26.4 million and $12.8 million in 1997 and 1996, respectively. In 1998, proceeds primarily related to the sale of the Company's agricultural fencing equipment exceeded capital expenditures. During 1997 and 1996, capital expenditures amounted to $40.3 million to support the Company's expansions into the tire bead wire, welding wire and collated fastener businesses. In addition, the Company expanded the capacity of its PC strand operation and upgraded its existing manufacturing facilities. Financing activities used $17.9 million and $3.7 million of cash in 1998 and 1996, respectively, while providing $17.7 million in 1997. During 1998, cash generated from the sharp reduction in inventories and the sale of assets related to the agricultural fencing product line was used to pay down debt. The increase in debt in 1997 was primarily related to funding the capital expenditures for the tire bead wire and welding wire expansion together with the increase in inventories. The financial position of the Company remains strong. The Company's debt to capital ratio decreased to 34% at October 3, 1998 compared with 42% and 31% at September 30, 1997 and 1996, respectively. During 1998, the Company's revolving credit facility was amended, increasing the maximum availability to $60.0 million, declining to $57.5 million on October 4, 1998 and $55.0 million on January 3, 1999 and thereafter. The Company utilized a portion of the increase to fund the prepayment of its $10.0 million 8.25% senior secured notes. At October 3, 1998, approximately $28.2 million was available under the facility. The Company currently expects to fund its capital expenditure requirements and liquidity needs from a combination of internally generated funds, the revolving credit facility and additional long-term sources of financing. 8
9 YEAR 2000 The "Year 2000" issue refers to older computer systems and other equipment operating on software that uses only two digits to represent the year, rather than four digits. As a result, these older systems and equipment may not process information or otherwise function properly when using the year "2000", since that year will be indistinguishable from the year "1900". The Company has initiated a Year 2000 program to assess and develop plans to resolve the issue both internally and externally. During 1996, the Company began developing a plan to upgrade its business and operating systems to Year 2000 compliant software. In addition to addressing the Year 2000 issue, the systems upgrade is expected to enhance the performance of the Company's customer service, manufacturing and administrative processes. Implementation of the upgrade began in 1997 with the initial testing of the system on a limited basis prior to converting all of the Company's locations. As of October 3, 1998, the implementation had been completed at 25% of the Company's facilities with the pace of the conversion expected to accelerate for the remaining locations. The Company expects to complete the project by September 1999. In order to identify potential Year 2000 problems at key suppliers and customers, the Company has initiated external surveys to assess their level of compliance. The Company expects to complete its assessment of outside parties and develop the appropriate actions to be taken by April 1999. The Company also is in the process of reviewing embedded software in its equipment and facilities to identify potential Year 2000 issues. Equipment manufacturers are being requested to certify their compliance and assist the Company in developing solutions where they are currently non-compliant. The Company expects to complete the assessment and testing process by September 1999. While reasonable actions have been taken to address the Year 2000 problem and will continue to be taken in the future to mitigate such disruption, the magnitude of all Year 2000 disturbances cannot be predicted. Failure to complete these programs as planned could result in the corruption of data, hardware or equipment failures or the inability to manufacture products or conduct other business activities, all of which could have a material impact on the Company's business, consolidated financial position or results of operations. Management believes that past or expected future capital requirements related to Year 2000 compliance issues will not have a material impact on its consolidated financial position or results of operations. The Company does not, at this time, have an overall contingency plan to address Year 2000 disturbances. Its efforts to date have been concentrated on mitigating such disturbances. As the Company proceeds forward with its assessment programs and evaluates the reasonable potential risks, it will determine the extent of contingency planning and resources that are appropriate. Any such contingency actions and resources would be planned to be in place in sufficient time for the Year 2000. OUTLOOK The Company's financial 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. Domestic wire rod market conditions tightened during the previous year and prices escalated due to actual and expected production outages at some of the major producers together with the filing of petitions alleging subsidized imports and dumping against certain countries exporting into the U.S. In November 1997, the U.S. International Trade Commission ("ITC") ruled that while imports from certain countries were subsidized, such subsidies did not cause or threaten to cause material injury to domestic producers of wire rod. In March 1998, the ITC ruled against the domestic wire rod producers on the dumping allegations as well. The resolution of the ITC filing together with recent expansions in domestic capacity have expanded the availability of wire rod to the Company and significantly increased supplier competition, resulting in lower price levels. The Company expects that these developments will alleviate the supply constraints that have characterized the market over the past year and favorably impact its financial results in ensuing quarters. The Company's business strategy continues to be focused on (1) further expansion into higher value products that offer the potential to generate returns that exceed the Company's cost of capital and (2) improving the financial performance 9
