-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OdjSl5X127bBdznwOe9BuFDVL27x/P+RvJEY/TLNlZbBghB5f7q3bBByKbVbgaj1 p7WlEzjGX9/pjFw/d+zANg== 0000950144-02-005375.txt : 20020514 0000950144-02-005375.hdr.sgml : 20020514 ACCESSION NUMBER: 0000950144-02-005375 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020330 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSTEEL INDUSTRIES INC CENTRAL INDEX KEY: 0000764401 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 560674867 STATE OF INCORPORATION: NC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09929 FILM NUMBER: 02646686 BUSINESS ADDRESS: STREET 1: 1373 BOGGS DR CITY: MOUNT AIRY STATE: NC ZIP: 27030 BUSINESS PHONE: 9107862141 MAIL ADDRESS: STREET 1: 1373 BOGGS DRIVE CITY: MOUNT AIRY STATE: NC ZIP: 27030 FORMER COMPANY: FORMER CONFORMED NAME: EXPOSAIC INDUSTRIES INC DATE OF NAME CHANGE: 19880511 10-Q 1 g76285e10-q.txt INSTEEL INDUSTRIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 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 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 [ ] The number of shares outstanding of the registrant's common stock as of May 13, 2002 was 8,460,187. PART I - - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSTEEL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
MARCH 30, SEPTEMBER 29, 2002 2001 --------- ------------- Assets Current assets: Cash and cash equivalents $ 1,764 $ 4,183 Accounts receivable, net 38,984 43,912 Inventories 36,524 34,576 Prepaid expenses and other 2,688 4,645 --------- --------- Total current assets 79,960 87,316 Property, plant and equipment, net 60,489 74,234 Other assets 18,467 37,296 --------- --------- Total assets $ 158,916 $ 198,846 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 27,049 $ 32,293 Accrued expenses 7,876 9,692 Current portion of long-term debt 5,720 2,920 --------- --------- Total current liabilities 40,645 44,905 Long-term debt 89,145 97,785 Other liabilities 4,593 6,092 Shareholders' equity: Common stock 16,920 16,920 Additional paid-in capital 38,327 38,327 Retained deficit (28,040) (1,562) Accumulated other comprehensive loss (2,674) (3,621) --------- --------- Total shareholders' equity 24,533 50,064 --------- --------- Total liabilities and shareholders' equity $ 158,916 $ 198,846 ========= =========
2 INSTEEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except for per share data) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------- -------------------------- MARCH 30, MARCH 31, MARCH 30, MARCH 31, 2002 2001 2002 2001 --------- --------- --------- --------- Net sales $ 64,900 $ 70,834 $ 127,614 $ 139,773 Cost of sales 59,903 67,756 117,549 133,780 --------- --------- --------- --------- Gross profit 4,997 3,078 10,065 5,993 Selling, general and administrative expense 2,784 4,863 6,106 10,298 Restructuring charges 12,802 -- 12,923 -- --------- --------- --------- --------- Operating loss (10,589) (1,785) (8,964) (4,305) Interest expense 2,984 4,544 6,127 7,931 Other income (66) (40) (1,023) (234) --------- --------- --------- --------- Loss before income taxes and accounting change (13,507) (6,289) (14,068) (12,002) Benefit for income taxes (1,776) (2,102) (1,948) (4,255) --------- --------- --------- --------- Loss before accounting change (11,731) (4,187) (12,120) (7,747) Cumulative effect of accounting change -- -- (14,358) -- --------- --------- --------- --------- Net loss $ (11,731) $ (4,187) $ (26,478) $ (7,747) ========= ========= ========= ========= Weighted average shares outstanding (basic and diluted) 8,460 8,460 8,460 8,460 ========= ========= ========= ========= Per share (basic and diluted): Loss before accounting change $ (1.39) $ (0.49) $ (1.43) $ (0.92) Cumulative effect of accounting change -- -- (1.70) -- --------- --------- --------- --------- Net loss $ (1.39) $ (0.49) $ (3.13) $ (0.92) ========= ========= ========= =========
3 INSTEEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED ----------------------------- MARCH 30, MARCH 31, 2002 2001 ---------- --------- Cash Flows From Operating Activities: Net loss $(26,478) $ (7,747) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Cumulative effect of accounting change 14,358 -- Depreciation and amortization 4,564 7,125 Gain on sale of assets (131) (55) Restructuring charges 12,923 -- Deferred income taxes 768 (5,620) Net changes in assets and liabilities: Accounts receivable, net 4,688 1,656 Inventories (1,948) 2,159 Accounts payable and accrued expenses (7,060) (6,799) Other changes 1,784 926 -------- -------- Total adjustments 29,946 (608) -------- -------- Net cash provided by (used for) operating activities 3,468 (8,355) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (337) (1,589) Proceeds from (issuance of) notes receivable 240 (47) Proceeds from sale of property, plant and equipment 50 82 -------- -------- Net cash used for investing activities (47) (1,554) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 2,100 66,900 Principal payments on long-term debt (7,940) (59,850) -------- -------- Net cash provided by (used for) financing activities (5,840) 7,050 -------- -------- Net decrease in cash (2,419) (2,859) Cash and cash equivalents at beginning of period 4,183 3,230 -------- -------- Cash and cash equivalents at end of period $ 1,764 $ 371 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 5,228 $ 6,536 Income taxes -- 5
4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The consolidated unaudited financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 29, 2001. The unaudited consolidated financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. (2) RESTRUCTURING CHARGES The Company recorded restructuring charges totaling $12.8 million (pre-tax) in the quarter. During the quarter, the Company exited the bulk and collated nail business with the closure of the nail manufacturing operations located in Andrews, South Carolina and disposed of most of the nail-related assets as well as certain of the remaining assets of the galvanized strand business, which the Company exited in May 2001. The restructuring charges consisted of: (1) losses on the sale of certain assets associated with the Company's nail business and write-downs in the carrying value of the remaining assets to be disposed of totaling $5.7 million; (2) estimated costs related to the closure of the Company's nail operations amounting to $0.2 million; (3) losses on the sale of certain assets associated with the Company's galvanized strand business and write-downs in the carrying value of the remaining assets to be disposed of totaling $2.9 million; and (4) an impairment loss on the long-lived assets associated with the industrial wire business amounting to $4.0 million. Approximately $12.6 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $0.2 million were cash charges associated with the closure of the nail business. Total net proceeds from the asset sales amounted to $1.6 million and were received by the Company subsequent to the end of the quarter. The $4.0 million impairment loss recorded on the long-lived assets related to the industrial wire business was primarily related to the impact of the closure of the nail business and related reduction in wire requirements together with unfavorable changes in the market. 