10-Q

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 December 28, 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 o

     The number of shares outstanding of the registrant’s common stock as of February 18, 2003 was 8,460,187.

TABLE OF CONTENTS

EX-4.1(G) AMENDMENT AGREEMENT NO. 7

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

			December 28,			September 28,
			2002			2002
Assets
Current assets:
	Cash and cash equivalents		$	519		$	310
	Accounts receivable, net			23,595			29,898
	Inventories			35,830			32,653
	Prepaid expenses and other			2,789			5,831
		Total current assets		62,733			68,692
Property, plant and equipment, net				54,354			55,445
Other assets				11,739			12,251
		Total assets	$	128,826		$	136,388
Liabilities and shareholders’ equity
Current liabilities:
	Accounts payable		$	19,350		$	23,855
	Accrued expenses			8,357			8,796
	Current portion of long-term debt			3,620			3,620
		Total current liabilities		31,327			36,271
Long-term debt				68,070			70,020
Other liabilities				6,714			6,773
Shareholders’ equity:
	Common stock			16,920			16,920
	Additional paid-in capital			38,327			38,327
	Retained deficit			(28,047	)		(27,284	)
	Accumulated other comprehensive loss			(4,485	)		(4,639	)
		Total shareholders’ equity		22,715			23,324
		Total liabilities and shareholders’ equity	$	128,826		$	136,388

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(Unaudited)

			Three Months Ended
			December 28,			December 29,
			2002			2001
Net sales			$	46,797		$	62,714
Cost of sales				42,766			57,646
	Gross profit			4,031			5,068
Selling, general and administrative expense				2,759			3,322
Restructuring charges				—			121
Other expense (income)				9			(861	)
	Earnings before interest, income taxes and accounting change			1,263			2,486
Interest expense				2,490			3,143
Interest income				(16	)		(96	)
	Loss before income taxes and accounting change			(1,211	)		(561	)
Benefit for income taxes				(448	)		(172	)
	Loss before accounting change			(763	)		(389	)
Cumulative effect of accounting change				—			(14,358	)
	Net loss		$	(763	)	$	(14,747	)
	Weighted average shares outstanding (basic and diluted)			8,460			8,460
Per share (basic and diluted):
	Loss before accounting change		$	(0.09	)	$	(0.04	)
	Cumulative effect of accounting change			—			(1.70	)
		Net loss	$	(0.09	)	$	(1.74	)

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

					Three Months Ended
					December 28,			December 29,
					2002			2001
Cash Flows From Operating Activities:
	Net loss				$	(763	)	$	(14,747	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
			Cumulative effect of accounting change			—			14,358
			Depreciation and amortization			1,793			2,541
			Loss on sale of assets			33			28
			Restructuring charges			—			121
			Deferred income taxes			(448	)		(186	)
			Net changes in assets and liabilities:
				Accounts receivable, net		6,303			10,075
				Inventories		(3,177	)		(2,963	)
				Accounts payable and accrued expenses		(6,065	)		(5,916	)
				Other changes		3,595			650
				Total adjustments		2,034			18,708
				Net cash provided by operating activities		1,271			3,961
Cash Flows From Investing Activities:
	Capital expenditures					(282	)		(86	)
	Proceeds from notes receivable					42			79
	Proceeds from sale of property, plant and equipment					7			6
				Net cash used for investing activities		(233	)		(1	)
Cash Flows From Financing Activities:
	Proceeds from long-term debt					1,600			2,100
	Principal payments on long-term debt					(3,550	)		(4,270	)
	Other					1,121			—
				Net cash used for financing activities		(829	)		(2,170	)
Net increase in cash						209			1,790
Cash and cash equivalents at beginning of period						310			962
Cash and cash equivalents at end of period					$	519		$	2,752
Supplemental Disclosures of Cash Flow Information:
	Cash paid during the period for:
		Interest			$	2,202		$	2,054

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except where otherwise indicated)

(1) Basis of Presentation

     The unaudited consolidated 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 in the United States (“GAAP”) 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 28, 2002.

     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) Recent Accounting Pronouncements

     In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” As a result of rescinding SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” gains and losses from extinguishments of debt are to be classified as extraordinary items only if they meet the criteria specified in Accounting Principles Board (“APB”) Opinion No. 30. This statement also amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company adopted the provisions of SFAS No. 145 during the first quarter of fiscal 2003, which did not have a significant impact on its results of operations or financial position.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires the recognition of a liability for the costs associated with an exit or disposal activity when the liability is incurred instead of at the date an entity commits to an exit plan. The statement is effective for exit and disposal activities entered into after December 31, 2002. The Company does not expect that the adoption of this statement will have a material impact on its results of operations or financial position.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” This statement requires all entities with stock-based employee compensation arrangements to provide additional disclosures in their summary of significant accounting policies note. Since the Company uses the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” the accounting policies note will include a tabular presentation of pro forma net income and earnings per share using the fair value method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation.” Also, SFAS No. 148 permits entities changing to the fair value method of accounting for employee stock compensation to choose from one of three transition methods — the prospective method, the modified prospective method, or the retroactive restatement method. Finally, SFAS No. 148 will require the Company to make interim-period pro forma disclosures if stock-based compensation is accounted for under the intrinsic value method in any period presented. The expanded annual disclosure requirements and the transition provisions are effective for the Company’s fiscal year 2003. The new interim period disclosures are required in the Company’s financial statements for interim periods beginning in the second quarter of fiscal 2003. The Company does not expect that the adoption of this statement will have a material impact on its results of operations or financial position.

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     In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a guarantee is issued, an entity must recognize an initial liability for the fair value, or market value, of the obligations assumed and must disclose such information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not expect that the adoption of this Interpretation will have a material impact on its financial statements.

     In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities (VIE)”. In general, FIN 46 clarifies how an enterprise should determine if it should consolidate a VIE. FIN 46 is effective immediately for variable interests in VIEs created after January 31, 2003. Additionally, for a variable interest in a VIE created before February 1, 2003, FIN 46 is required to be applied no later than the beginning of the Company’s fourth quarter of fiscal 2003. The Company does not expect that the adoption of this Interpretation will have an impact on its financial statements.

