-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O2HWZNRKov1CFVu0SLPCKl+uJ0IQJhPqrJyFXujYaB+z7QwF985V75zSRn+i66gN J4KKrYYNk4Dl/T53oZaEyg== 0000950144-99-014118.txt : 19991220 0000950144-99-014118.hdr.sgml : 19991220 ACCESSION NUMBER: 0000950144-99-014118 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSTEEL INDUSTRIES INC CENTRAL INDEX KEY: 0000764401 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 560674867 STATE OF INCORPORATION: NC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09929 FILM NUMBER: 99776222 BUSINESS ADDRESS: STREET 1: 1373 BOGGS DR CITY: MOUNT AIRY STATE: NC ZIP: 27030 BUSINESS PHONE: 9107862141 MAIL ADDRESS: STREET 1: 1373 BOGGS DRIVE CITY: MOUNT AIRY STATE: NC ZIP: 27030 FORMER COMPANY: FORMER CONFORMED NAME: EXPOSAIC INDUSTRIES INC DATE OF NAME CHANGE: 19880511 10-K405 1 INSTEEL INDUSTRIES, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 2, 1999 COMMISSION FILE NUMBER 1-9929 INSTEEL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0674867 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1373 BOGGS DRIVE, MOUNT AIRY, NORTH CAROLINA 27030 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (336) 786-2141 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] The aggregate market value of the common stock held by non-affiliates of the registrant as of December 13, 1999 was $62,163,416. The number of shares outstanding of the registrant's common stock as of December 13, 1999 was 8,457,226. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement to be delivered to shareholders in connection with the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS. GENERAL Insteel Industries, Inc. ("Insteel" or "the Company") is one of the nation's leading manufacturers of wire products. Insteel Wire Products Company ("IWP"), the Company's wholly-owned subsidiary, manufactures and markets concrete reinforcing products, industrial wire, nails and tire bead wire for a broad range of construction and industrial applications. Insteel's business strategy is driven off of a return on capital framework with the primary objective of creating economic value through the generation of returns that exceed the Company's cost of capital. The Company seeks to attain leadership positions in the markets that it serves through internal growth as well as acquisitions. The Company also pursues expansion opportunities in new and related products that leverage off of its core competencies in the manufacture and marketing of wire products. During 1999, the Company furthered this strategy with the completion of two expansions in its concrete reinforcing business. In January 1999, the Company acquired a 25% interest in Structural Reinforcement Products, Inc. ("SRP"), a manufacturer of welded wire fabric products. In April 1999, the Company acquired the assets of the concrete reinforcing business of Northwestern Steel and Wire Company, consisting of the inventory, property, plant and equipment of its Hickman, Kentucky facility which manufactures welded wire fabric products. PRODUCTS CONCRETE REINFORCING PRODUCTS include welded wire fabric and prestressed concrete strand ("PC strand"). Welded wire fabric is produced as both standard and specially engineered reinforcing products for concrete pipe manufacturers, precasters, distributors and construction companies. PC strand is a sophisticated reinforcing product sold to precasters and posttensioning suppliers that is used for both pretensioned and posttensioned prestressed concrete construction. INDUSTRIAL WIRE PRODUCTS are primarily sold to manufacturers of springs for bedding and furniture, appliances, display racks and a broad range of other products. Product attributes vary with the end use and can include galvanizing for corrosion resistance and intermediate heat-treating, in addition to stringent tolerance requirements and mechanical properties. BULK NAILS consist of a wide variety of products such as common nails, finishing nails, box nails, sinkers, duplex nails and galvanized nails sold to wholesalers and distributors primarily for construction-related applications. In addition, the Company produces machine quality nails that are used for industrial applications such as pallet manufacturing. COLLATED NAILS are comprised of a broad range of brite and galvanized collated nails that are used by a variety of pneumatic nailing tools. The products are sold to distributors and original equipment manufacturers ("OEMs") primarily for construction-related applications. TIRE BEAD WIRE is a bronze-plated steel wire sold to tire manufacturers that is used to reinforce the inside diameter of a tire and hold the tire to the wheel. MARKETING AND DISTRIBUTION Insteel markets its products through sales representatives who are employees of the Company. The Company's sales organization is aligned with its product lines, assigned to the specific markets served. The Company's products are sold directly to users and through numerous wholesalers, distributors and retailers located primarily in the eastern part of the U.S. as well as portions of the Southwest and West Coast. Insteel delivers its products by truck using common or contract carriers. CUSTOMERS The Company sells its products to a broad range of customers including OEMs, distributors, wholesalers and retailers. There were no customers that represented 10% or more of the Company's net sales in 1999. Sealy, Inc. accounted for approximately 11% of the Company's net sales in 1998 and 10% in 1997. 