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 impairment charge reflects 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. (3) GOODWILL AND INTANGIBLE ASSETS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, the Company will no longer amortize goodwill and intangibles which have indefinite lives. SFAS 142 requires that the Company assess goodwill and certain intangible assets with indefinite useful lives for impairment upon adoption at the beginning of the fiscal year (September 30, 2002) and at least annually thereafter. The Company has determined that it will perform its annual impairment review during the fourth quarter of each year, commencing in the fourth quarter of fiscal 2002. Under SFAS 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. For purposes of the impairment testing, the Company determined that the goodwill asset to be tested was entirely related to the continuing operations of Florida Wire and Cable, Inc. ("FWC"), a subsidiary of the Company that was acquired in January 2000. In calculating the impairment charge, the fair value of the impaired reporting unit, FWC, was estimated using a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA") based on recent comparable transactions and using a discounted cash flow methodology based on estimated future cash flows. Based on the impairment testing, the Company recorded a non-cash charge of $14.4 million, or $1.70 per share, as the cumulative effect of a change in accounting principle to write off the entire goodwill balance associated with FWC as of 5 the beginning of the fiscal year. Including the cumulative effect of the accounting change, the first quarter net loss was $14.7 million, or $1.74 per share, compared with a net loss of $0.4 million, or 5 cents per share as previously reported (prior to the charge). The Company's fiscal 2001 results reflect goodwill amortization expense (pre-tax) of $0.3 million for the second quarter and $0.5 million for the six-month period. A reconciliation of the previously reported fiscal 2001 statement of operations information to pro forma amounts that reflect the elimination of goodwill amortization is presented below:
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2001 MARCH 31, 2001 ------------------------------ ------------------------------ NET LOSS PER NET LOSS PER SHARE (BASIC) SHARE (BASIC) NET LOSS AND DILUTED) NET LOSS AND DILUTED) -------------- ------------- ------------- ------------- Net loss, as reported $(4,187) $(0.49) $(7,747) $(0.92) Add back goodwill amortization 168 0.02 329 0.04 ------- ------ ------- ----- Net loss, pro forma $(4,019) $(0.47) $(7,418) $(0.88) ======= ====== ======= =====
(4) DEFERRED TAX ASSET As of March 30, 2002, the Company recorded a deferred tax asset of $7.6 million, net of valuation allowance of $7.5 million. 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 ("GAAP") 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 the Company's projections of future operations, the Company believes that it will generate sufficient taxable income to utilize all of its NOLs. Under GAAP, however, projected financial performance alone is not sufficient to warrant the recognition of a deferred tax asset to the extent the Company has had cumulative losses in recent years. Rather, the presumption exists that absent recent historical evidence of the Company's ability to generate taxable income, a valuation reserve against deferred tax assets should be established. Accordingly, in connection with the loss incurred for the quarter, the Company established a valuation allowance of $7.5 million against its deferred tax assets, $6.7 million of which relates to non-current tax assets. The provision to establish this valuation allowance is included in the benefit for income taxes reported for the quarter ended March 30, 2002. The valuation allowance established by the Company is subject to periodic review and adjustment based on changes in facts and circumstances. (5) CREDIT FACILITIES The Company has a senior secured credit facility with a group of banks, consisting of a $50.0 million revolving credit loan and a $57.5 million term loan. In May 2002, the Company and its senior lenders agreed to an amendment to the credit agreement that extended the previously amended maturity date of the credit facility from January 15, 2003 to October 15, 2003. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margin that allow the Company to lower its borrowing rates through improvements in the ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") or future reductions in the term loan outstandings; (2) a reduction in the amount of the revolving credit commitment from $50.0 million to $42.0 million that is to occur no later than July 31, 2002 based on decreases in the borrowing base resulting from the Company's divestitures and expected reductions in the Company's borrowing requirements; (3) the deferral of certain scheduled fee payments and increases in the fee amounts payable; (4) annual limitations on the amount of capital expenditures; and (5) mandatory prepayments of the term loan should actual EBITDA exceed certain thresholds. Under the amended terms of the credit agreement, interest rates on the credit facility 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, in either case, an 6 applicable interest rate margin. As of March 30, 2002, the interest rate on the credit facility was 8.00%. In addition, a commitment fee is payable on the unused portion of the revolving credit facility. Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. At March 30, 2002, approximately $7.6 million was available under the revolving credit facility. Under the amended terms of the credit agreement, the Company is subject to financial covenants that require the maintenance of EBITDA and net worth above specified levels. The senior secured credit facility is collateralized by all of the Company's assets. The Company and its senior lenders have agreed to certain modifications in the credit facility through a series of amendments to the credit agreement. The previous amendments had the effect of increasing the Company's interest expense from the amounts that would have been incurred under the original terms of the credit agreement as a result of: (1) 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) a reduction in the term of the credit facility and the period over which the capitalized financing costs are amortized, resulting in higher amortization expense. 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. The Company intends to refinance the senior secured credit facility prior to its amended maturity date of October 15, 2003. 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 operations. As required by its lenders under the terms of the 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. The Company has designated its interest rate swap agreements as cash flow hedges and formally assesses on an ongoing basis whether these agreements are highly effective in offsetting the changes in the fair values of the interest cash flows under its senior secured credit facility. 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. Changes in the fair value of the swap agreements are recorded as a component of "accumulated other comprehensive income." As of March 30, 2002, the fair value of the swap agreements was ($3.5 million) and was recorded in other liabilities on the Company's consolidated balance sheet. (6) EARNINGS PER SHARE The reconciliation of basic and diluted earnings per share ("EPS") is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- MARCH 30, MARCH 31, MARCH 30, MARCH 31, (Amounts in thousands, except per share data) 2002 2001 2002 2001 --------- ---------- ---------- --------- Net loss $(11,731) $ (4,187) $(26,478) $ (7,747) Weighted average shares outstanding: Weighted average shares outstanding (basic) 8,460 8,460 8,460 8,460 Dilutive effect of stock options -- -- -- -- -------- -------- -------- -------- Weighted average shares outstanding (diluted) 8,460 8,460 8,460 8,460 ======== ======== ======== ======== Net loss (basic and diluted) $ (1.39) $ (0.49) $ (3.13) $ (0.92) ======== ======== ======== ========
Options to purchase 1,169,000 shares and 846,000 shares for the three months ended March 30, 2002 and March 31, 2001, respectively, were antidilutive and were not included in the diluted EPS computation. 7 (7) COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of tax, for the three months ended March 30, 2002 and March 31, 2001 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------- ---------------------------- MARCH 30, MARCH 31, MARCH 30, MARCH 31, (Amounts in thousands) 2002 2001 2002 2001 -------- -------- ---------- --------- Net loss $(11,731) $ (4,187) $(26,478) $ (7,747) Change in fair market value of financial instruments 525 (378) 947 (1,569) -------- -------- -------- -------- Total comprehensive loss $(11,206) $ (4,565) $(25,531) $ (9,316) ======== ======== ======== ========