(3) Restructuring Charges

     In the prior year quarter, the Company recorded restructuring charges totaling $121 for separation costs associated with selling and administrative staffing reductions.

(4) Goodwill and Intangible Assets

     The Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” as of September 30, 2001, the first day of fiscal 2002. In accordance with this statement, the Company will no longer amortize goodwill and intangible assets which have indefinite lives. SFAS No. 142 requires that the Company assess goodwill and certain intangible assets with indefinite useful lives for impairment upon adoption and at least annually thereafter. The Company has determined that it will perform its annual impairment review during the fourth quarter of each year.

     Under SFAS No. 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 as of the implementation date, 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, in the prior year quarter as the cumulative effect of a change in accounting principle to write off the entire goodwill balance associated with FWC as of the beginning of fiscal year 2002.

(5) Deferred Tax Asset

     The Company has recorded the following amounts for deferred tax assets on its consolidated balance sheet as of December 28, 2002: a current deferred tax asset of $1.8 million in prepaid expenses and other, and a noncurrent deferred tax asset of $7.3 million (net of valuation allowance of $7.5 million) in other assets. The realization of the Company’s deferred tax assets is entirely dependent upon the Company’s ability to generate future taxable income. 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 net operating loss carryforwards. 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 fiscal year 2002, the Company established a valuation allowance of $7.5 million against its deferred tax assets. The valuation allowance established by the Company is subject to periodic review and adjustment based on changes in facts and circumstances.

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(6) Credit Facilities

     The Company has a senior secured credit facility with a group of banks, consisting of a $42.0 million revolving credit loan and a $41.7 million term loan. In February 2003, 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 October 15, 2003 to March 31, 2004. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margins that allow the Company to lower its interest rates through future reductions in the term loan; (2) additional fees which become payable to the lenders on certain dates unless a refinancing of the credit facility is completed before such dates; (3) the deferral of the payment dates of other contingent fees consistent with the period of time for which the maturity date was extended; (4) adjustments to the financial covenants that are applicable under the credit agreement; (5) limitations on the amount of capital expenditures to $1.8 million for each fiscal year; and (6) 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 0.50% plus the federal funds rate, plus, in either case, an applicable interest rate margin. As of December 28, 2002, interest rates on the credit facility were as follows: 6.75% on the revolver, 8.00% on $40.6 million of the term loan and 11.25% on $1.0 million of the term loan. 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 December 28, 2002, approximately $6.0 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 Company was in compliance with all of the financial covenants as of December 28, 2002. 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 March 31, 2004. In the event that such efforts were 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 a fixed rate of 7.08% plus the applicable margin under the credit facility. 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 loss.” As of December 28, 2002, the fair value of the swap agreements was ($5.4 million) and was recorded in other liabilities on the Company’s consolidated balance sheet.

(7) Stock Option Plans

     In order to enable employees to acquire or increase their holdings of the Company’s common stock and to promote a closer identification of their interests with those of the Company and its shareholders, on November 12, 2002, the Board of Directors approved a one-time exchange program under the 1994 Employee Stock Option Plan. Under the terms of the exchange, participants that elected to surrender eligible options prior to December 9, 2002 will be issued one option for

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     every three options surrendered on a date that will be more than 6 months from the date of cancellation of the surrendered options. The new options will be issued at an exercise price equal to the market price of the Company’s stock on the grant date. The Chief Executive Officer and the Chairman of the Board of Directors elected not to participate in the exchange program.

(8) Earnings Per Share

     The reconciliation of basic and diluted earnings per share (“EPS”) is as follows:

			(Unaudited)
			Three Months Ended
			December 28,			December 29,
(Amounts in thousands except for per share data)			2002			2001
Loss before accounting change			$	(763	)	$	(389	)
Cumulative effect of accounting change				—			(14,358	)
	Net loss		$	(763	)	$	(14,747	)
Weighted average shares outstanding:
	Weighted average shares outstanding (basic)			8,460			8,460
	Dilutive effect of stock options			—			—
		Weighted average shares outstanding (diluted)		8,460			8,460
Per share (basic and diluted):
	Loss before accounting change		$	(0.09	)	$	(0.04	)
	Cumulative effect of accounting change			—			(1.70	)
		Net loss	$	(0.09	)	$	(1.74	)

     Options to purchase 974 shares and 1,184 shares for the three months ended December 28, 2002 and December 29, 2001, respectively, were antidilutive and were not included in the diluted EPS computation.

(9) Comprehensive Loss

     The components of comprehensive loss, net of tax, for the three months ended December 28, 2002 and December 29, 2001, respectively, are as follows:

		(Unaudited)
		Three Months Ended
		December 28,			December 29,
(Amounts in thousands)		2002			2001
Net loss		$	(763	)	$	(14,747	)
Change in fair market value of financial instruments			154			422
	Total comprehensive loss	$	(609	)	$	(14,325	)

     The change in the accumulated other comprehensive loss for the three months ended December 28, 2002 is as follows:

(Amounts in thousands)
Balance, September 28, 2002		$	(4,639	)
Change in fair market value of financial instruments			154
	Balance, December 28, 2002 (Unaudited)	$	(4,485	)

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(10) Other Financial Data

     Balance sheet information:

			(Unaudited)
			December 28,			September 28,
(Amounts in thousands)			2002			2002
Accounts receivable, net:
	Accounts receivable		$	24,715		$	30,931
	Less allowance for doubtful accounts			(1,120	)		(1,033	)
		Total	$	23,595		$	29,898
Inventories:
	Raw materials		$	15,505		$	14,637
	Supplies			601			682
	Work in process			752			1,047
	Finished goods			18,972			16,287
		Total	$	35,830		$	32,653
Other assets:
	Non-current deferred tax asset, net		$	5,413		$	5,508
	Cash surrender value of life insurance policies			2,213			2,179
	Assets held for sale			1,821			1,821
	Capitalized financing costs, net			1,254			1,651
	Other			1,038			1,092
		Total	$	11,739		$	12,251
Property, plant and equipment, net:
	Land and land improvements		$	5,031		$	5,031
	Buildings			31,413			31,413
	Machinery and equipment			63,322			63,387
	Construction in progress			1,320			1,078
				101,086			100,909
	Less accumulated depreciation			(46,732	)		(45,464	)
		Total	$	54,354		$	55,445

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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 future events of default with respect to its indebtedness, particularly under its senior secured credit facility, as amended; and the Company’s ability to refinance its current indebtedness in a timely manner and on favorable terms.