2 3 RAW MATERIALS The primary raw material required in the production of Insteel's wire products is hot rolled carbon steel wire rod. The Company purchases wire rod from both domestic and foreign suppliers. Wire rod supply was adequate during 1999 and the market was relatively stable. Worldwide demand for wire rod began to recover as the impact of the Asian financial crisis eased and global demand improved. Domestic wire rod producers successfully increased prices in the Company's third quarter, and again in the fourth quarter, as they sought to restore pricing to pre-1998 levels. In January 1999, domestic wire rod producers initiated a Section 201 filing with the U.S. International Trade Commission ("ITC") alleging that rising import levels had resulted in serious injury to the domestic industry. The domestic producers are pursuing trade relief on a worldwide basis against all countries other than NAFTA nations through duties, quotas or other measures intended to reduce import competition. In May 1999, three ITC commissioners found that the domestic wire rod industry had not been injured by imports. Two commissioners found that the industry had been injured by imports, and the sixth commissioner found that the industry had not been injured, but that a threat of injury existed. The investigation is now in the remedy phase. Although President Clinton was scheduled to make a determination on relief for the industry by September 27, 1999, to date, no determination has been made. The future impact of these actions on the Company's financial results is difficult to predict, depending upon the resolution of the trade filings together with the Company's ability to recover any raw material price increases in its markets. COMPETITION The markets in which the Company's business is conducted are highly competitive. Insteel faces formidable competition in most of its market segments, including competition from companies whose revenues and financial resources are much larger than the Company's. Some of its competitors are integrated steelmakers that produce both wire rod and wire products and offer multiple product lines over broad geographical areas. Other competitors are smaller independent wire mills that offer limited competition in certain markets. Market participants compete on the basis of price, quality and service. Selling prices tend to ultimately move with changes in raw material costs, although spreads can widen or narrow depending upon market conditions. Technology has become a critical factor in maintaining competitive levels of conversion costs and quality. The Company believes that it is one of the leading low cost producers of wire products based upon its technologically-advanced manufacturing facilities and production capabilities. In addition, the Company offers a broader range of products through more diverse distribution channels than any of its competitors. The Company believes that it is well positioned to compete favorably on the industry's critical success factors. EMPLOYEES As of October 2, 1999, the Company employed 1,004 people. The Company has a collective bargaining agreement with a labor union at its Delaware plant covering its hourly employees. The Company believes that relations with the labor union and employees are satisfactory. ENVIRONMENTAL MATTERS The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. The Company has experienced no material difficulties in complying with legislative or regulatory standards and believes that these standards have not materially impacted its financial position or results of operations. Compliance with future additional environmental requirements could necessitate capital outlays. However, the Company does not believe that these expenditures should ultimately result in a material adverse effect on its financial position or results of operations. 3 4 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows:
Name Age Position with the Company - ----------------------- --- ------------------------------------------------- Howard O. Woltz, Jr. 74 Chairman of the Board and a Director H.O. Woltz III 43 President, Chief Executive Officer and a Director Gary D. Kniskern 54 Vice President - Administration and Secretary Michael C. Gazmarian 40 Chief Financial Officer and Treasurer