10 of the Company's traditional businesses to acceptable levels. During 1994 - 1997, the Company built two new production facilities and reconfigured an existing operation in order to develop the manufacturing capabilities required to enter the markets for PC strand, collated fasteners, tire bead wire and welding wire. Sales of these new products are expected to increase from $39.6 million in 1998 to $100.0 million when fully operational. During 1998, the Company completed the expansion of the PC strand manufacturing facility to its full design capacity. The Company expects that the recently enacted federal highway spending legislation ("TEA-21") will have a favorable impact on the demand for its concrete reinforcing products. Significant progress was made towards the completion of the qualification process for tire bead wire and welding wire as the Company obtained customer approval on certain products and began to attain consistent shipment volumes. The financial results of the Company will continue to be negatively impacted until sales of these products rise to projected levels. As the Company is currently incurring substantially all of the anticipated operating costs required to support its new businesses, the incremental impact of forecasted increases in sales is expected to significantly improve its financial performance. FACTORS THAT MAY AFFECT FUTURE RESULTS This report contains forward-looking statements that reflect management's current assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, the success of the Company's new product initiatives, including the PC strand, collated fastener, tire bead wire and welding wire expansions; the inability of the Company to expedite the qualification process with prospective customers for tire bead wire and welding wire; the failure of the Company to receive regular and substantial orders for its new products; general economic conditions in the markets in which the Company operates; unanticipated changes in customer demand, order patterns and inventory levels; fluctuations in the cost and availability of the Company's primary raw material, hot rolled steel rod; the Company's ability to raise selling prices in order to recover increases in steel rod prices; disruptions in the business activities of the Company and its suppliers and customers resulting from the Year 2000 problem; and legal, environmental or regulatory developments that significantly impact the Company's operating costs;. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (A) FINANCIAL STATEMENTS <TABLE> <S> <C> Consolidated Balance Sheets as of October 3, 1998 and September 30, 1997 12 Consolidated Statements of Earnings for the three years ended October 3, 1998 and September 30, 1997 and 1996 13 Consolidated Statements of Shareholders? Equity for the three years ended October 3, 1998 and September 30, 1997 and 1996 14 Consolidated Statements of Cash Flows for the three years ended October 3, 1998 and September 30, 1997 and 1996 15 Notes to Consolidated Financial Statements 16 Report of Independent Public Accountants 26 Schedule II - Valuation and Qualifying Accounts for the three years ended October 3, 1998 and September 30, 1997 and 1996 27 Report of Independent Public Accountants on Schedule 28 </TABLE> 10
11 (B) SUPPLEMENTARY DATA Selected quarterly financial data is as follows: FINANCIAL DATA BY QUARTER (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AND PRICE DATA) <TABLE> <CAPTION> QUARTER ENDED --------------------------------------------------------------------- DEC 27 MAR 28 JUN 27 OCT 3 ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> 1998 OPERATING RESULTS Net sales $ 59,919 $ 62,996 $ 69,275 $ 73,957 Gross profit 1,475 1,327 4,017 6,534 Earnings (loss) before extraordinary item (1,687) (379) 5 2,389 Extraordinary loss -- (408) -- -- Net earnings (loss) (1,687) (787) 5 2,389 PER SHARE DATA (BASIC AND DILUTED) Earnings (loss) before extraordinary item (0.20) (0.04) -- 0.28 Extraordinary loss -- (0.05) -- -- Net earnings (loss) (0.20) (0.09) -- 0.28 Cash dividends 0.06 0.06 0.06 0.06 Stock prices High 8.63 7.81 8.44 6.69 Low 6.25 6.19 6.13 4.50 <CAPTION> QUARTER ENDED --------------------------------------------------------------------- DEC 27 MAR 28 JUN 27 OCT 3 ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> 1997 OPERATING RESULTS Net sales $ 58,426 $ 65,250 $ 68,127 $ 70,522 Gross profit 3,410 4,643 5,862 4,937 Earnings from continuing operations 34 658 1,176 668 Loss from discontinued operations (292) (2,585) -- -- Net earnings (loss) (258) (1,927) 1,176 668 PER SHARE DATA (BASIC AND DILUTED) Earnings from continuing operations -- 0.08 0.14 0.08 Loss from discontinued operations (0.03) (0.31) -- -- Net earnings (loss) (0.03) (0.23) 0.14 0.08 Cash dividends 0.06 0.06 0.06 0.06 Stock prices High 9.25 9.63 9.13 8.25 Low 6.63 8.00 7.50 7.19 </TABLE> 11
12 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> OCTOBER 3, SEPTEMBER 30, 1998 1997 ---------------- ---------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 422 $ 1,079 Accounts receivable, net 28,687 31,049 Inventories 30,566 44,463 Prepaid expenses and other 2,023 1,702 Net assets of discontinued operations - 1,869 ---------------- ---------------- Total current assets 61,698 80,162 Property, plant and equipment, net 80,350 86,401 Other assets 5,083 4,913 ---------------- ---------------- Total assets $ 147,131 $ 171,476 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 28,758 $ 31,639 Accrued expenses 6,013 9,216 Current portion of long-term debt 620 2,620 ---------------- ---------------- Total current liabilities 35,391 43,475 Long-term debt 35,743 49,673 Deferred income taxes 5,726 5,989 Other liabilities 1,011 1,017 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: 1998 8,443; 1997 8,437 16,885 16,873 Additional paid-in capital 38,232 38,200 Retained earnings 14,143 16,249 ---------------- ---------------- Total shareholders' equity 69,260 71,322 ---------------- ---------------- Total liabilities and shareholders' equity $ 147,131 $ 171,476 ================ ================ </TABLE> See accompanying notes to consolidated financial statements. 12