Results of Operations

Statements of Operations – Selected Data
($ in thousands)

		Three Months Ended
		December 28,						December 29,
		2002			Change			2001
Net sales		$	46,797			(25	)%	$	62,714
Gross profit			4,031			(20	)%		5,068
	Percentage of net sales		8.6	%					8.1	%
Selling, general and administrative expense		$	2,759			(17	)%	$	3,322
	Percentage of net sales		5.9	%					5.3	%
Restructuring charges		$	—			N/M		$	121
Other expense (income)			9			N/M			(861	)
Earnings before interest, income taxes and accounting change			1,263			(49	)%		2,486
Interest expense			2,490			(21	)%		3,143
	Percentage of net sales		5.3	%					5.0	%
Effective income tax rate			37.0	%					30.7	%
Loss before accounting change		$	(763	)		N/M		$	(389	)
Cumulative effect of accounting change			—			N/M			(14,358	)
Net loss			(763	)		N/M			(14,747	)

     “N/M” = not meaningful

First Quarter of Fiscal 2003 Compared to First Quarter of Fiscal 2002

Net Sales

     Net sales for the quarter decreased 25% to $46.8 million from $62.7 million in the same year-ago period primarily due to the elimination of revenues from the product lines that the Company has exited, including nails and certain segments of the industrial wire business. On a comparable basis, excluding the revenues from these discontinued product lines, sales declined 6%. Sales of the Company’s concrete reinforcing products (welded wire fabric and PC strand) declined 11% from the year-ago quarter, but rose to 85% of consolidated sales from 71%. Sales of industrial wire products (tire bead wire and other industrial wire), excluding revenues from the segments that Company has exited, rose 32% from the year-ago quarter, increasing to 15% of consolidated sales from 9%. Sales of the product lines that the Company has exited represented 20% of

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consolidated sales in the year-ago quarter. The changes in product mix were primarily due to the impact of the Company’s exit from the nail and certain segments of the industrial wire business together with increased sales of tire bead wire in the current year.

Gross Profit

     Gross profit declined 20% to $4.0 million, or 8.6% of net sales in the quarter compared with $5.1 million, or 8.1% of net sales in the same year-ago period. The 0.5 point increase in gross margin was due to higher productivity levels and favorable costs achieved by the Company’s manufacturing facilities for the quarter, which reduced average unit conversion costs. These improvements served to counteract the lower level of shipments relative to the prior year quarter.

Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) fell 17% to $2.8 million, or 5.9% of net sales in the quarter from $3.3 million, or 5.3% of net sales in the same year-ago period. The decrease in SG&A expense was primarily due to the elimination of the selling and administrative costs which supported the product lines the Company has exited as well as the savings generated from previously implemented cost reduction measures.

Restructuring Charges

     In the prior year quarter, the Company recorded restructuring charges totaling $121 for separation costs associated with selling and administrative staffing reductions.

Other Expense (Income)

     In the prior year quarter, the Company recorded a $1.0 million gain in connection with an insurance settlement, which was partially offset by $0.2 million of other expense. The insurance 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.

Earnings Before Interest, Income Taxes and Accounting Change

     The Company’s earnings before interest, income taxes and accounting change for the quarter was $1.3 million compared with $2.5 million in the same year-ago period.

Interest Expense

     Interest expense for the quarter decreased $0.6 million, or 21%, to $2.5 million from $3.1 million in the same year-ago period. The decrease was primarily due to lower average borrowing levels on the Company’s senior secured credit facility ($0.6 million) and reduced amortization of capitalized financing costs ($0.1 million), partially offset by higher average interest rates ($0.1 million).

Income Taxes

     The Company’s effective income tax rate increased to 37.0% in the quarter compared to 30.7% in the same year-ago period, due to the decreasing impact of permanent book-tax differences.

Net Loss

     The Company’s net loss for the quarter was $0.7 million, or 9 cents per share compared to $14.7 million, or $1.74 per share, in the same year-ago period. The prior year net loss reflects a $14.4 million, or $1.70 per share, non-cash goodwill impairment charge that was recorded in connection with the Company’s adoption of SFAS No. 142. The year-ago loss before this accounting change was $0.4 million, or 4 cents per share.

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Liquidity and Capital Resources

Selected Financial Data
($ in thousands)

		Three Months Ended
		December 28,			December 29,
		2002			2001
Net cash provided by operating activities		$	1,271		$	3,961
Net cash used for investing activities			(233	)		(1	)
Net cash used for financing activities			(829	)		(2,170	)
Total long-term debt			71,690			98,535
	Percentage of total capital		76	%		73	%
Shareholders’ equity		$	22,715		$	35,739
	Percentage of total capital		24	%		27	%
Total capital (total long-term debt + shareholders’ equity)		$	94,405		$	134,274

Cash Flow Analysis

     Operating activities provided $1.3 million of cash for the first three months of fiscal 2003 compared to $4.0 million in the same year-ago period. The year-to-year change was primarily related to the $3.8 million reduction in cash generated by receivables largely due to the reduced level of sales in the current year. The net change in the working capital components of receivables, inventories and accounts payable and accrued expenses used $2.9 million in the current year while providing $1.2 million in the same year-ago period. Depreciation and amortization declined by $0.7 million, or 29%, compared to the prior year primarily due to the sale of certain assets of the nail and industrial wire businesses and lower amortization expense associated with capitalized financing costs.