The components of the change in the accumulated other comprehensive loss for the six months ended March 30, 2002 are as follows: (Amounts in thousands) Balance, September 29, 2001 $(3,621) Change in fair market value of financial instruments 947 ------- Balance, March 30, 2002 $(2,674) =======
(8) OTHER FINANCIAL DATA Balance sheet information:
MARCH 30, SEPTEMBER 29, 2002 2001 --------- ------------- Accounts receivable, net: Accounts receivable $ 37,277 $ 41,810 Other receivables (income tax refund) 2,816 3,034 Less allowance for doubtful accounts (1,109) (932) --------- --------- Total $ 38,984 $ 43,912 ========= ========= Inventories: Raw materials $ 15,588 $ 16,514 Supplies 1,145 1,901 Work in process 1,163 1,791 Finished goods 18,628 14,370 --------- --------- Total $ 36,524 $ 34,576 ========= ========= Other assets: Non-current deferred taxes, net $ 5,370 $ 5,806 Equity investment 3,250 3,401 Cash surrender value of life insurance policies 2,480 2,380 Assets held for sale 1,764 4,724 Capitalized financing costs, net 1,355 1,771 Goodwill, net -- 14,358 Other 4,248 4,856 --------- --------- Total $ 18,467 $ 37,296 ========= ========= Property, plant and equipment, net: Land and land improvements $ 5,788 $ 6,708 Buildings 34,376 40,239 Machinery and equipment 76,481 97,446 Construction in progress 1,483 1,444 --------- --------- 118,128 145,837 Less accumulated depreciation (57,639) (71,603) --------- --------- Total $ 60,489 $ 74,234 ========= =========
8 ITEM 2. 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 EARNINGS - - SELECTED DATA ($ in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------------------- ---------------------------------------- MARCH 30, MARCH 31, MARCH 30, MARCH 31, 2002 CHANGE 2001 2002 CHANGE 2001 ------------ -------- ------------ ------------ -------- ------------- Net sales $ 64,900 (8%) $ 70,834 $ 127,614 (9%) $ 139,773 Gross profit 4,997 62% 3,078 10,065 68% 5,993 Percentage of net sales 7.7% 4.3% 7.9% 4.3% Selling, general and administrative expense $ 2,784 (43%) $ 4,863 $ 6,106 (41%) $ 10,298 Percentage of net sales 4.3% 6.9% 4.8% 7.4% Restructuring charges $ 12,802 N/M $ -- $ 12,923 N/M $ -- Operating loss $ (10,589) N/M $ (1,785) $ (8,964) N/M $ (4,305) Percentage of net sales (16.3%) (2.5%) (7.0%) (3.1%) Interest expense $ 2,984 (34%) $ 4,544 $ 6,127 (23%) $ 7,931 Percentage of net sales 4.6% 6.4% 4.8% 5.7% Effective income tax rate 13.1% 33.4% 13.8% 35.5% Cumulative effect of accounting change $ -- -- $ -- $ (14,358) N/M $ -- Net loss $ (11,731) 180% $ (4,187) $ (26,478) 242% $ (7,747) Percentage of net sales (18.1%) (5.9%) (20.7%) (5.5%)
N/M = Not meaningful SECOND QUARTER OF FISCAL 2002 COMPARED TO SECOND QUARTER OF FISCAL 2001 Net Sales Net sales for the quarter decreased 8% to $64.9 million from $70.8 million in the same year-ago period primarily due to the Company's exit from the galvanized strand and nail businesses. On a comparable basis, excluding the revenues from these discontinued product lines, sales rose 1%. Sales of the Company's concrete reinforcing products (welded wire fabric and PC strand) declined 4% from the year-ago quarter, but rose to 68% of consolidated sales from 65%. Sales of wire products (industrial wire and tire bead wire, excluding nails) increased 19% from the year-ago quarter and rose to 25% of consolidated sales from 20%. The changes in product mix were primarily due to increased sales of welded wire fabric and tire bead wire together with the elimination of galvanized strand sales and the reduction in nail sales in the current year. 9 Following the Company's exit from the galvanized strand business in the third quarter of fiscal 2001 and from the nail business during the current quarter, the Company no longer generates revenues from these product lines. For fiscal 2001, sales of bulk and collated nails were $24.3 million, or 8% of the Company's consolidated sales. Gross Profit Gross profit rose 62% to $5.0 million, or 7.7% of net sales in the quarter compared with $3.1 million, or 4.3% of net sales in the same year-ago period. The 3.4 point improvement in gross margins was due to manufacturing cost reductions and higher productivity levels at the Company's facilities, which served to more than offset lower spreads between average selling prices and raw material costs. Selling, General and Administrative Expense Selling, general and administrative expense ("SG&A expense") fell 43% to $2.8 million, or 4.3% of net sales in the quarter from $4.9 million, or 6.9% of net sales in the same year-ago period. The decrease in SG&A expense was largely driven by the Company's exit from the galvanized strand and nail businesses together with the favorable impact of the cost reduction measures that have been implemented. Restructuring Charges During the quarter, the Company recorded pre-tax restructuring charges totaling $12.8 million ($11.1 million after-tax, or $1.31 per share), for losses on the sale of assets associated with the nail and galvanized strand businesses, write-downs in the carrying value of the remaining assets to be disposed of, closure costs associated with the nail business, and an impairment loss on the long-lived assets of the industrial wire business. Approximately $12.6 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $0.2 million were cash charges associated with the closure of the nail business (see Note 2 - Restructuring Charges). Operating Loss The Company's operating loss increased to $10.6 million for the quarter from $1.8 million in the same year-ago period due to the restructuring charges that were recorded in the current year quarter. On a comparable basis, excluding restructuring charges in the current year and goodwill amortization expense in the prior year, the Company's operating income was $2.2 million for the quarter, compared with an operating loss of $1.5 million in the same year-ago period. Interest Expense Interest expense for the quarter fell $1.5 million to $3.0 million from $4.5 million in the same year-ago period. The decrease was primarily due to reductions in amortization expense associated with capitalized financing costs ($1.0 million), average borrowing levels ($0.4 million) and average interest rates ($0.1 million). Income Taxes The Company's effective income tax rate decreased to 13.1% for the quarter compared to 33.4% in the same year-ago period. The decrease was due to the establishment of a $7.5 million valuation allowance against the Company's deferred tax assets related to the tax benefit generated by the loss incurred for the current quarter. Net Loss The Company's net loss for the quarter increased to $11.7 million, or $1.39 per share, from $4.2 million, or 49 cents per share, in the same year-ago period. On a comparable basis, excluding restructuring charges in the current year and goodwill amortization expense in the prior year, the Company's net loss was $0.6 million, or 7 cents per share, for the quarter, compared with a net loss of $4.0 million, or 48 cents per share, in the same year-ago period. 