13 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED ----------------------------------------------------- OCTOBER 3, SEPTEMBER 30, --------------------------------- 1998 1997 1996 -------------- ------------- ------------- <S> <C> <C> <C> Net sales $ 266,147 $ 262,325 $ 264,382 Cost of sales 252,794 243,473 242,158 -------------- ------------- ------------- Gross profit 13,353 18,852 22,224 Selling, general and administrative expense 13,410 12,395 11,973 -------------- ------------- ------------- Operating income (loss) (57) 6,457 10,251 Interest expense 3,810 2,276 1,923 Other expense (income) (4,375) 193 221 -------------- ------------- ------------- Earnings from continuing operations before income taxes 508 3,988 8,107 Provision for income taxes 180 1,452 2,870 -------------- ------------- ------------- Earnings from continuing operations before extraordinary item 328 2,536 5,237 Discontinued operations: Loss from operations of Insteel Construction Systems net of income tax benefits of $395 and $544 -- (693) (994) Loss on disposal of Insteel Construction Systems, including provision of $400 for operating losses during phase-out period (net of income tax benefit of $1,245) -- (2,184) -- Loss from discontinued operations -- (2,877) (994) -------------- ------------- ------------- Earnings (loss) before extraordinary item 328 (341) 4,243 -------------- ------------- ------------- Extraordinary loss on early extinguishment of debt (net of income tax benefit of $224) (408) -- -- -------------- ------------- ------------- Net earnings (loss) $ (80) $ (341) $ 4,243 ============== ============= ============= Per share (basic and diluted): Earnings from continuing operations $ 0.04 $ 0.30 $ 0.62 Loss from discontinued operations -- (0.34) (0.12) Extraordinary loss (0.05) -- -- -------------- ------------- ------------- Net earnings (loss) $ (0.01) $ (0.04) $ 0.50 ============== ============= ============= Cash dividends per share $ 0.24 $ 0.24 $ 0.24 ============== ============= ============= </TABLE> See accompanying notes to consolidated financial statements. 13
14 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED --------------------------------------------------------- OCTOBER 3, SEPTEMBER 30, ----------------------------------- 1998 1997 1996 ------------- ------------- ------------- <S> <C> <C> <C> COMMON STOCK: Balance, beginning of year $ 16,873 $ 16,871 $ 16,787 Stock options exercised 12 2 84 ------------- ------------- ------------- Balance, end of year $ 16,885 $ 16,873 $ 16,871 ============= ============= ============= ADDITIONAL PAID-IN CAPITAL: Balance, beginning of year $ 38,200 $ 38,192 $ 38,033 Stock options exercised 32 8 159 ------------- ------------- ------------- Balance, end of year $ 38,232 $ 38,200 $ 38,192 ============= ============= ============= RETAINED EARNINGS: Balance, beginning of year $ 16,249 $ 18,614 $ 16,392 Cash dividends declared (2,026) (2,024) (2,021) Net earnings (loss) (80) (341) 4,243 ------------- ------------- ------------- Balance, end of year $ 14,143 $ 16,249 $ 18,614 ============= ============= ============= </TABLE> See accompanying notes to consolidated financial statements. 14
15 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED ----------------------------------------------------- SEPTEMBER 30, OCTOBER 3, --------------------------------- 1998 1997 1996 -------------- ------------- ------------- <S> <C> <C> <C> CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Net earnings (loss) $ (80) $ (341) $ 4,243 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 8,738 8,224 7,688 Extraordinary loss 408 -- -- Gain on sale of assets (4,575) -- -- Loss from discontinued operations -- 2,877 994 Net changes in assets and liabilities: Accounts receivable, net 2,365 1,347 (2,476) Inventories 13,898 (12,758) 8,760 Accounts payable and accrued expenses (6,083) 7,924 (2,451) Other changes (154) 4 (1,029) -------------- ------------ ------------ Total adjustments 14,597 7,618 11,486 -------------- ------------ ------------ Net cash provided by continuing operating activities 14,517 7,277 15,729 -------------- ------------ ------------ CASH FLOWS FROM DISCONTINUED OPERATING ACTIVITIES: Net cash provided by discontinued operating activities 366 1,100 1,979 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (6,708) (27,076) (13,193) Proceeds from notes receivable 222 638 389 Proceeds from sale of property, plant and equipment 8,858 -- -- -------------- ------------ ------------ Net cash provided by (used for) investing activities 2,372 (26,438) (12,804) -------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in short-term debt -- -- (8,260) Proceeds from long-term debt 107,132 115,256 80,424 Principal payments on long-term debt (123,062) (95,525) (74,130) Proceeds from exercise of stock options 44 10 243 Cash dividends paid (2,026) (2,024) (2,021) -------------- ------------- ------------- Net cash provided by (used for) financing activities (17,912) 17,717 (3,744) -------------- ------------- ------------- Net increase (decrease) in cash (657) (344) 1,160 Cash and cash equivalents at beginning of year 1,079 1,423 263 -------------- ------------- ------------- Cash and cash equivalents at end of year $ 422 $ 1,079 $ 1,423 ============== ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 4,843 $ 2,023 $ 2,257 Income taxes 596 896 926 </TABLE> See accompanying notes to consolidated financial statements. 15