     Investing activities used $0.2 million of cash for the first three months of fiscal 2003 compared to breakeven for the same year-ago period. The Company expects that capital expenditures will remain at reduced levels in 2003 in comparison to the recent historical levels prior to 2001 in connection with its debt reduction efforts and consistent with the limitations required under its credit facility.

     Financing activities used $0.8 million of cash for the first three months of fiscal 2003 compared to $2.2 million in the same year-ago period. The reduction in financing requirements was primarily due to the receipt of a $3.0 million federal tax refund during the quarter, which was used to pay down term debt on the credit facility.

     The Company’s total debt to capital ratio rose to 76% at December 28, 2002 from 73% at December 29, 2001 primarily due to the net losses incurred over the prior twelve-month period and resulting reduction in shareholders’ equity, which offset the $26.8 million year-over-year decrease in long-term debt.

Credit Facilities

     The Company has a senior secured credit facility with a group of banks, consisting of a $42.0 million revolving credit loan and a $41.7 million term loan. In February 2003, 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 October 15, 2003 to March 31, 2004. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margins that allow the Company to lower its interest rates through future reductions in the term loan; (2) additional fees which become payable to the lenders on certain dates unless a refinancing of the credit facility is completed before such dates; (3) the deferral of the payment dates of other contingent fees consistent with the period of time for which the maturity date was extended; (4) adjustments to the financial covenants that are applicable under the credit agreement; (5) limitations on the amount of capital expenditures to $1.8 million for each fiscal year; and (6) 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 0.50% plus the federal funds rate, plus, in either case, an

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applicable interest rate margin. As of December 28, 2002, interest rates on the credit facility were as follows: 6.75% on the revolver, 8.00% on $40.6 million of the term loan and 11.25% on $1.0 million of the term loan. 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 December 28, 2002, approximately $6.0 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 Company was in compliance with all of the financial covenants as of December 28, 2002. 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 March 31, 2004. In the event that such efforts were 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 a fixed rate of 7.08% plus the applicable margin under the credit facility. 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 loss.” As of December 28, 2002, the fair value of the swap agreements was ($5.4 million) and was recorded in other liabilities on the Company’s consolidated balance sheet.

Trade Actions — PC Strand

     On January 31, 2003, the Company together with a coalition of U.S. producers of PC strand filed petitions with the International Trade Commission (“ITC”) alleging that imports from five countries have injured the domestic PC strand industry. The petitions allege that imports of PC strand from Brazil, India, Korea, Thailand and Mexico were being “dumped” or sold in the U.S. at a lower price than in their home markets and that imports from India were also receiving subsidies from the government of India. The petitioners are monitoring imports from all countries for unfair trade practices as well as from the five countries for any surges in volume resulting from the filing of the petitions in an effort to circumvent the potential imposition of duties, which could range up to 122 percent. The filing of the petitions initiates a year-long investigative process, the first step of which occurs within 45 days of the filing when the ITC reaches a preliminary determination as to whether the imports are causing or threatening to cause material injury to the domestic industry.

Outlook

     The Company believes that the overall weakening in the economy will continue to create challenging business conditions through the remainder of fiscal 2003. In addition, reduced domestic wire rod capacity together with recent antidumping and countervailing duty orders entered against certain offshore suppliers of wire rod could result in higher raw material costs. In the event that it was unsuccessful in recovering higher costs in its markets, the Company’s financial performance would be negatively impacted as a result of the compression in gross margin.

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     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 fiscal 2003 (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 and denominated in U.S. dollars. The Company typically negotiates quantities and pricing on a quarterly basis for both domestic and foreign steel wire rod purchases to manage its exposure to price fluctuations and to ensure adequate availability of material consistent with its requirements. The Company’s ability to acquire steel wire rod from foreign sources on favorable terms is impacted by fluctuations in foreign currency exchange rates, foreign taxes, duties, tariffs, and other trade actions. Although changes in wire rod costs and selling prices tend to be correlated, depending upon market conditions, there may be periods during which the Company is unable to fully recover increased rod costs through higher selling prices, which reduces its gross profit and cash flow from operations.

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 a fixed rate of 7.08% plus the applicable margin under the 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. Based on the Company’s interest rate exposure and floating rate debt levels as of December 28, 2002, and considering the effect of the interest rate swap, a 100 basis point change in interest rates would have an estimated $0.2 million impact on pre-tax earnings over a one-year period.

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 December 28, 2002.

Item 4. Controls and Procedures

     Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures

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pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its subsidiaries) required to be included in the Company’s periodic SEC filings.

     Since the date of the evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.

Part II – Other Information

Item 6. Exhibits and Reports on Form 8-K

a. Exhibits:

4.1(g) Amendment Agreement No. 7 dated February 18, 2003 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, January 28, 2002 and May 10, 2002. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment).

b.	Reports of Form 8-K
	None.

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: February 18, 2003	By:	/s/ H.O. Woltz III
		H.O. Woltz III
		President and Chief Executive Officer
Date: February 18, 2003	By:	/s/ Michael C. Gazmarian
		Michael C. Gazmarian
		Chief Financial Officer and Treasurer

16

CERTIFICATION

I, H.O. Woltz III, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Insteel Industries, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period which this quarterly report is being prepared;
	(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 18, 2003

/s/	H. O. WOLTZ III
	H. O. WOLTZ III
	Chief Executive Officer and President

17

CERTIFICATION

I, Michael C. Gazmarian, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Insteel Industries, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period which this quarterly report is being prepared;
	(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 18, 2003

/s/	MICHAEL C. GAZMARIAN
	MICHAEL C. GAZMARIAN
	Chief Financial Officer and Treasurer