10 FIRST SIX MONTHS OF FISCAL 2002 COMPARED WITH FIRST SIX MONTHS OF FISCAL 2001 Net Sales Net sales for the first six months of fiscal 2002 decreased 9% to $127.6 million from $139.8 million in the same year-ago period primarily due to the Company's exit from the galvanized strand and nail businesses. On a comparable basis, excluding the revenues from these discontinued product lines, sales were essentially flat. Sales of the Company's concrete reinforcing products (welded wire fabric and PC strand) declined 4% from the year-ago period, but rose to 69% of consolidated sales from 66%. Sales of wire products (industrial wire and tire bead wire, excluding nails) increased 16% from the year-ago quarter and rose to 24% of consolidated sales from 19%. The changes in product mix were primarily due to increased sales of welded wire fabric and tire bead wire together with the elimination of galvanized strand sales and reduction in nail sales in the current year. Following the Company's exits from the galvanized strand business in the third quarter of fiscal 2001 and from the nail business during the current quarter, the Company no longer generates revenues from these product lines. For fiscal 2001, sales of bulk and collated nails were $24.3 million, or 8% of the Company's consolidated sales. Gross Profit Gross profit rose 68% to $10.1 million, or 7.9% of net sales for the first six months of fiscal 2002 compared with $6.0 million, or 4.3% of net sales in the same year-ago period. The 3.6 point improvement in gross margins was due to manufacturing cost reductions and higher productivity levels at the Company's facilities, which served to more than offset lower spreads between average selling prices and raw material costs. Selling, General and Administrative Expense Selling, general and administrative expense ("SG&A expense") fell 41% to $6.1 million, or 4.8% of net sales for the first six months of fiscal 2002 from $10.3 million, or 7.4% of net sales in the same year-ago period. The decrease in SG&A expense was largely driven by the Company's exit from the galvanized strand and nail businesses together with the favorable impact of the cost reduction measures that have been implemented. Restructuring Charges During the current year, the Company recorded pre-tax restructuring charges totaling $12.9 million ($11.1 million after-tax, or $1.32 per share), for losses on the sale of assets associated with the nail and galvanized strand businesses, write-downs in the carrying value of the remaining assets to be disposed of, closure costs associated with the nail business, an impairment loss on the long-lived assets of the industrial wire business, and separation costs associated with other selling and administrative staffing reductions. Approximately $12.6 million of the restructuring charges were non-cash charges related to asset write-downs or losses on asset sales and the remaining $0.3 million were cash charges associated with the closure of the nail business and employee separation costs (See Note 2-Restructuring Charges). Operating Loss The Company's operating loss increased to $9.0 million for the first six months of fiscal 2002 from $4.3 million in the same year-ago period due to the restructuring charges that were recorded in the current year. On a comparable basis, excluding restructuring charges in the current year and goodwill amortization expense in the prior year, the Company's operating income was $4.0 million for the first six months of the current year, compared with an operating loss of $3.8 million in the same year-ago period. Interest Expense Interest expense for the first six months of fiscal 2002 fell $1.8 million to $6.1 million from $7.9 million in the same year-ago period. The decrease was primarily due to reductions in amortization expense associated with capitalized financing costs ($1.0 million), average borrowing levels ($0.6 million) and average interest rates ($0.2 million). 11 Other Income The Company's results for the first six months of fiscal 2002 reflect a pre-tax gain of $1.0 million that was recorded in other income in connection with an insurance settlement. The settlement was related to a property damage and business interruption claim resulting from an accident that occurred at the Fredericksburg, Virginia facility in August 1999. Income Taxes The Company's effective income tax rate decreased to 13.8% for the first six months of fiscal 2002 compared with 35.5% in the same year-ago period. The decrease was due to the establishment of a $7.5 million valuation allowance against the Company's deferred tax assets related to the tax benefit generated by the loss incurred for the current year. Cumulative Effect of Accounting Change The Company's results for the first six months of fiscal 2002 reflect a non-cash charge of $14.4 million resulting from an accounting change. During the current year, the Company completed the goodwill impairment testing required in connection with its adoption of Statement of Financial Accounting Standards 142 ("SFAS 142") effective September 30, 2001. Based on the results of the testing, the Company determined that goodwill had been impaired and that a charge should be recorded as of the date of adoption at the beginning of the current fiscal year. In accordance with generally accepted accounting principles, the Company's fiscal 2001 results reflect charges for the amortization of goodwill of $0.3 million for the second quarter and $0.5 million for the six-month period. Goodwill is no longer amortized in the current year with the adoption of SFAS 142. Including the cumulative effect of the accounting change in the first quarter of fiscal 2002, the net loss was $14.7 million, or $1.74 per share, compared with a net loss of $0.4 million, or 5 cents per share as previously reported (prior to the charge) (See Note 3-Goodwill and Intangible Assets). Net Loss The Company's net loss for the first six months of fiscal 2002 increased to $26.5 million, or $3.13 per share, from $7.7 million, or 92 cents per share, in the same year-ago period. On a comparable basis, excluding restructuring charges and the gain on the insurance settlement in the current year, and goodwill amortization expense in the prior year, the Company's net loss was $1.9 million, or 22 cents per share, for the first six months of the current year, compared with a net loss of $7.4 million, or 88 cents per share, in the same year-ago period. LIQUIDITY AND CAPITAL RESOURCES SELECTED FINANCIAL DATA ($ in thousands)
SIX MONTHS ENDED ----------------------------- MARCH 30, MARCH 31, 2002 2001 ----------- --------- Net cash provided by (used for) operating activities $ 3,468 $ (8,355) Net cash used for investing activities (47) (1,554) Net cash provided by (used for) financing activities (5,840) 7,050 Total long-term debt 94,865 112,050 Percentage of total capital 79% 62% Shareholders' equity $ 24,533 $ 67,518 Percentage of total capital 21% 38% Total capital (total long-term debt + shareholders' equity) $ 119,398 $ 179,568
CASH FLOW ANALYSIS Operating activities provided $3.5 million of cash for the first six months of fiscal 2002 while using $8.4 million in the same year-ago period. The year-to-year increase was primarily due to the improvement in the Company's cash operating performance in the current year, after adjusting for the non-cash accounting change and restructuring charges, compared with 12 the prior year net loss and the associated change in deferred income taxes. The net change in the working capital components of receivables, inventories and accounts payable and accrued expenses used $4.3 million in the current year while using $3.0 million in the prior year. Depreciation and amortization declined by $2.6 million, or 36%, compared to the prior year primarily due to: (1) lower amortization expense associated with capitalized financing costs; (2) the elimination of goodwill amortization in the current year in connection with the adoption of SFAS 142; (3) the reduced depreciation in the current year resulting from the impairment losses and write-downs in the carrying values of the Company's tire bead wire and galvanized strand facilities in the third quarter of fiscal 2001; and (4) the closure and sale of the assets of the nail business and write-down of the carrying value of the Company's industrial wire assets in the second quarter of fiscal 2002. Investing activities were essentially breakeven for the first six months of fiscal 2002 while using $1.6 million in the same year-ago period. The decrease was principally due to the Company's curtailment of capital outlays in connection with its debt reduction efforts. The Company expects capital expenditures to be below $2.0 million in fiscal 2002 and $3.0 million in fiscal 2003. Financing activities used $5.8 million of cash for the first six months of fiscal 2002 while providing $7.1 million in the same year-ago period. The reduction in financing requirements was primarily due to the Company's debt reduction efforts. As required by its lenders under the terms of the 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. The Company has designated its interest rate swap agreements as cash flow hedges and formally assesses on an ongoing basis whether these agreements are highly effective in offsetting the changes in the fair values of the interest cash flows under its senior secured credit facility. 