16 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 AND 1996 (Amounts in thousands, except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR. Effective October 1, 1997, the Company adopted a 52 or 53 week fiscal year ending on the Saturday nearest the last day of September in each year. Prior to fiscal 1998, the Company's fiscal year was the 12-month period ending September 30. All references to years relate to fiscal years rather than calendar years. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. REVENUE RECOGNITION. Revenue is recognized when the related products are shipped. INVENTORIES. Inventories are valued at the lower of average cost (which approximates computation on a first-in, first-out basis) or market (net realizable value or replacement cost). PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 3 - 15 years; buildings 10 - 30 years; land improvements, 5 - 15 years. Capitalized software is amortized over the shorter of the estimated useful life or 5 years. No interest costs were capitalized in 1998 or 1996. Capitalized interest costs were $492 in 1997. OTHER ASSETS. Other assets consist principally of the cash surrender value of life insurance policies, various intangible assets and long-term notes receivable. Intangible assets are amortized on a straight-line basis over the expected periods to be benefited. 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. INCOME TAXES. Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. EARNINGS PER SHARE. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" in 1998. SFAS No. 128 replaces the primary and fully diluted earnings per share ("EPS") computations with basic and diluted EPS. Basic EPS are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS are computed by dividing net earnings by the weighted average number of common shares and other dilutive equity securities outstanding during the period. Securities that have the effect of increasing EPS are considered to be antidilutive and are not included in the computation of diluted EPS. 16
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components. As the statement only impacts financial statement disclosures, it will not effect the Company's financial position or results of operations. The Company will adopt SFAS No. 130 as required in its interim financial statements for the first quarter of 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected information about operating segments and related disclosures about products and services, major customers and geographic areas. As the statement only impacts financial statement disclosures, it will not effect the Company's financial position or results of operations. Management is in the process of evaluating the effects of this change on its reporting. The Company will adopt SFAS No. 131 as required in its annual report for 1999. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has not yet evaluated the effects of this change on its operations. The Company will adopt SFAS No. 133 as required in its interim financial statements for the first quarter of 2000. RECLASSIFICATIONS. Certain reclassifications have been made in prior years' financial statements for consistent presentation. (2) EXTRAORDINARY LOSS - EARLY EXTINGUISHMENT OF DEBT In 1998, the Company retired its $10.0 million 8.25% senior secured notes due 2002, funding the prepayment under its unsecured revolving credit facility. The Company recorded an extraordinary loss of $408,000 after income taxes, or approximately 5 cents per share, related to the redemption premium and write-off of deferred financing costs. (3) DISCONTINUED OPERATIONS In 1997, the Company sold the assets of its Insteel Construction Systems division ("ICS"), which manufactured and marketed the Insteel 3-D(R) building panel. ICS has been classified as a discontinued operation in the accompanying financial statements in accordance with Accounting Principles Board ("APB") Opinion No. 30. The Company recorded a provision of $2,184 for the estimated loss on disposal of ICS (net of a $1,245 tax benefit) which included a $400 provision for anticipated operating losses prior to disposal. The operating results of the discontinued ICS division are as follows: <TABLE> <CAPTION> YEAR ENDED ---------------------------------------------- OCTOBER 3, SEPTEMBER 30, --------------------------- 1998 1997 1996 ------------ ----------- ---------- <S> <C> <C> <C> Net sales $ -- $ 580 $ 2,388 Cost of sales -- 743 2,247 ------------ ----------- ---------- Gross profit (loss) -- (163) 141 Selling, general and administrative expense -- 720 1,465 ------------ ----------- ---------- Operating loss -- (883) (1,324) Interest expense -- 82 350 Other expense (income) -- 123 (136) ------------ ----------- ---------- Loss from operations of Insteel Construction Systems -- (1,088) (1,538) before income taxes Benefit for income taxes -- (395) (544) ------------ ----------- --------- Loss from operations of Insteel Construction Systems $ -- $ (693) $ (994) ============ =========== ========= </TABLE> 17
18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) The net assets of the discontinued ICS division were valued at the lower of cost or realizable value. The components of net assets are as follows: <TABLE> <CAPTION> OCTOBER 3, SEPTEMBER 30, 1998 1997 ------------ ------------- <S> <C> <C> Prepaid expenses and other $ -- $ 323 Property, plant and equipment, net -- 1,418 Other assets -- 803 ------------ ------------- Total assets -- 2,544 Accrued expenses -- 675 ------------ ------------- Total liabilities -- 675 ------------ ------------- Net assets of discontinued operations $ -- $ 1,869 ------------ ------------- (4) DEBT AND CREDIT FACILITIES Long-term debt, due dates and interest rates are as follows: <CAPTION> OCTOBER 3, SEPTEMBER 30, 1998 1997 ------------ ------------- <S> <C> <C> Revolving credit agreement; expires November 2000 at variable interest rate (7.53% at October 3, 1998 and 6.25% at September $ 31,823 $ 36,133 30, 1997) Industrial revenue refunding bonds; due dates through 2005 at 6.50% - 7.75% 2,240 2,520 Industrial development revenue refunding bonds; due dates through 1999 at variable interest rate (3.80% at October 3, 1998 1,700 2,040 and 4.20% at September 30, 1997) Mortgage note 600 600 Senior secured notes; due dates through 2002 at 8.25% -- 11,000 ------------ ------------- Total long-term debt 36,363 52,293 Less current maturities 620 2,620 ------------ ------------- Long-term debt, excluding