18 EX-4.1(G) 3 g80779exv4w1xgy.txt EX-4.1(G) AMENDMENT AGREEMENT NO. 7 Exhibit 4.1(g) 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. 7 TO CREDIT AGREEMENT AND EQUITY APPRECIATION RIGHTS AGREEMENT THIS AMENDMENT AGREEMENT (this "Amendment Agreement") is made and entered into as of this 18th day of February, 2003, 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, by Amendment Agreement No. 5 to Credit Agreement dated January 28, 2002 and by Amendment Agreement No. 6 to Credit Agreement and Equity Appreciation Rights Agreement dated May 10, 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. W I T N E S S E T H: 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 and the Lender wish to divide the existing Term Loan to a term loan A and a term loan B; 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; 1 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 context otherwise requires, other than paragraph 3, 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 3 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. 7 as follows: (a) Section 1.1 is hereby amended by adding the following new definitions thereto in the appropriate alphabetical order: "`Amendment No. 7' means Amendment Agreement No. 7 to Credit Agreement and Equity Appreciation Rights Agreement which Amendment No. 7 is dated February 18, 2003." "`Existing Term Loan' means that certain term loan advanced to the Borrower on the Closing Date pursuant to the Agreement in the original principal amount of $80,000,000." "`Term Loan A' means that portion of the Existing Term Loan converted to the Term Loan A Facility in accordance with Section 2.1." "'Term Loan A Commitment' means, with respect to each Lender, the Obligation of such Lender to convert a portion of the Existing Term Loan to Term Loan A in a principal amount equal to such Lender's Applicable Commitment Percentage of the Total Term Loan A Commitment as set forth on Exhibit A." "`Term Loan A Facility' means the facility described in Section 2.1 providing for the Term Loan A to the Borrower by the Lenders in the original principal amount of $28,460,000." "`Term Loan A Outstandings' means, as of any date of determination, the aggregate principal amount of the Term Loan A then outstanding and all interest accrued thereon." "`Term Loan B' means that portion of the Existing Term Loan converted to the Term Loan B Facility in accordance with Section 2.1." 2 "'Term Loan B Commitment' means, with respect to each Lender, the Obligation of such Lender to convert a portion of the Existing Term Loan to Term Loan B in a principal amount equal to such Lender's Applicable Commitment Percentage of the Total Term Loan Commitment as set forth on Exhibit A." "'Term Loan B Facility' means the facility described in Section 2.1 providing for a Term Loan B to the Borrower by the Lenders in the original principal amount of $13,000,000." "'Term Loan B Outstandings' means, as of any date of determination, the aggregate principal amount of the Term Loan B then outstanding and all interest accrued thereon." "'Total Term Loan A Commitment' means a principal amount equal to $28,460,000." "'Total Term Loan B Commitment' means a principal amount equal to $13,000,000." (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; and 3 (b) with respect to the Term Loan Facility, 4% per annum." (c) The definition of "Excess EBITDA" in Section 1.1 is amended so that the chart describing the Applicable Period and Amount contained in such definition is replaced in its entirety as follows:

"Applicable Period Amount ------------------ ------ Fiscal Year ending $15,081,000 September 27, 2003"

(d) The definition of "Stated Termination Date" in Section 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "`Stated Termination Date' means March 31, 2004." (e) The definition of "Term Loan" in Section 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "`Term Loan' means, collectively, the aggregate of the Term Loan A and the Term Loan B made pursuant to the Term Loan Facility." (f) The definition of "Term Loan Commitment" in Section 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "'Term Loan Commitment' means the aggregate of the Term Loan A Commitment and the Term Loan B Commitment." (g) The definition of "Term Loan Facility" in Section 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "`Term Loan Facility' means, collectively, the Term Loan A Facility and the Term Loan B Facility." (h) 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 March 31, 2004." (i) The definition of "Term Loan Outstandings" in Section 1.1 is hereby amended in its entirety to that as amended it shall read as follows: "`Term Loan Outstandings' means, as of any date of determination, the aggregate principal amount of the Term Loan A Outstandings and the Term Loan B Outstandings." 4 (j) 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 ---- ------ 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 October 31, 2003 $150,000 November 30, 2003 $150,000 December 31, 2003 $150,000 January 31, 2004 $250,000 February 29, 2004 $250,000

provided, however, that such payments of principal shall be applied (i) to Term Loan B until Term Loan B is paid in full, and (ii) in the event that Term Loan B has been fully repaid, to Term Loan A until Term Loan A is paid in full, and provided further, however, that the entire amount of Term Loan Outstandings shall be due and payable in full on the Term Loan Termination Date." (k) Section 2.1 is further amended to add the following clause (f) to read in its entirety as follows: "(f) Term Loan Division. Subject to the terms and conditions of this Agreement, the Existing Term Loan made to the Borrower pursuant to Sections 2.1(a) and (b) is divided as of the date of Amendment No. 7 into Term Loan A and Term Loan B. No additional Advances of the Existing Term Loan or Advances of Term Loan A or Term Loan B shall be made by any Lender. All Collateral which secured the Existing Term Loan shall continue to secure Term Loan A and Term Loan B. The principal amount of each Segment of the Term Loan A and the Term Loan B outstanding hereunder from time to time shall bear interest and the Term Loan A and Term Loan B shall be repayable as herein provided. No amount of either of the Term Loan A or the Term Loan B repaid or prepaid by the Borrower may be reborrowed hereunder, and no subsequent Advances of Term Loan A or Term Loan B amounts shall be made by any Lender. 5 (l) Section 2.1 is further amended to add the following clause (g) to read in its entirety as follows: "(g) Payment of Term Loan Principal. Notwithstanding anything contained to the contrary herein, any payment of principal of the Term Loan, other than as expressly provided in Section 2.1(c), (whether by mandatory or optional prepayment or otherwise) shall be applied as follows: (i) to installments of principal of Term Loan B 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 Term Loan B has been fully repaid, to installments of principal of Term Loan A in inverse order of their maturities (as adjusted to give effect to any prior payments or prepayments of principal). (m) Section 4.6 is hereby amended to add the following clause (f) to read as follows: "(f) Utilization Fee. Commencing on June 30, 2003, the Borrower agrees to pay to the Agent, for the pro rata benefit of the Lenders based upon their Applicable Commitment Percentage, a utilization fee equal to three quarters percent (.75%) of the Term Loan B Outstandings at the end of each fiscal quarter. Such payment shall be due within fifteen (15) days of the end of each fiscal quarter." (n) Section 9.1 is amended to delete the "and" at the end of clause (i), to delete the "." at the end of clause (j) and add a "; and" in replacement thereof, and to add a new subsection (k) to read as follows: "(k) as soon as practical and in any event within 15 days after the end of each month deliver to the Agent a certificate showing the computation of Consolidated EBITDA and Consolidated Net Worth for the month then ended and demonstrating compliance with Section 10.1(b)." (o) 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 ------------------ ------ March 1, 2003 $1,351,000 March 29, 2003 2,253,000 May 3, 2003 3,254,000 May 31, 2003 3,447,000 June 28, 2003 3,603,000