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. Changes in the fair value of the swap agreements are recorded as a component of "accumulated other comprehensive income." As of March 30, 2002, the fair value of the swap agreements was ($3.5 million) and was recorded in other liabilities on the Company's consolidated balance sheet. The Company's total debt to capital ratio increased to 79% at March 30, 2002 compared with 62% at March 31, 2001 primarily due to the net losses incurred over the prior twelve-month period and the resulting reduction in shareholders' equity. CREDIT FACILITIES The Company has a senior secured credit facility with a group of banks, consisting of a $50.0 million revolving credit loan and a $57.5 million term loan. In May 2002, the Company and its senior lenders agreed to an amendment to the credit agreement that extended the previously amended maturity date of the credit facility from January 15, 2003 to October 15, 2003. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margin that allow the Company to lower its borrowing rates through improvements in the ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") or future reductions in the term loan outstandings; (2) a reduction in the amount of the revolving credit commitment from $50.0 million to $42.0 million that is to occur no later than July 31, 2002 based on decreases in the borrowing base resulting from the Company's divestitures and expected reductions in the Company's borrowing requirements; (3) the deferral of certain scheduled fee payments and increases in the fee amounts payable; (4) annual limitations on the amount of capital expenditures; and (5) mandatory prepayments of the term loan should actual EBITDA exceed certain thresholds. Under the amended terms of the credit agreement, interest rates on the credit facility 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, in either case, an applicable interest rate margin. As of March 30, 2002, the interest rate on the credit facility was 8.00%. In addition, a commitment fee is payable on the unused portion of the revolving credit facility. Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. At March 30, 2002. approximately $7.6 million was available under the revolving credit facility. Under the amended terms of the credit agreement, the Company is subject to financial covenants that require the maintenance of EBITDA and net worth above specified levels. The senior secured credit facility is collateralized by all of the Company's assets. 13 The Company and its senior lenders have agreed to certain modifications in the credit facility through a series of amendments to the credit agreement. The previous amendments had the effect of increasing the Company's interest expense from the amounts that would have been incurred under the original terms of the credit agreement as a result of: (1) 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) a reduction in the term of the credit facility and the period over which the capitalized financing costs are amortized, resulting in higher amortization expense. 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. The Company intends to refinance the senior secured credit facility prior to its amended maturity date of October 15, 2003. 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 operations. OUTLOOK The Company believes that the overall weakening in the economy will continue to create challenging business conditions through the remainder of fiscal 2002. In addition, reduced domestic capacity together with the "tariff-rate-quota" framework that is in effect and pending antidumping and countervailing duty actions could adversely impact the supply of hot rolled carbon steel wire rod, the Company's primary raw material, leading to higher prices. In the event that it was unsuccessful in recovering these higher costs in its markets, the Company's financial performance would be negatively impacted. 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. Over the prior year, the Company focused on improving the performance of its core operations, divested non-core operations, completed related 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, disposal of under performing businesses and excess assets will facilitate further 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 the remainder of 2002 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements"). ITEM 3. QUALITATIVE AND QUANTITATIVE 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 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 14 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 March 30, 2002. PART II -- OTHER INFORMATION ITEM 5. OTHER MATTERS. In January 2002, the Company was notified by the New York Stock Exchange ("NYSE") that it would initiate procedures to suspend trading and delist the common stock of the Company in view of the fact that it had fallen below the following NYSE continued listing standards: (1) average global market capitalization over a consecutive 30 trading-day period less than $15.0 million, and (2) average closing price of the Company's common stock less than $1.00 over a consecutive 30 trading-day period. In February 2002, the Company's common stock began trading on the OTC bulletin board. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 4.1(f) Amendment Agreement No. 6 dated May 10, 2002 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, August 9, 2001, November 16, 2001 and January 28, 2002. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). b. Reports of Form 8-K On February 12, 2002, the Company filed a Form 8-K under Item 5 regarding delisting of its common stock on the NYSE and the commencement of trading on the OTC bulletin board. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INSTEEL INDUSTRIES, INC. ------------------------ Registrant Date: May 14, 2002 By: /s/ H.O. Woltz III -------------------------------------- H.O. Woltz III President and Chief Executive Officer Date: May 14, 2002 By: /s/ Michael C. Gazmarian -------------------------------------- Michael C. Gazmarian Chief Financial Officer and Treasurer 16 EX-4.1(F) 3 g76285ex4-1f.txt AMENDMENT AGREEMENT #6 DATED MAY 10, 2002 EXHIBIT 4.1(f) THIS DOCUMENT IS SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AMENDMENT AGREEMENT NO. 6 TO CREDIT AGREEMENT AND EQUITY APPRECIATION RIGHTS AGREEMENT THIS AMENDMENT AGREEMENT (this "Amendment Agreement") is made and entered into as of this 10th day of May, 2002, by and among INSTEEL INDUSTRIES, INC., a North Carolina corporation (herein called the "Borrower"), BANK OF AMERICA, N.A., a national banking association (the "Agent"), as Agent for the lenders (the "Lenders") party to the Credit Agreement dated January 31, 2000 as amended by the Amendment Agreement No. 1 to Credit Agreement dated January 12, 2001, by the Supplement to Amendment Agreement No. 1 to the Credit Agreement effective January 12, 2001, by the Amendment Agreement No. 2 to Credit Agreement dated May 21, 2001, by Amendment Agreement No. 3 to Credit Agreement dated August 9, 2001, by Amendment Agreement No. 4 to Credit Agreement dated November 16, 2001 and by Amendment Agreement No. 5 to Credit Agreement dated January 28, 2002 (collectively the "Agreement"), and the Equity Appreciation Rights Agreement dated May 21, 2001 (the "EAR Agreement"), among the Borrower, the Agent, and the Lenders, and the UNDERSIGNED LENDERS. WITNESSETH: WHEREAS, the parties hereto have entered into the Agreement pursuant to which the Lenders have agreed to make loans to the Borrower as evidenced by the Notes (as defined in the Agreement) and to issue Letters of Credit for the benefit