current maturities $ 35,743 $ 49,673 ============ ============= </TABLE> During 1998, the Company's unsecured revolving credit facility was amended, increasing the maximum availability on its line of credit to $60.0 million through October 3, 1998, declining to $57.5 million on October 4, 1998 and $55.0 million on January 3, 1999 thereafter. The Company utilized a portion of the increase to fund the prepayment of its $10.0 million 8.25% senior secured notes. At October 3, 1998, approximately $28.2 million was available under the facility. Under the revolving credit agreement, interest is payable at a variable rate based on LIBOR and the Company pays a commitment fee based on the unused portion of the facility. The interest spread over LIBOR and unused commitment fee are adjusted quarterly based on the Company?s ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The revolving credit facility and certain other debt agreements contain restrictive covenants which, among other restrictions, limit the amount of additional debt relative to total capitalization and EBITDA and require tangible net worth to be maintained at specified amounts. At October 3, 1998, the Company was in compliance with all of the restrictive covenants. Property, plant and equipment with an aggregate carrying value of $25,992 is pledged as collateral under the Company?s debt agreements. Aggregate maturities of long-term debt for the next five years are as follows: 1999, $620; 2000, $1,640; 2001, $31,823; 2002, $0; 2003, $840; beyond, $1,440. 18
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) (5) SHAREHOLDERS' EQUITY Shares of common stock outstanding are as follows: <TABLE> <CAPTION> YEAR ENDED ---------------------------------------------- OCTOBER 3, SEPTEMBER 30, ---------------------------- 1998 1997 1996 ---------- ---------- ----------- <S> <C> <C> <C> Balance, beginning of year 8,437 8,435 8,393 Stock options exercised 6 2 42 ---------- ---------- ----------- Balance, end of year 8,443 8,437 8,435 ========== ========== =========== </TABLE> (6) STOCK OPTION PLANS The Company has stock option plans under which employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under the 1985 employee and 1990 director stock option plans vest over five years and expire five years from the date of the grant. By action of the Board of Directors in 1994, no further options may be granted under these plans. Options granted under the 1994 employee and director stock option plans vest over five years and expire ten years from the date of the grant. A summary of stock option activity follows: <TABLE> <CAPTION> EXERCISE PRICE PER SHARE ---------------------------------------------- OPTIONS WEIGHTED OUTSTANDING RANGE AVERAGE ----------- ------------------------- ----------- <S> <C> <C> <C> <C> Balance, September 30, 1995 409 $ 5.21 - $ 12.25 $ 9.05 Granted 94 6.88 - 7.13 7.03 Exercised (42) 5.21 - 6.20 5.75 Cancelled (15) 5.21 - 12.25 10.49 ----------- Balance, September 30, 1996 446 6.88 - 10.68 8.88 Granted 106 7.56 - 9.13 8.14 Exercised (13) 8.57 - 8.57 8.57 Cancelled (35) 7.00 - 10.44 9.31 ----------- Balance, September 30, 1997 504 6.88 - 10.68 8.71 Granted 232 4.69 - 7.31 5.49 Exercised (6) 7.00 - 7.88 7.43 Cancelled (104) 6.38 - 10.68 9.41 =========== Balance, October 3, 1998 626 4.69 - 10.44 7.41 =========== The weighted average characteristics of outstanding stock options at October 3, 1998 for various price ranges are as follows: <CAPTION> OUTSTANDING OPTIONS EXERCISABLE OPTIONS ---------------------------------------------- ---------------------------- REMAINING WEIGHTED WEIGHTED LIFE AVERAGE AVERAGE RANGE OF EXERCISE PRICES SHARES (YEARS) PRICE SHARES PRICE - ---------------------------- ---------- ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> $ 4.69 - $ 4.69 130 9.9 $ 4.69 26 $ 4.69 6.38 - 7.00 133 8.5 6.60 62 6.74 7.13 - 7.56 130 8.0 7.42 71 7.40 7.88 - 9.13 122 6.2 8.42 104 8.39 10.44 - 10.44 111 0.1 10.44 111 10.44 </TABLE> At October 3, 1998, 458 shares were available for future grants under the plans. Options exercisable were 374 at October 3, 1998 and 343 at September 30, 1997. The weighted average exercise price for these shares was $8.28 for 1998 and $8.99 for 1997. 19
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) 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 ---------------------------------------------- OCTOBER 3, SEPTEMBER 30, ---------------------------- 1998 1997 1996 ----------- ---------- ----------- <S> <C> <C> <C> Net earnings (loss) as reported under: APB No. 25 $ (80) $ (341) $ 4,243 SFAS No. 123 (224) (445) 4,187 Basic and diluted net earnings (loss) per share as reported under: APB No. 25 (0.01) (0.04) 0.50 SFAS No. 123 (0.03) (0.05) 0.50 </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 --------------------------------------------- OCTOBER 3, SEPTEMBER 30, -------------------------- 1998 1997 1996 ---------- -------- -------- <S> <C> <C> <C> Expected life (in years) 5.0 5.0 5.0 Risk-free interest rate 5.5% 6.3% 5.8% Expected volatility 0.30 0.30 0.30 Expected dividend yield 3.0% 3.0% 3.0% </TABLE> The weighted average estimated fair values of options granted during 1998, 1997 and 1996 were $1.61, $2.48 and $2.07 per share, respectively. The above pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on net earnings and net earnings per share in future years, because they do not take into consideration pro forma compensation expense related to grants made prior to 1996. (7) INCOME TAXES The provision for income taxes for continuing operations consists of: <TABLE> <CAPTION> YEAR ENDED --------------------------------------------- OCTOBER 3, SEPTEMBER 30, ---------------------------- 1998 1997 1996 ----------- ----------- ---------- <S> <C> <C> <C> CURRENT: Federal $ 373 $ 1,673 $ 3,574 State (5) 112 268 ----------- ----------- ---------- 368 1,785 3,842 DEFERRED: Federal 10 (522) (683) State (198) 189 (289) ------------ ----------- ---------- (188) (333) (972) ------------ ----------- ---------- Provision for income taxes $ 180 $ 1,452 $ 2,870 ============ =========== ========== </TABLE> 20