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APPLICABLE PERIOD AMOUNT ------------------ ------ August 2, 2003 3,675,000 August 30, 2003 3,823,000 September 27, 2003 3,749,000 November 1, 2003 4,379,000 November 29, 2003 3,421,000 December 27, 2003 2,630,000 January 31, 2004 1,380,000 February 28, 2004 1,728,000

(p) Section 10.3 is hereby amended in its entirety so that as amended it shall read as follows: "10.3 Capital Expenditures. Make or become committed to make Capital Expenditures which exceed in the aggregate (i) $1,750,000 for the Fiscal Year 2003 plus, in the event that Consolidated EBITDA exceeds $13,710,000 for Fiscal Year 2003, the amount of such excess up to an additional $1,150,000 of Capital Expenditures for the Fiscal Year 2003; provided, however, that Capital Expenditures for the Fiscal Year 2003 shall not exceed $2,900,000 in the aggregate, and (ii) thereafter, $1,750,000 for each Fiscal Year." 3. 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. 7 as follows: (a) Section 1.01 is hereby amended by adding the following new definition thereto in the appropriate alphabetical order: "Amendment No. 7" means Amendment Agreement No. 7 to Credit Agreement and Equity Appreciation Rights Agreement which Amendment No. 7 is dated February 18, 2003." (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) December 31, 2003 or (ii) occurrence of an Event of Default under the Credit Agreement and ending on December 31, 2005;" (c) 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 September 30, 2003 and the Facility 7 Termination Date (as defined in the Credit Agreement) shall have occurred by September 30, 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 September 30, 2003 but are paid in full by December 31, 2003 and the Facility Termination Date (as defined in the Credit Agreement) shall have occurred by December 31, 2003, the Rights Fee shall be in a maximum amount of [*] but in no event less than the greater of: (i) [*]; or (ii) [*]; and" 4. 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. 5. Representations and Warranties. The Borrower hereby represents, warrants and covenants 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; (b) There has been no material adverse change in the condition, financial or otherwise, of the Borrower and its Subsidiaries since December 31, 2002, 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; (d) After giving effect to this Amendment Agreement (including the waivers by the Lenders set forth herein), no event has occurred and no condition [*] Confidential portion has been omitted and filed separately with the Commission. 8 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; and (e) [*]. 6. Amendment Fees. Borrower reaffirms its obligations to pay an amendment fee of [*] with respect to Amendment No. 6 which is due and payable on April 30, 2003. Borrower further agrees to pay an amendment fee with respect to this Amendment Agreement of [*] (which is deemed fully earned as of the date hereof) which is due and payable on January 31, 2004. In the event all Obligations have been paid in full and the Facility Termination Date has occurred prior to January 31, 2004, payment of the amendment fee due with respect to this Amendment Agreement shall be waived. 7. Extension Fee. Borrower agrees to pay to the Agent, for the pro rata benefit of the Lenders based upon their Applicable Commitment Percentage, an extension fee equal to one-eighth percent (.125%) of the Total Outstandings on the date of this Amendment Agreement, which extension fee shall be fully earned and due and payable on the date hereof. 8. 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; (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. 9. 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 [*] Confidential portion has been omitted and filed separately with the Commission. 9 obligations of every kind and nature, both in law and in equity, known or unknown, whether matured or unmatured, absolute or contingent. 10. 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. 11. 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. 12. 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/ Sheila M. Spencer - ------------------------------ By: /s/ Michael C. Gazmarian Print Name: Sheila M. Spencer ---------------------------------------- ------------------- Name: Michael C. Gazmarian -------------------------------------- Title: CFO and Treasurer ------------------------------------- /s/ Angelia H. Ramey - ----------------------------- Print Name: Angelia H. Ramey ------------------ 11 GUARANTORS: INSTEEL WIRE PRODUCTS COMPANY INTERCONTINENTAL METALS CORPORATION WITNESS: /s/ Sheila M. Spencer - ------------------------------ By: /s/ Michael C. Gazmarian Print Name: Sheila M. Spencer ---------------------------------------- ------------------- Name: Michael C. Gazmarian -------------------------------------- Title: CFO and Treasurer ------------------------------------- /s/ Angelia H. Ramey - ----------------------------- Print Name: Angelia H. Ramey ------------------ 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, 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-----

EX-4.1(G)

                                                                  Exhibit 4.1(g)



          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. 7
                             TO CREDIT AGREEMENT AND
                      EQUITY APPRECIATION RIGHTS AGREEMENT

         THIS AMENDMENT AGREEMENT (this "Amendment Agreement") is made and
entered into as of this 18th day of February, 2003, 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, by Amendment Agreement No. 5 to Credit Agreement dated
January 28, 2002 and by Amendment Agreement No. 6 to Credit Agreement and Equity
Appreciation Rights Agreement dated May 10, 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.


                              W I T N E S S E T H:


         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 and the Lender wish to divide the existing Term
Loan to a term loan A and a term loan B;

         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;


                                       1



         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 context otherwise requires, other
than paragraph 3, 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 3 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. 7 as follows:

                  (a)      Section 1.1 is hereby amended by adding the following
         new definitions thereto in the appropriate alphabetical order:

                           "`Amendment No. 7' means Amendment Agreement No. 7 to
                  Credit Agreement and Equity Appreciation Rights Agreement
                  which Amendment No. 7 is dated February 18, 2003."

                           "`Existing Term Loan' means that certain term loan
                  advanced to the Borrower on the Closing Date pursuant to the
                  Agreement in the original principal amount of $80,000,000."