Howard O. Woltz, Jr., has been Chairman of the Board since 1958 and has served in various capacities for more than 41 years. He had been President of the Company from 1958 to 1968 and from 1974 to 1989. He previously served as Vice President, General Counsel and a director of Quality Mills, Inc., a publicly-held manufacturer of knit apparel and fabrics, for more than 35 years prior to its acquisition in 1988 by Russell Corporation. H. O. Woltz III, a son of Howard O. Woltz, Jr., was elected Chief Executive Officer in 1991 and has served in various capacities for more than 21 years. He was named President and Chief Operating Officer in 1989. He had been Vice President of the Company since 1988 and, previously, President of Rappahannock Wire Company, formerly a subsidiary of the Company, since 1981. Mr. Woltz has been a director of the Company since 1986 and also serves as President of Insteel Wire Products Company. Gary D. Kniskern was elected Vice President - Administration in 1994 and has served in various capacities for more than 20 years. He had been Secretary and Treasurer since 1984 and, previously, internal auditor since 1979. Michael C. Gazmarian joined Insteel as Chief Financial Officer and was elected Treasurer in 1994. He had been with Guardian Industries Corp., a privately held glass manufacturer, since 1986, serving in various financial capacities. The executive officers listed above were elected by the Board of Directors at its annual meeting held February 9, 1999 for a term that will expire at the next annual meeting of the Board of Directors or until their successors are elected and qualify. The next meeting at which officers will be elected is scheduled for February 1, 2000. ITEM 2. PROPERTIES. Insteel's corporate headquarters and IWP's divisional office are located in Mount Airy, North Carolina. IWP has nine manufacturing facilities located in Andrews, South Carolina (2 plants); Gallatin, Tennessee (2 plants); Dayton, Texas; Fredericksburg, Virginia; Mount Airy, North Carolina; Wilmington, Delaware; and Hickman, Kentucky. The Company owns all of its properties with the exception of the land at its Wilmington facility, which is leased. The Dayton and Fredericksburg plants are pledged as security under long-term financing agreements. The Company considers that its properties are in good operating condition and that its machinery and equipment have been well-maintained. The Company's manufacturing facilities are suitable for their intended purposes and have capacities adequate for current and projected needs for existing products. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or which any of their property is a subject. 4 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. The Company's common stock is listed on the New York Stock Exchange under the symbol III. At December 1, 1999, there were 683 shareholders of record. Selected quarterly financial data appears under the caption "Financial Information by Quarter (Unaudited)" in Item 8(b) of this report. ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED ------------------------------------------------------------------------------- SEPTEMBER 30, OCTOBER 2, OCTOBER 3, -------------------------------------------- 1999 1998 1997 1996 1995 --------- ---------- --------- --------- --------- Net sales $ 270,992 $ 266,147 $ 262,325 $ 264,382 $ 258,582 Earnings from continuing operations before extraordinary loss 9,986 328 2,536 5,237 5,344 Net earnings (loss) 9,986 (80) (341) 4,243 6,336 Earnings per share from continuing operations before extraordinary loss (basic and diluted) 1.18 0.04 0.03 0.62 0.64 Net earnings (loss) per share (basic and diluted) 1.18 (0.01) (0.04) 0.50 0.76 Cash dividends per share 0.24 0.24 0.24 0.24 0.24 Total assets 167,896 147,131 171,476 146,122 148,920 Long-term debt 46,197 35,743 49,673 29,655 21,451 Shareholders' equity 77,329 69,260 71,322 73,677 71,212
5 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS STATEMENTS OF EARNINGS - SELECTED DATA (DOLLARS IN THOUSANDS)
YEAR ENDED ----------------------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 CHANGE 1998 CHANGE 1997 ---------- ------ ---------- ------ ------------- Net sales $270,992 2% $266,147 1% $262,325 Gross profit 35,647 167% 13,353 (29%) 18,852 Percentage of net sales 13.2% 5.0% 7.2% Selling, general and administrative expense $ 17,429 30% $ 13,410 8% $ 12,395 Percentage of net sales 6.4% 5.0% 4.7% Operating income (loss) 18,218 N/M (57) N/M 6,457 Percentage of net sales 6.7% - 2.5% Interest expense $ 2,482 (35%) $ 3,810 67% $ 2,276 Percentage of net sales 0.9% 1.4% 0.9% Effective income tax rate 36.3% 35.4% 36.4% Earnings from continuing operations $ 9,986 N/M $ 328 (87%) $ 2,536 Percentage of net sales 3.7% 0.1% 1.0%
1999 COMPARED WITH 1998 Net sales rose 2% to $271.0 million in 1999 from $266.1 million in 1998. The growth in sales was in spite of the sale of the Company's agricultural fencing product line in February 1998, which reduced current year sales relative to the prior year. On a comparable basis, sales rose 4% for the year. Sales of concrete reinforcing products increased 20% for the year as a result of strong construction markets together with the additional manufacturing capacity provided by the Company's supply agreement with SRP and its acquisition of a competitor's concrete reinforcing business. Sales of tire bead wire steadily increased during the year as the Company continued to gain customer acceptance and further its market penetration. Industrial wire sales declined for the year primarily due to a significant increase in the proportion of wire consumed internally by downstream value-added processes to manufacture other products. Gross margins increased to 13.2% of sales in 1999 from 5.0% in 1998. The margin improvement was primarily generated by the Company's recent expansions together with strong market