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) The provision for income taxes for continuing operations differs from the amount computed by applying the federal statutory rate to the Company?s earnings from continuing operations before taxes as a result of the following differences: <TABLE> <CAPTION> YEAR ENDED --------------------------------------------- OCTOBER 3, SEPTEMBER 30, ---------------------------- 1998 1997 1996 ----------- ----------- ---------- <S> <C> <C> <C> Provision for income taxes at statutory rate $ 173 $ 1,356 $ 2,756 State income taxes, net of federal income (3) 74 177 tax benefit Other, net 10 22 (63) ----------- ----------- ---------- Provision for income taxes $ 180 $ 1,452 $ 2,870 =========== =========== ========== </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> OCTOBER 3, SEPTEMBER 30, 1998 1997 ------------ --------------- <S> <C> <C> DEFERRED TAX ASSETS: Accrued expenses or asset reserves for financial statements not $ 2,826 $ 2,474 yet deductible for tax purposes Alternative minimum tax credit carryforwards 1,788 1,712 ------------ -------------- Gross deferred tax assets 4,614 4,186 DEFERRED TAX LIABILITIES: Plant and equipment principally due to differences in Depreciation and capitalized interest (8,290) (8,542) Other reserves (557) (525) Prepaid expenses for financial statements that were deducted for tax purposes -- (127) ----------- ------------- Gross deferred tax liabilities (8,847) (9,194) ----------- ------------- Net deferred tax liability $ (4,233) $ (5,008) =========== ============= </TABLE> 21
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) (8) EMPLOYEE BENEFIT PLANS RETIREMENT PLANS. The Company currently has two defined benefit pension plans for eligible employees that provide benefits based primarily upon years of service and compensation levels: (1) the Pension Plan of Insteel Industries, Inc., ("the Insteel Plan"), and (2) the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware, ("the Delaware Plan"). The Company?s funding policy is to contribute amounts at least equal to those required by law. Effective October 1, 1997, the Company froze all benefit accruals for additional years of credited service for plan participants in the Insteel Plan. In August 1998, the Company terminated the Insteel 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 Company expects to complete the settlement of the Insteel Plan by the end of 1999. Insteel Plan assets are primarily invested in short-term money market investments in anticipation of the settlement. The Insteel Plan held 27 shares of the Company's common stock with a market value of $126 at October 3, 1998. The funded status and components of net pension expense used for the Insteel Plan are as follows: <TABLE> <CAPTION> OCTOBER 3, SEPTEMBER 30, 1998 1997 ------------ ------------- <S> <C> <C> Actuarial present value of: Vested benefit obligation $ 4,960 $ 7,227 Nonvested benefit obligation -- 344 ------------ ------------- Accumulated benefit obligation 4,960 7,571 Projected benefit obligation 4,960 10,222 Plan assets at fair market value 5,168 9,873 ------------ ------------- Plan assets in excess of (less than) projected benefit obligation 208 (349) Unrecognized net transition asset (97) (238) Unrecognized prior service cost -- 373 Unrecognized net loss (gain) 97 (2,075) ------------ ------------- Prepaid pension expense (accrued pension liability) included in accrued expenses $ 208 $ (2,289) ------------ ------------- <CAPTION> YEAR ENDED ----------------------------------------------- OCTOBER 3, SEPTEMBER 30, ---------------------------- 1998 1997 1996 ---------- ---------- ---------- <S> <C> <C> <C> Service cost - benefits earned during the period $ -- $ 555 $ 506 Interest cost on projected benefit obligation 722 654 623 Expected investment return on plan assets (776) (2,081) (823) Net amortization and deferral (163) 1,304 76 Curtailment gain (1,200) -- -- --------- ---------- ---------- Net pension expense (income) $ (1,417) $ 432 $ 392 ========= ========== ========== </TABLE> The Delaware Plan assets are primarily invested in publicly traded equities and insurance company guaranteed investment accounts. The funded status and components of net pension expense for the Delaware Plan are as follows: <TABLE> <CAPTION> OCTOBER 3, SEPTEMBER 30, 1998 1997 ------------ -------------- <S> <C> <C> Actuarial present value of: Vested benefit obligation $ 3,336 $ 2,642 Nonvested benefit obligation 392 359 ------------ -------------- Accumulated benefit obligation 3,728 3,001 Projected benefit obligation 3,728 3,001 Plan assets at fair market value 2,806 3,235 ------------ -------------- Projected benefit obligation (in excess of) less than plan assets (922) 234 Unrecognized net transition obligation 30 41 Unrecognized prior service cost 75 19 Unrecognized net gain (45) (293) ------------ -------------- Prepaid pension expense (accrued pension liability) included in accrued expenses $ (922) $ 1 ============ ============== </TABLE> 22
23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) <TABLE> <CAPTION> YEAR ENDED --------------------------------------------------- OCTOBER 3, SEPTEMBER 30, ------------------------------- 1998 1997 1996 ------------- ------------ ------------ <S> <C> <C> <C> Service cost - benefits earned during the period $ 93 $ 106 $ 102 Interest cost on projected benefit obligation 225 205 183 Expected investment return on plan assets 445 (666) (215) Net amortization and deferral (696) 481 60 ------------- ------------ ------------ Net pension expense $ 67 $ 126 $ 130 ------------- ------------ ------------ </TABLE> The weighted average assumptions used for the calculations for the Insteel and Delaware Plans are as follows: <TABLE> <CAPTION> YEAR ENDED -------------------------------------------------- OCTOBER 3, SEPTEMBER 30, ------------------------------ 1998 1997 1996 ----------- ---------- ---------- <S> <C> <C> <C> Assumptions at year-end: Discount rate 5.9%-6.5% 7.5% 7.5% Rate of increase in compensation levels 5.0% 5.0% 5.