                           "`Term Loan A' means that portion of the Existing
                  Term Loan converted to the Term Loan A Facility in accordance
                  with Section 2.1."

                           "'Term Loan A Commitment' means, with respect to each
                  Lender, the Obligation of such Lender to convert a portion of
                  the Existing Term Loan to Term Loan A in a principal amount
                  equal to such Lender's Applicable Commitment Percentage of the
                  Total Term Loan A Commitment as set forth on Exhibit A."

                           "`Term Loan A Facility' means the facility
                  described in Section 2.1 providing for the Term Loan A to the
                  Borrower by the Lenders in the original principal amount of
                  $28,460,000."

                           "`Term Loan A Outstandings' means, as of any date
                  of determination, the aggregate principal amount of the Term
                  Loan A then outstanding and all interest accrued thereon."

                           "`Term Loan B' means that portion of the Existing
                  Term Loan converted to the Term Loan B Facility in accordance
                  with Section 2.1."


                                       2

                           "'Term Loan B Commitment' means, with respect to each
                  Lender, the Obligation of such Lender to convert a portion of
                  the Existing Term Loan to Term Loan B in a principal amount
                  equal to such Lender's Applicable Commitment Percentage of the
                  Total Term Loan Commitment as set forth on Exhibit A."

                           "'Term Loan B Facility' means the facility described
                  in Section 2.1 providing for a Term Loan B to the Borrower by
                  the Lenders in the original principal amount of $13,000,000."

                           "'Term Loan B Outstandings' means, as of any date of
                  determination, the aggregate principal amount of the Term Loan
                  B then outstanding and all interest accrued thereon."

                           "'Total Term Loan A Commitment' means a principal
                  amount equal to $28,460,000."

                           "'Total Term Loan B Commitment' means a principal
                  amount equal to $13,000,000."

                  (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; and


                                       3


                           (b)      with respect to the Term Loan Facility, 4%
                  per annum."

                  (c)      The definition of "Excess EBITDA" in Section 1.1 is
         amended so that the chart describing the Applicable Period and Amount
         contained in such definition is replaced in its entirety as follows:



                  "Applicable Period                 Amount
                  ------------------                 ------
                                                  
                  Fiscal Year ending                 $15,081,000
                  September 27, 2003"


                  (d)      The definition of "Stated Termination Date" in
         Section 1.1 is hereby amended in its entirety so that as amended it
         shall read as follows:

                           "`Stated Termination Date' means March 31, 2004."

                  (e)      The definition of "Term Loan" in Section 1.1 is
         hereby amended in its entirety so that as amended it shall read as
         follows:

                           "`Term Loan' means, collectively, the aggregate of
         the Term Loan A and the Term Loan B made pursuant to the Term Loan
         Facility."

                  (f)      The definition of "Term Loan Commitment" in Section
         1.1 is hereby amended in its entirety so that as amended it shall read
         as follows:

                           "'Term Loan Commitment' means the aggregate of the
                  Term Loan A Commitment and the Term Loan B Commitment."

                  (g)      The definition of "Term Loan Facility" in Section 1.1
         is hereby amended in its entirety so that as amended it shall read as
         follows:

                           "`Term Loan Facility' means, collectively, the Term
         Loan A Facility and the Term Loan B Facility."

                  (h)      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 March 31, 2004."

                  (i)      The definition of "Term Loan Outstandings" in Section
         1.1 is hereby amended in its entirety to that as amended it shall read
         as follows:

                           "`Term Loan Outstandings' means, as of any date of
                  determination, the aggregate principal amount of the Term Loan
                  A Outstandings and the Term Loan B Outstandings."


                                       4


                  (j)      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
                             ----                              ------
                                                           
                       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
                       October 31, 2003                       $150,000
                       November 30, 2003                      $150,000
                       December 31, 2003                      $150,000
                       January 31, 2004                       $250,000
                       February 29, 2004                      $250,000


                  provided, however, that such payments of principal shall be
                  applied (i) to Term Loan B until Term Loan B is paid in full,
                  and (ii) in the event that Term Loan B has been fully repaid,
                  to Term Loan A until Term Loan A is paid in full, and provided
                  further, however, that the entire amount of Term Loan
                  Outstandings shall be due and payable in full on the Term Loan
                  Termination Date."

                  (k)      Section 2.1 is further amended to add the following
         clause (f) to read in its entirety as follows:

                           "(f)     Term Loan Division. Subject to the terms and
                  conditions of this Agreement, the Existing Term Loan made to
                  the Borrower pursuant to Sections 2.1(a) and (b) is divided as
                  of the date of Amendment No. 7 into Term Loan A and Term Loan
                  B. No additional Advances of the Existing Term Loan or
                  Advances of Term Loan A or Term Loan B shall be made by any
                  Lender. All Collateral which secured the Existing Term Loan
                  shall continue to secure Term Loan A and Term Loan B. The
                  principal amount of each Segment of the Term Loan A and the
                  Term Loan B outstanding hereunder from time to time shall bear
                  interest and the Term Loan A and Term Loan B shall be
                  repayable as herein provided. No amount of either of the Term
                  Loan A or the Term Loan B repaid or prepaid by the Borrower
                  may be reborrowed hereunder, and no subsequent Advances of
                  Term Loan A or Term Loan B amounts shall be made by any
                  Lender.


                                       5


                  (l)      Section 2.1 is further amended to add the following
         clause (g) to read in its entirety as follows:

                           "(g)     Payment of Term Loan Principal.
                  Notwithstanding anything contained to the contrary herein, any
                  payment of principal of the Term Loan, other than as expressly
                  provided in Section 2.1(c), (whether by mandatory or optional
                  prepayment or otherwise) shall be applied as follows: (i) to
                  installments of principal of Term Loan B 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 Term Loan B has been fully repaid, to installments of
                  principal of Term Loan A in inverse order of their maturities
                  (as adjusted to give effect to any prior payments or
                  prepayments of principal).