conditions and widening spreads between selling values and raw material costs for certain product lines. Gross margins were also favorably impacted by higher operating volumes and lower per-unit manufacturing costs. Selling, general and administrative expense ("SG&A expense") rose 30%, increasing to 6.4% of sales in 1999 from 5.0% in 1998. The increase in SG&A expense was primarily due to higher employee incentive plan and profit-sharing expenses resulting from the significant improvement in the Company's financial results together with legal fees associated with employment-related issues. Interest expense fell sharply in 1999 compared with 1998 due to a decrease in average borrowing levels and lower interest rates on the Company's revolving credit facility. The reduction in debt was primarily due to the significant improvement in the Company's earnings relative to the year-ago loss. During 1998, the Company sold the inventory and equipment related to its agricultural fencing product line. The Company's 1998 financial results reflect a pre-tax gain of $3.4 million, or 26 cents per share after-tax, on the sale of the assets in other income, net of a provision for the estimated transition-related costs. Under the terms of the sale, the Company agreed to manufacture fencing products for the buyer until the equipment was relocated to the buyer's facilities. The Company ceased the remainder of its agricultural fencing activities in October 1998. The Company terminated one of its pension plans during 1998, recognizing a pre-tax gain of $1.2 million, or 7 cents per share after-tax, in other income for the curtailment of plan benefits and settlements that had been made to date. The Company completed the settlement of the plan in September 1999. 6 7 Also in 1998, the Company retired its $10.0 million 8.25% senior secured notes, funding the prepayment under its unsecured revolving credit facility. The Company's financial results reflect an extraordinary loss of $408,000 after income taxes, or approximately 5 cents per share, related to the early extinguishment of debt. 1998 COMPARED WITH 1997 Net sales rose 1% to $266.1 million in 1998 from $262.3 million in 1997. The growth in sales was in spite of the sale of the Company's agricultural fencing product line, which reduced current year sales relative to the prior year. Excluding sales of agricultural fencing products, sales increased 8%. Sales of bulk nails rose sharply in 1998 as shipments reached a new record high while industrial wire sales were flat. Sales of concrete reinforcing products increased 7% primarily as a result of higher shipments of welded wire fabric. Tire bead wire sales gradually increased during the year as the Company obtained customer approval on certain products and began to achieve consistent shipment levels. Gross margins fell to 5.0% of sales in 1998 from 7.2% in 1997. The reduction in margins was primarily caused by a narrowing in spreads between selling values and raw material costs in certain products and markets together with low operating volumes at the Company's recent expansions. The Virginia manufacturing facility continued to operate at a significant loss as revenues remained well below the levels required to cover the costs necessary to support the anticipated ramp-up of the tire bead wire business. The Company's other recent expansion, collated nails, also operated at a loss due to insufficient sales volume and pricing pressure resulting from increased import competition. SG&A expense rose 8%, increasing to 5.0% of sales in 1998 from 4.7% in 1997. The increase in SG&A expense was primarily due to higher selling expenses to support the new businesses, rising employee benefit costs and expenditures related to the upgrade of the Company's management information system. These increases were partially offset by a decline in employee incentive plan and profit-sharing expenses. Interest expense rose sharply in 1998 compared with 1997 due to higher average borrowing levels on the Company's revolving credit facility. The increase in debt was primarily related to higher average inventory levels together with capital expenditures for the tire bead wire expansion. During 1998, the Company sold the inventory and equipment related to its agricultural fencing product line. The Company's financial results reflect a pre-tax gain of $3.4 million, or 26 cents per share after-tax, on the sale of the assets in other income, net of a provision for the estimated transition-related costs. Under the terms of the sale, the Company agreed to manufacture fencing products for the buyer until the equipment was relocated to the buyer's facilities. The Company ceased the remainder of its agricultural fencing activities in October 1998. The Company terminated one of its pension plans during 1998, recognizing a pre-tax gain of $1.2 million, or 7 cents per share after-tax, in other income for the curtailment of plan benefits and settlements that had been made to date. Also in 1998, the Company retired its $10.0 million 8.25% senior secured notes, funding the prepayment under its unsecured revolving credit facility. The Company's financial results reflect an extraordinary loss of $408,000 after income taxes, or approximately 5 cents per share, related to the early extinguishment of debt. The Company's 1997 financial statements reflect the disposal of its Insteel Construction Systems division ("ICS") and the reclassification of the segment as discontinued operations. ICS manufactured and marketed the Insteel 3-D(R) building panel. The Company recorded a provision of $2.2 million for the estimated loss on disposal of ICS (net of a $1.2 million tax benefit) which included a $400,000 provision for anticipated operating losses prior to disposal. 7 8 LIQUIDITY AND CAPITAL RESOURCES SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS)