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0% </TABLE> PROFIT-SHARING AND INCENTIVE PLANS. The Company has a profit-sharing plan covering substantially all of its employees. Under the plan, a profit pool of 10% of earnings before income taxes is paid to the Company's employees each year. Corporate officers, a portion of the Company's management and certain manufacturing facilities participate in other incentive plans based upon the attainment of targeted levels for return on capital and key performance measurements. Profit-sharing and incentive plan expense was $487 in 1998, $658 in 1997 and $1,074 in 1996. 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 is a stock bonus plan that provides 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 1998, 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 $496 in 1998 and $85 in 1997 and 1996. MANAGEMENT SECURITY PROGRAM. The Company has a management security program 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. Management security program expense was $37 in 1998, $84 in 1997 and $87 in 1996. 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 1998, $350 in 1997 and $727 in 1996. (9) 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 $932 in 1998, $1,068 in 1997 and $1,084 in 1996. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 1999, $330; 2000, $217; 2001, $177; 2002, $114; 2003; $25; beyond, $569. 23
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) PURCHASE COMMITMENTS. Commitments for the construction or purchase of property, plant and equipment approximate $257 at October 3, 1998. LEGAL PROCEEDINGS. The Company is involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. Management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. (10) EARNINGS PER SHARE The reconciliation of basic and diluted EPS as required under SFAS No. 128 is as follows: <TABLE> <CAPTION> YEAR ENDED --------------------------------------------- OCTOBER 3, SEPTEMBER 30, ---------------------------- 1998 1997 1996 ---------- ---------- ---------- <S> <C> <C> <C> Earnings from continuing operations $ 328 $ 2,536 $ 5,237 Loss from discontinued operations -- (2,877) (994) Extraordinary loss (408) -- -- ---------- ---------- ---------- Net earnings (loss) $ (80) $ (341) $ 4,243 ========== ========== ========== Weighted average shares outstanding: Weighted average shares outstanding (basic) 8,442 8,436 8,416 Dilutive effect of stock options -- -- 3 ---------- ---------- ---------- Weighted average shares outstanding (diluted) 8,442 8,436 8,419 ---------- ---------- ---------- Earnings (loss) per share (basic and diluted): Earnings from continuing operations $ 0.04 $ 0.30 $ 0.62 Loss from discontinued operations -- (0.34) (0.12) Extraordinary loss (0.05) -- -- ---------- ---------- ---------- Net earnings (loss) $ (0.01) $ (0.04) $ 0.50 ========== ========== ========== </TABLE> Options to purchase 523 shares in 1998, 463 shares in 1997 and 403 shares in 1996 were antidilutive and were not included in the diluted EPS computation. (11) MAJOR CUSTOMERS One customer accounted for 11% of the Company's net sales in 1998 and 10% in 1997. There were no customers that accounted for 10% or more of the Company's net sales in 1996. (12) RELATED PARTY TRANSACTIONS Howard O. Woltz, Jr., Chairman of the Company, is a shareholder in ICS 3-D Panel Works, Inc. ("ICSPW"). As discussed in Note 3, in 1997, the Company sold its ICS division to ICSPW, a new corporation organized by the division's management group. Prior to the sale, the Audit Committee of the Company's Board of Directors reviewed the terms of the proposed transaction focusing particularly on the participation of Mr. Woltz as an investor. Based upon the continuing operating losses of ICS and the prospective benefit to the Company from the sale of the division, the Audit Committee concluded that (1) Mr. Woltz' participation was essential to the transaction and beneficial to the Company and (2) approval of the transaction was in the best interests of the Company. Based upon the Audit Committee's recommendation, the Board of Directors approved the transaction. C. Richard Vaughn, a director of the Company, is Chairman of John S. Clark Company, Inc. ("John S. Clark"), a general building contractor. Construction services provided by John S. Clark to the Company were $93 in 1998 and $5,904 in 1997. 24
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except per share data) (13) OTHER FINANCIAL DATA Balance sheet information: <TABLE> <CAPTION> OCTOBER 3, SEPTEMBER 30, 1998 1997 ------------- ------------- <S> <C> <C> Accounts receivable, net: Accounts receivable $ 28,912 $ 31,291 Less allowance for doubtful accounts (225) (242) ------------- ------------ Total $ 28,687 $ 31,049 ============= ============ Inventories: Raw materials $ 15,514 $ 24,698 Supplies 2,242 2,147 Work in process 1,525 1,730 Finished goods 11,285 15,888 ------------- ------------ Total $ 30,566 $ 44,463 ============= ============ Property, plant and equipment, net: Land and land improvements $ 5,140 $ 5,106 Buildings 36,225 35,938 Machinery and equipment 95,372 99,554 Construction in progress 1,660 1,851 ------------- ------------ 138,397 142,449 Less accumulated depreciation (58,047) (56,048) ------------- ------------ Total $ 80,350 $ 86,401 ============= ============ </TABLE> 25
26 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. and subsidiaries as of October 3, 1998 and September 30, 1997 and the related consolidated statements of earnings, shareholders' equity, and cash flows for the three years ended October 3, 1998 and September 30, 1997 and 1996. 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 generally accepted auditing standards. 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 October 3, 1998 and September 30, 1997, and the results of their operations and their cash flows for the three years ended October 3, 1998 and September 30, 1997 and 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Charlotte, North Carolina October 15, 1998. 26