                  (m)      Section 4.6 is hereby amended to add the following
         clause (f) to read as follows:

                           "(f)     Utilization Fee. Commencing on June 30,
                  2003, the Borrower agrees to pay to the Agent, for the pro
                  rata benefit of the Lenders based upon their Applicable
                  Commitment Percentage, a utilization fee equal to three
                  quarters percent (.75%) of the Term Loan B Outstandings at the
                  end of each fiscal quarter. Such payment shall be due within
                  fifteen (15) days of the end of each fiscal quarter."

                  (n)      Section 9.1 is amended to delete the "and" at the end
         of clause (i), to delete the "." at the end of clause (j) and add a ";
         and" in replacement thereof, and to add a new subsection (k) to read as
         follows:

                           "(k)     as soon as practical and in any event within
                  15 days after the end of each month deliver to the Agent a
                  certificate showing the computation of Consolidated EBITDA and
                  Consolidated Net Worth for the month then ended and
                  demonstrating compliance with Section 10.1(b)."

                  (o)      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
                            ------------------              ------
                                                       
                            March 1, 2003                 $1,351,000
                            March 29, 2003                 2,253,000
                            May 3, 2003                    3,254,000
                            May 31, 2003                   3,447,000
                            June 28, 2003                  3,603,000



                                       6



                            APPLICABLE PERIOD               AMOUNT
                            ------------------              ------
                                                       
                            August 2, 2003                 3,675,000
                            August 30, 2003                3,823,000
                            September 27, 2003             3,749,000
                            November 1, 2003               4,379,000
                            November 29, 2003              3,421,000
                            December 27, 2003              2,630,000
                            January 31, 2004               1,380,000
                            February 28, 2004              1,728,000



                  (p)      Section 10.3 is hereby amended in its entirety so
         that as amended it shall read as follows:

                  "10.3 Capital Expenditures. Make or become committed to make
                  Capital Expenditures which exceed in the aggregate (i)
                  $1,750,000 for the Fiscal Year 2003 plus, in the event that
                  Consolidated EBITDA exceeds $13,710,000 for Fiscal Year 2003,
                  the amount of such excess up to an additional $1,150,000 of
                  Capital Expenditures for the Fiscal Year 2003; provided,
                  however, that Capital Expenditures for the Fiscal Year 2003
                  shall not exceed $2,900,000 in the aggregate, and (ii)
                  thereafter, $1,750,000 for each Fiscal Year."

         3.       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. 7 as follows:

                  (a)      Section 1.01 is hereby amended by adding the
         following new definition thereto in the appropriate alphabetical order:

                           "Amendment No. 7" means Amendment Agreement No. 7
                  to Credit Agreement and Equity Appreciation Rights Agreement
                  which Amendment No. 7 is dated February 18, 2003."

                  (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) December 31, 2003 or (ii) occurrence of an Event of
                  Default under the Credit Agreement and ending on December 31,
                  2005;"

                  (c)      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 September 30,
                  2003 and the Facility


                                       7

                  Termination Date (as defined in the Credit Agreement) shall
                  have occurred by September 30, 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 September
                  30, 2003 but are paid in full by December 31, 2003 and the
                  Facility Termination Date (as defined in the Credit Agreement)
                  shall have occurred by December 31, 2003, the Rights Fee shall
                  be in a maximum amount of [*] but in no event less than the
                  greater of:

                                     (i)  [*]; or

                                    (ii)  [*]; and"

         4.       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.

         5.       Representations and Warranties. The Borrower hereby
represents, warrants and covenants 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;

                  (b)      There has been no material adverse change in the
         condition, financial or otherwise, of the Borrower and its Subsidiaries
         since December 31, 2002, 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;

                  (d)      After giving effect to this Amendment Agreement
         (including the waivers by the Lenders set forth herein), no event has
         occurred and no condition




[*] Confidential portion has been omitted and filed separately with the
Commission.


                                       8


         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; and

                  (e)      [*].

         6.       Amendment Fees. Borrower reaffirms its obligations to pay an
amendment fee of [*] with respect to Amendment No. 6 which is due and payable on
April 30, 2003. Borrower further agrees to pay an amendment fee with respect to
this Amendment Agreement of [*] (which is deemed fully earned as of the date
hereof) which is due and payable on January 31, 2004. In the event all
Obligations have been paid in full and the Facility Termination Date has
occurred prior to January 31, 2004, payment of the amendment fee due with
respect to this Amendment Agreement shall be waived.

         7.       Extension Fee. Borrower agrees to pay to the Agent, for the
pro rata benefit of the Lenders based upon their Applicable Commitment
Percentage, an extension fee equal to one-eighth percent (.125%) of the Total
Outstandings on the date of this Amendment Agreement, which extension fee shall
be fully earned and due and payable on the date hereof.

         8.       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;

                  (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.

         9.       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






[*] Confidential portion has been omitted and filed separately with the
Commission.


                                       9

obligations of every kind and nature, both in law and in equity, known or
unknown, whether matured or unmatured, absolute or contingent.

         10.      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.

         11.      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.

         12.      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/ Sheila M. Spencer
- ------------------------------      By: /s/ Michael C. Gazmarian
Print Name: Sheila M. Spencer          ----------------------------------------
           -------------------
                                    Name: Michael C. Gazmarian
                                         --------------------------------------

                                    Title: CFO and Treasurer
                                          -------------------------------------
/s/ Angelia H. Ramey
- -----------------------------
Print Name: Angelia H. Ramey
           ------------------



                                       11



                                            GUARANTORS:

                                            INSTEEL WIRE PRODUCTS COMPANY
                                            INTERCONTINENTAL METALS CORPORATION


WITNESS:

/s/ Sheila M. Spencer
- ------------------------------      By: /s/ Michael C. Gazmarian
Print Name: Sheila M. Spencer          ----------------------------------------
           -------------------
                                    Name: Michael C. Gazmarian
                                         --------------------------------------

                                    Title: CFO and Treasurer
                                          -------------------------------------
/s/ Angelia H. Ramey
- -----------------------------
Print Name: Angelia H. Ramey
           ------------------



                                       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,



                                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