YEAR ENDED ------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ---------- ---------- ------------- Net cash provided by continuing operating activities $ 13,708 $ 14,517 $ 7,277 Net cash provided by (used for) investing activities (21,840) 2,372 (26,438) Net cash provided by (used for) financing activities 8,537 (17,912) 17,717 Working capital 35,633 26,307 36,687 Turnover ratios: (1) Working capital (2) 8.9 8.9 8.2 Receivables 9.1 8.9 8.2 Inventories 7.0 6.7 6.4 Total debt $ 46,817 $ 36,363 $ 52,293 Percentage of total capitalization 38% 34% 42% Shareholders' equity $ 77,329 $ 69,260 $ 71,322 Percentage of total capitalization 62% 66% 58% Total capital $ 124,146 $105,623 $ 123,615
1 Based upon average year-end balances 2 Excluding cash and cash equivalents and net assets of discontinued operations Continuing operating activities generated $13.7 million of cash in 1999 compared with $14.5 million and $7.3 million in 1998 and 1997, respectively. The fluctuations were primarily due to changes in the Company's financial results and inventory levels. In 1999, cash generated from continuing operating activities was favorably impacted by the improvement in the Company's financial results in comparison to 1998 and 1997. The increase in earnings was partially offset by a planned build in inventories in anticipation of rising raw material prices and the potential unfavorable impact of trade actions filed by domestic rod producers. In 1998, inventories decreased due to a substantial reduction in raw material inventories together with the sale of finished goods inventories associated with the agricultural fencing product line. Cash generated from the inventory reduction was partially offset by a decline in accounts payable related to lower raw material purchases. In 1997, inventories were increased in anticipation of rising raw material prices together with potential supply disruptions resulting from labor contract negotiations at two major rod producers. Accounts payable increased as a result of the higher purchase volumes required to build inventories. Investing activities consumed $21.8 million and $26.4 million in 1999 and 1997, respectively, while providing $2.4 million in 1998. In 1999, investing activities reflect a total of $6.6 million relating to the investment in SRP and $8.4 million for the acquisition of a concrete reinforcing business. Capital expenditures amounted to $7.3 million, $6.7 million and $27.1 million in 1999, 1998 and 1997, respectively, primarily related to the tire bead wire and PC strand expansions. In 1998, proceeds primarily generated from the sale of the Company's agricultural fencing equipment exceeded capital expenditures. Financing activities provided $8.5 million and $17.7 million of cash in 1999 and 1997, respectively, while using $17.9 million in 1998. The increase in financing requirements in 1999 was primarily related to the investment in SRP and the acquisition of a concrete reinforcing business. During 1998, cash generated from the sharp reduction in inventories and the sale of assets related to the agricultural fencing product line was used to pay down debt. The increase in debt in 1997 was primarily related to funding the capital expenditures for the tire bead wire expansion together with the increase in inventories. The financial position of the Company remains strong. The Company's debt to capital ratio increased to 38% at October 2, 1999 compared with 34% and 42% at October 3, 1998 and September 30, 1997 respectively. The increase in debt was primarily due to the investment in SRP and the acquisition of a concrete reinforcing business. During 1999, the Company's revolving credit facility was amended, increasing the maximum availability to $60.0 million through November 2000. At October 2, 1999, approximately $17.1 million was available under the facility. In November 1999, the Company entered into a definitive agreement to acquire all of the outstanding stock of Florida Wire and Cable, Inc. for $68.5 million subject to a purchase price adjustment to be determined based upon the closing balance sheet. The Company plans to finance the acquisition with funding provided by a $150.0 million senior secured credit facility 8 9 that it expects to enter into with a group of banks. The additional funding available under the credit facility will be used to refinance the Company's existing indebtedness and fund other ongoing requirements following the completion of the transaction. The Company expects to complete the closing of the credit facility and acquisition in January 2000. YEAR 2000 