of the Borrower; and WHEREAS, as a condition to the making of the loans pursuant to the Agreement the Lenders have required that the Subsidiaries of the Borrower guarantee payment of all Obligations of the Borrower arising under the Agreement; and WHEREAS, the Borrower has requested that the Lenders further amend the Agreement and amend the EAR Agreement in the manner described herein; and WHEREAS, the Lenders are willing to further amend the Agreement and amend the EAR Agreement subject to the terms and conditions set forth herein; NOW, THEREFORE, the Borrower, the Agent and the Lenders do hereby agree as follows: 1. Definitions. The term "Agreement" as used herein and in the Loan Documents (as defined in the Agreement) shall mean the Agreement as hereinafter amended and modified. The term "EAR Agreement" as used herein and in the Loan Documents (as defined in the Agreement) shall mean the EAR Agreement as hereinafter amended and modified. Unless the 1 context otherwise requires, other than paragraph 6, all terms used herein without definition shall have the definition provided therefor in the Agreement. Unless the context requires otherwise, all terms used herein in paragraph 6 without definition shall have the definition provided therefor in the EAR Agreement. 2. Amendment to Agreement. Subject to the conditions set forth herein, the Agreement is hereby amended, effective as of the date of this Amendment No. 6 as follows: (a) Section 1.1 is hereby amended by adding the following new definitions thereto in the appropriate alphabetical order: "`Amendment No. 6' means Amendment Agreement No. 6 to Credit Agreement and Equity Appreciation Rights Agreement which Amendment No. 6 is dated May 10, 2002;" "`Applicable Period' means, (x) with respect to the calculation of Consolidated EBITDA for purposes of determining the Applicable Margin, the Four-Quarter Period most recently ended for which the Borrower has delivered a certificate pursuant to Section 9.1(a)(ii) and (b)(ii), (y) with respect to the calculation of Consolidated EBITDA for purposes of determining Excess EBITDA at any date, the Fiscal Year ending on such date, and (z) with respect to the calculation of Consolidated EBITDA for purposes of determining compliance with Section 10.1(b) as at each of the dates set forth below, the following periods of time ending at such date: Date Applicable Period ---- ----------------- June 1, 2002 The 1 month period then ended June 29, 2002 The 2 month period then ended August 3, 2002 and each The 3 month period then ended fiscal month end thereafter " "`Excess EBITDA' means, for each of the Applicable Periods set forth below, 75% of the amount by which Consolidated EBITDA exceeds the amount set forth below opposite each such period: Applicable Period Amount ----------------- ------ Fiscal Year ending September 28, 2002 $[*] Fiscal Year ending September 27, 2003 $[*]" [*] Confidential portion has been omitted and filed separately with the Commission. 2 (b) The definition of "Applicable Margin" in Section 1.1 is hereby further amended in its entirety so that as amended it shall read as follows: "`Applicable Margin' means (a) with respect to the Revolving Credit Facility, the following percentages per annum based upon the Consolidated Leverage Ratio for the Applicable Period as set forth in the most recent compliance certificate received by the Agent: Pricing Applicable Level Consolidated Leverage Ratio Margin ------- --------------------------- ---------- 1 < 4.00:1 2.00% - 2 >4.00:1 but < 4.50:1 2.50% - 3 >4.50:1 but < 5.00:1 3.00% - 4 >5.00:1 3.50% Any increase or decrease in the Applicable Margin resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first Business Day immediately following the date a compliance certificate is delivered pursuant to Section 9.1(a); provided, however, that if a compliance certificate is not delivered when due in accordance with such Section, then Pricing Level 4 shall apply as of the first Business Day after the date on which such compliance certificate was required to have been delivered. The Applicable Margin in effect from May 6, 2002 through July 15, 2002 shall be determined based upon Pricing Level 2, and (b) with respect to the Term Loan Credit Facility, 7% per annum for any Term Loan Outstandings in excess of $40,635,000 and for each of the periods set forth below that percent per annum set forth opposite each such period for all other Term Loan Outstandings: Period Applicable Margin ------ ----------------- May 6, 2002 through December 31, 2002 3.75% January 1, 2003 through October 15, 2003 4.00% (c) The definition of "Consolidated EBITDA" in Section 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "`Consolidated EBITDA' means, with respect to the Borrower and its Subsidiaries for any Applicable Period ending on the date of computation thereof, the sum of, without duplication, (i) Consolidated Net Income, plus any losses or minus any gains [*] (ii) Consolidated Interest Expense, [*] Confidential portion has been omitted and filed separately with the Commission. 3 (iii) taxes on income, (iv) amortization, (v) depreciation, (vi) Amendment Fees payable to Lenders when and to the extent actually paid and other actual cash expenses paid in each case in connection with Amendment No. 6, the aggregate of such fees and expenses not to exceed $[*], all determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis." (d) The definition of "Stated Termination Date" in Section 1.1 is hereby further amended in its entirety so that as amended it shall read as follows: "`Stated Termination Date' means October 15, 2003." (e) The definition of "Term Loan Maturity Date" in Section 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "`Term Loan Maturity Date' means October 15, 2003." (f) The definition of "Total Revolving Credit Commitment" in Section 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "`Total Revolving Credit Commitment' means $50,000,000 and shall be subject to reduction from time to time in accordance with Section 2.2(e) and subject to further reduction by $8,000,000 on the earlier to occur of (i) [*] and (ii) July 31, 2002." (g) Section 2.1(c) is hereby amended in its entirety so that as amended it shall read as follows: "(c) Payment of Principal. The principal amount of the Term Loan shall be repaid in monthly installments on the dates and in the amounts set forth below: Date Amount ---- ------ May 31, 2002 $300,000 June 30, 2002 $300,000 July 31, 2002 $700,000 August 31, 2002 $700,000 September 30, 2002 $700,000 October 31, 2002 $100,000 November 30, 2002 $100,000 December 31, 2002 $100,000 January 31, 2003 $200,000 February 28, 2003 $200,000 March 31, 2003 $200,000 April 30, 2003 $300,000 May 31, 2003 $300,000 June 30, 2003 $300,000 July 31, 2003 $400,000 August 31, 2003 $400,000 September 30, 2003 $400,000 [*] Confidential portion has been omitted and filed separately with the Commission. 