27 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 AND 1996 ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED --------------------------------------------------------- OCTOBER 3, SEPTEMBER 30, ----------------------------------- 1998 1997 1996 ------------- ------------- ------------- <S> <C> <C> <C> Balance, beginning of year $ 242 $ 240 $ 250 Additions charged to earnings 19 18 (10) Accounts written off (36) (16) -- ------------- ------------- ------------- Balance, end of year $ 225 $ 242 $ 240 ============= ============= ============= </TABLE> 27
28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Shareholders Insteel Industries, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Insteel Industries, Inc. and subsidiaries as of October 3, 1998 and September 30, 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the three years ended October 3, 1998 and September 30, 1997 and 1996, and have issued our report thereon dated October 15, 1998. 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 15, 1998. 28
29 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 1999 Annual Meeting of Shareholders and is 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 1999 Annual Meeting of Shareholders and is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required for this item appears under the captions "Principal Shareholders" and "Security Ownership of Management" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders and is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required for this item appears under the captions "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Transactions With Management and Others" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders and is 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 27 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 October 3, 1998. (C) EXHIBITS See exhibit index on page 31. (D) FINANCIAL STATEMENT SCHEDULES See Item 14 (a)(2) above. 29
30 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 2, 1998 By: /s/ H. O. WOLTZ III ----------------------- H. O. WOLTZ III Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on December 2, 1998 below by the following persons on behalf of the registrant and in the capacities indicated: <TABLE> <CAPTION> Name and Signature Positions(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> 30
31 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED OCTOBER 3, 1998 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION <S> <C> <C> 3- ARTICLES OF INCORPORATION AND BYLAWS ------------------------------------ 3.1 Restated articles of incorporation of the registrant, 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 registrant (as last amended February 5, 1991) (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). 4- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES ------------------------------------------- 4.2 Articles IV and VI of the registrant's restated articles of incorporation, which are incorporated herein by reference to Exhibit 3.1. 4.3 Article 2, Section 8, of the registrant's bylaws, which is incorporated herein by reference to Exhibit 3.2. * 4.13 Loan Agreement dated as of September 1, 1988, between Liberty County Industrial Development Corporation ("Issuer") and Insteel Industries, Inc. ("Company") pursuant to which the Issuer agreed to loan the proceeds from its $3,400,000 Industrial Development Revenue Refunding Bonds, Series 1988 (Insteel Industries, Inc. Project) (the "Bonds") to the Company and the Company agreed to repay such loan to the Issuer. * 4.14 Promissory Note dated October 26, 1988 and issued by the Company to the Issuer in the principal amount of $3,400,000, which note evidences the loan from the Issuer to the Company under the Loan Agreement (Exhibit 4.13). * 4.15 Purchase Contract dated October 26, 1988, among the Issuer, the Company, Texas Department of Commerce and Federated Tax-Free Trust ("Purchaser") pursuant to which the Purchaser agreed to purchase the Bonds issued by the Issuer. * 4.16 Letter of Credit and Reimbursement Agreement dated as of September 1, 1988, by and between the Company and First Union National Bank of North Carolina ("Bank") pursuant to which the Bank agreed to issue its Letter of Credit to secure payment of the Bonds and the Company agreed to reimburse the Bank for any and all drawings made under the Letter of Credit. # 4.24 Indenture of Trust between Industrial Development Authority of the City of Fredericksburg, Virginia and Crestar Bank as Trustee, dated as of September 1, 1990, relating to $4,205,000 Industrial Development Authority of the City of Fredericksburg, Virginia Industrial Development First Mortgage Revenue Refunding Bonds (Insteel Industries, Inc./Rappahannock Wire Company Project) Series of 1990. # 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. </TABLE> 31
32 EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED OCTOBER 3, 1998 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION <S> <C> <C> ## 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. 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 + 10.5 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 </TABLE> 32
33 EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED OCTOBER 3, 1998 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION <S> <C> <C> +++ 10.30 Insteel Industries, Inc. Director Compensation Plan 21- List of Subsidiaries of Insteel Industries, Inc., at October 3, 1998. 23- CONSENTS OF EXPERTS AND COUNSEL: INDEPENDENT AUDITORS' CONSENT. -------------------------------------------- 23.1 Consent of Arthur Andersen LLP 27- Financial Data Schedule (for SEC use only) * Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1988. + Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1989. # Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1990. ** Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1993. ++ Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1994. ## Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. *** Incorporated by reference to the exhibit of the same number contained in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. +++ Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. </TABLE> 33