4 provided, however, that the entire amount of Term Loan Outstandings shall be due and payable in full on the Term Loan Termination Date." (h) Section 2.1(e) is hereby amended in its entirety so that as amended it shall read as follows: "(e) Mandatory Prepayments. In addition to the required payments of principal of the Term Loan set forth in Section 2.1(c) and any optional payments of principal of the Term Loan or reductions of the Revolving Credit Facility effected under Section 2.1(d) or Section 2.2(e), the Borrower shall make, or shall cause each applicable Subsidiary to make, a prepayment from the proceeds of (i) each private or public offering of equity securities of the Borrower or any Subsidiary (other than securities issued to the Borrower or a Guarantor) in an amount equal to fifty percent (50%) of the Net Proceeds of each issuance of equity securities of the Borrower or any Subsidiary (including without limitation any security not constituting Indebtedness exchangeable, exercisable or convertible for or into equity securities), (ii) the issuance of any Indebtedness for Money Borrowed permitted by the Required Lenders, in an amount equal to one hundred percent (100%) of the Net Proceeds from the issuance of such Indebtedness excluding Indebtedness permitted to be issued under Section 10.5(a), (iii) each Asset Disposition permitted under Section 10.6(b), (c), (f) and (g) in an amount equal to one hundred percent (100%) of the Net Proceeds of such Asset Disposition, (iv) one hundred percent (100%) of the amount of any Price Adjustment received by the Borrower, (v) one hundred percent (100%) of the amount of any tax refund from all federal, state and local tax returns filed by the Borrower and each of its Subsidiaries, and (vi) seventy-five percent (75%) of the Excess EBITDA, each such prepayment (other than Excess EBITDA) to be made within fifteen (15) Business Days of receipt of such proceeds, and with respect to (vi), within fifteen (15) Business Days after the delivery of the financial statements pursuant to Section 9.1(a), and upon not less than five (5) Business Days' written notice to the Agent, which notice shall include a certificate of an Authorized Representative setting forth in reasonable detail the calculations utilized in computing the amount of such prepayment; provided, that the required Excess EBITDA payment due within such 15 day period shall be an amount equal to the sum of cash and cash equivalents of the Borrower and its Subsidiaries and availability under the Revolving Credit Facility minus $8,500,000, with the balance of such Excess EBITDA to be due and payable in three equal installments on the first Business Day of April, May and June. The Agent shall give each Lender, within one (1) Business Day, telefacsimile notice of each notice of prepayment described in this Section 2.1(e). All mandatory prepayments made pursuant to this Section 2.1(e) shall be applied (i) to installments of principal of the Term Loan in inverse order of their maturities (as adjusted to give effect to any prior payments or prepayments of principal), and (ii) in the event that the Term Loan shall have been fully repaid, to the Revolving Credit Outstandings; provided that the Total Revolving Credit Commitment shall not be permanently reduced by any such prepayment except 5 that prepayments of Revolving Credit Outstandings pursuant to Section 2.1(e)(iii) above shall permanently reduce the Total Revolving Credit Commitment by the amount of such prepayment. Notwithstanding the foregoing, (x) the Net Proceeds received from the sale of Inventory, other than in the ordinary course of business, or Accounts Receivable shall be applied as repayments of the Revolving Credit Outstandings to permanently reduce the Total Revolving Credit Commitment, and (y) the Net Proceeds received from [*] shall be applied in the following manner: first, $[*] shall be applied as a prepayment to the Term Loan Outstandings, and second, the remaining Net Proceeds from such [*] shall be applied as repayments of the Revolving Credit Outstandings." (i) Section 9.1(g) is amended in its entirety so that as amended it shall read as follows: "(g) as soon as practicable and in any event within 15 days after the end of each fiscal month deliver to the Agent (i) an Accounts Receivable trial balance aged from the date of invoice, (ii) an accounts payable trial balance aged from the date of invoice, (iii) a list of the Inventory summarized as required by the Agent, and (iv) a compliance certificate of an Authorized Representative demonstrating compliance with Sections 10.1(a) and (b), each of the foregoing to be in form and detail acceptable to the Agent;" (j) Section 10.1(a) is amended in its entirety so that as amended it shall read as follows: "(a) Consolidated Net Worth. Permit Consolidated Net Worth to be less than (i) $[*] and (ii) as at the last day of each fiscal quarter of the Borrower ending after March 30, 2002 and until (but excluding) the last day of the next following fiscal quarter of the Borrower, the sum of (A) the amount of Consolidated Net Worth required to be maintained pursuant to this Section 10.1(a) as at the end of the immediately preceding fiscal quarter (or, in the case of the computation for the quarter ended March 30, 2002, $[*], plus (B) 50% of Consolidated Net Income (with no reduction for net losses during any period) for the fiscal quarter of the Borrower ending on such day (including within "Consolidated Net Income" certain items otherwise excluded, as provided for in the definition of "Consolidated Net Income"), plus (C) 100% of the aggregate amount of all increases in the stated capital and additional paid-in capital accounts of the Borrower resulting from the issuance of equity securities or other capital investments." [*] Confidential portion has been omitted and filed separately with the Commission. 6 (k) Section 10.1(b) is amended in its entirety so that as amended it shall read as follows: "(b) Consolidated EBITDA. Permit Consolidated EBITDA for each of the Applicable Periods ending on the dates set forth below to be less than the amount set forth opposite each such date: APPLICABLE PERIOD AMOUNT ----------------- ------ June 1, 2002 $[*] June 29, 2002 [*] August 3, 2002 [*] August 31, 2002 [*] September 28, 2002 [*] November 2, 2002 [*] November 30, 2002 [*] December 28, 2002 [*] February 1, 2003 [*] March 1, 2003 [*] March 29, 2003 [*] May 3, 2003 [*] May 31, 2003 [*] June 28, 2003 [*] August 2, 2003 [*] August 30, 2003 [*] September 27, 2003 [*] (l) Section 10.3 is hereby amended in its entirety so that as amended it shall read as follows: "Capital Expenditures. Make or become committed to make Capital Expenditures which exceed in the aggregate $2,000,000 for the Fiscal Year 2002, and $3,000,000 for the Fiscal Year 2003." 3. Subsidiary Consents. Each Subsidiary of the Borrower that has delivered a Guaranty to the Agent has joined in the execution of this Amendment Agreement for the purpose of (i) agreeing to the amendment to the Agreement and (ii) confirming its guarantee of payment of all the Obligations. 4. Representations and Warranties. The Borrower hereby represents and warrants that: (a) The representations and warranties made by Borrower in Article VIII of the Agreement are true on and as of the date hereof except that the financial statements referred to in Section 8.6(a) shall be those most recently furnished to each Lender pursuant to Section 9.1; [*] Confidential portion has been omitted and filed separately with the Commission. 7 (b) There has been no material adverse change in the condition, financial or otherwise, of the Borrower and its Subsidiaries since the date of the most recent financial reports of the Borrower received by each Lender under Section 9.1 thereof, other than changes in the ordinary course of business, none of which has been a material adverse change; (c) The business and properties of the Borrower and its Subsidiaries are not and have not been adversely affected in any substantial way as the result of any fire, explosion, earthquake, accident, strike, lockout, combination of workers, flood, embargo, riot, activities of armed forces, war or acts of God or the public enemy, or cancellation or loss of any major contracts; and (d) After giving effect to this Amendment Agreement (including the waivers by the Lenders set forth herein), no event has occurred and no condition exists which, upon the consummation of the transaction contemplated hereby, constitutes a Default or an Event of Default on the part of the Borrower under the Agreement, the Notes or any other Loan Document either immediately or with the lapse of time or the giving of notice, or both. 5. Deferral of Amendment Fee under Amendment No. 5. The provisions regarding the Amendment Fee as set forth in paragraph 5 of Amendment No. 5 are modified as follows: (i) payment of $[*] is due on each of July 31, 2002, October 31, 2002 and January 31, 2003 and (ii) payment of $[*] is due on April 30, 2003. In the event all Obligations have been paid in full prior to the date each payment shall be due, payment of such fees shall be waived. 6. Amendment to EAR Agreement. Subject to the conditions set forth herein, the EAR Agreement is hereby amended, effective as of the date of this Amendment No. 5 as follows: (a) Section 1.01 is hereby amended by adding the following new definition thereto in the appropriate alphabetical order: "Amendment No. 6" means Amendment Agreement No. 6 to Credit Agreement and Equity Appreciation Rights Agreement which Amendment No. 6 is dated May 6, 2002;" (b) The definition of "Exercise Period" in Section 1.01 is hereby amended in its entirety so that as amended it shall read as follows: "Exercise Period" means the period (a) beginning and ending in the case of Section 2.02(b) and (c), upon payment in full of all the Loans or (b) beginning on the earlier to occur of (i) July 15, 2003 or (ii) occurrence of an Event of Default under the Credit Agreement and ending on July 15, 2005;" [*] Confidential portion has been omitted and filed separately with the Commission. 8 (c) Section 2.02(a) is hereby amended in its entirety so that as amended is shall read as follows: "(a) The Borrower agrees to pay to the Agent for the benefit of the Lenders the Rights Fee not later than ninety (90) days next following the Exercise Date, provided the Agent shall have given the Borrower notice of the Exercise Date within ten (10) business days next following delivery by the Borrower to the Agent of the financial information required to be delivered to the Agent pursuant to Section 9.1 of the Credit Agreement for the period ending on such Exercise Date. The Rights Fee shall be in a maximum amount of $[*] but in no event less than the greater of (i) [*]; or (ii) $[*]; (d) Section 2.02(b) is hereby amended in its entirety so that as amended it shall read as follows: "(b) In the event all Obligations (as defined in the Credit Agreement) have been paid in full by April 15, 2003 and the Facility Termination Date (as defined in the Credit Agreement) shall have occurred by April 15, 2003, the Rights Fee shall be $[*];" (e) Section 2.02(c) is hereby amended in its entirety so that as amended it shall read as follows: "(c) In the event all Obligations (as defined in the Credit Agreement) have not been paid in full by April 15, 2003 but are paid in full by July 15, 2003 and the Facility Termination Date (as defined in the Credit Agreement) shall have occurred by July 15, 2003, the Rights Fee shall be in a maximum amount of $[*] but in no event less than the greater of: (i) [*]; or (ii) $[*]; and" 7. Conditions. This Amendment Agreement shall become effective upon the Borrower delivering or causing to be delivered to the Agent the following: (i) five (5) counterparts of this Amendment Agreement duly executed by the Borrower, the Agent and the Required Lenders and consented to by each of the Subsidiaries; [*] Confidential portion has been omitted and filed separately with the Commission. 9 (ii) copy of resolutions adopted by the Board of Directors of the Borrower and each Guarantor approving this Amendment Agreement and authorizing its execution certified by the Secretary or Assistant Secretary to be a true and correct copy duly adopted; and (iii) all other fees and expenses, including the Agent's fees, due in connection with this Amendment Agreement. 8. Acknowledgment; Release. The Borrower and the Guarantors acknowledge that they have no existing defense, counterclaim, offset, cross-complaint, claim or demand of any kind or nature whatsoever that can be asserted to reduce or eliminate all or any part of any of their respective liability to pay the full indebtedness outstanding under the terms of the Agreement and any other Loan Documents which evidence, guaranty or secure the Obligations. The Borrower and the Guarantors hereby release and forever discharge the Agent, the Lenders and all of their officers, directors, employees, attorneys, consultants and agents from any and all actions, causes of action, debts, dues, claims, demands, liabilities and obligations of every kind and nature, both in law and in equity, known or unknown, whether matured or unmatured, absolute or contingent. 9. Costs and Expenses. The Borrower agrees to pay all costs and expenses associated with the preparation, due diligence, administration and enforcement of all documentation executed in connection with the Amendment Agreement, including without limitation, the legal fees and out-of-pocket expenses of counsel to the Agent. The Borrower also agrees to pay the expenses of the Agent and the Lenders in connection with Collateral review, field audits and retention of consultants. 10. Entire Agreement. This Amendment Agreement sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relative to such subject matter. No promise, conditions, representation or warranty, express or implied, not herein set forth shall bind any party hereto, and no one of them has relied on any such promise, condition, representation or warranty. Each of the parties hereto acknowledges that, except as in this Amendment Agreement otherwise expressly stated, no representations, warranties or commitments, express or implied, have been made by any other party to the other. None of the terms or conditions of this Amendment Agreement may be changed, modified, waived or canceled orally or otherwise, except by writing, in the manner provided in the Agreement, specifying such change, modification, waiver or cancellation of such terms or conditions, or of any proceeding or succeeding breach thereof. 11. Full Force and Effect of Agreement. Except as hereby specifically amended, modified or supplemented, the Agreement and all of the other Loan Documents are hereby confirmed and ratified in all respects and shall remain in full force and effect according to their respective terms. [Remainder of page intentionally left blank.] 10 IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written. BORROWER: INSTEEL INDUSTRIES, INC. WITNESS: /s/ Howard O. Woltz, Jr. By: /s/ H.O. Woltz III - ----------------------------------- ---------------------------------- Print Name: Howard O. Woltz, Jr. Name: H.O. Woltz III ----------------------- ---------------------------------- Title: President ---------------------------------- /s/ Michael C. Gazmarian - ----------------------------------- Print Name: Michael C. Gazmarian ----------------------- 11 GUARANTORS: INSTEEL WIRE PRODUCTS COMPANY INTERCONTINENTAL METALS CORPORATION FLORIDA WIRE AND CABLE, INC. WITNESS: /s/ Howard O. Woltz, Jr. By: /s/ H.O. Woltz III - ----------------------------------- ---------------------------------- Print Name: Howard O. Woltz, Jr. Name: H.O. Woltz III ----------------------- ---------------------------------- Title: President ---------------------------------- /s/ Michael C. Gazmarian - ----------------------------------- Print Name: Michael C. Gazmarian ----------------------- 12 BANK OF AMERICA, N.A., as Agent for the Lenders By: /s/ Michael J. Fey -------------------------------------- Name: Michael J. Fey ------------------------------------ Title: Senior Vice President ----------------------------------- BANC OF AMERICA STRATEGIC SOLUTIONS, INC., as a Lender By: /s/ Michael J. Fey -------------------------------------- Name: Michael J. Fey ------------------------------------ Title: Senior Vice President ----------------------------------- 13 BRANCH BANKING AND TRUST COMPANY By: /s/ Richard C.F. Spencer -------------------------------------- Name: Richard C.F. Spencer ------------------------------------ Title: Senior Vice President ----------------------------------- 14 WACHOVIA BANK, NATIONAL ASSOCIATION, as successor in interest to First Union National Bank By: /s/ Elizabeth D. Morris -------------------------------------- Name: Elizabeth D. Morris ------------------------------------ Title: Director ----------------------------------- 15 PNC BANK, N.A., as successor in interest to National Bank of Canada, a Canadian chartered bank By: /s/ Jay Stein -------------------------------------- Name: Jay Stein ------------------------------------ Title: Vice President ----------------------------------- 16 -----END PRIVACY-ENHANCED MESSAGE-----