The "Year 2000" issue refers to older computer systems and other equipment operating on software that uses only two digits to represent the year, rather than four digits. As a result, these older systems and equipment may not process information or otherwise function properly when using the year "2000", since that year will be indistinguishable from the year "1900". The Company has initiated a Year 2000 program to assess and develop plans to resolve the issue both internally and externally. During 1996, the Company began a plan to upgrade its business and operating systems to Year 2000 compliant software. In addition to addressing the Year 2000 issue, the systems upgrade is expected to enhance the performance of the Company's customer service, manufacturing and administrative processes. Implementation of the upgrade began in 1997 with the initial testing of the system on a limited basis prior to converting all of the Company's locations. The Company completed the implementation in September 1999. In order to identify Year 2000 problems at key suppliers and customers, the Company initiated external surveys to assess their level of compliance. The Company has received responses back from substantially all of its critical suppliers indicating that they were either already in compliance or planned on being in compliance by December 31, 1999. Alternative suppliers have been identified and evaluated for those vendors who have indicated that they are not currently in compliance. The Company also reviewed embedded software in its equipment and facilities to identify potential Year 2000 issues. Equipment manufacturers were requested to certify their compliance and assist the Company in developing solutions in situations where they were not in compliance. As of October 2, 1999, substantially all of the Company's critical manufacturing equipment had been certified by vendors as being Year 2000 compliant. In addition to mitigating Year 2000 disturbances, the Company has identified potential risks and is in the process of finalizing a detailed contingency plan for each location. These plans will list the steps that are necessary to sufficiently protect the assets at each location and to minimize the disruption of Company operations. Such contingency plans will be finalized and in place by December 31, 1999. While reasonable actions have been taken to address the Year 2000 problem and will continue to be taken in the future to mitigate such disruption, the magnitude of all Year 2000 disturbances cannot be predicted. Failure to complete these programs as planned could result in the corruption of data, hardware or equipment failures or the inability to manufacture products or conduct other business activities, all of which could have a material impact on the Company's business, consolidated financial position or results of operations. Management believes that past or expected future capital requirements related to Year 2000 compliance issues will not have a material impact on its consolidated financial position or results of operations. OUTLOOK The Company's operating results are impacted by seasonal factors, particularly in the first quarter of the fiscal year, which has historically represented the lowest quarterly sales volume. Shipments typically increase in the second quarter and reach a high point in the third or fourth quarter, reflecting the buying patterns of the Company's customers. Market conditions for the Company's primary raw material, hot-rolled carbon steel wire rod, were relatively stable in 1999. Worldwide demand for wire rod began to recover as the impact of the Asian financial crisis eased and global demand improved. Domestic wire rod producers successfully increased prices in the Company's third quarter, and again in the fourth quarter, as they sought to restore pricing to pre-1998 levels. In January 1999, domestic wire rod producers initiated a Section 201 filing with the U.S. ITC alleging that rising import levels had resulted in serious injury to the domestic industry. The domestic producers are pursuing trade relief on a worldwide basis against all countries other than NAFTA nations through duties, quotas or other measures intended to reduce import competition. In May 1999, three ITC commissioners found that the domestic wire rod industry had not been injured by imports. Two commissioners found that the industry had been injured by imports, and the sixth commissioner found that the industry had not been injured, but that a threat of injury existed. The investigation is now in the remedy phase. Although President Clinton was scheduled to make a determination on relief for the industry by September 27, 1999, to date, no determination has been made. The future impact of these actions on the Company's 9 10 financial results is difficult to predict, depending upon the resolution of the trade filings together with the Company's ability to recover any raw material price increases in its markets. The Company has built inventory during its third and fourth quarters in anticipation of the potential unfavorable impact of a negative outcome. The Company expects that the recently enacted federal highway spending legislation ("TEA-21") will have a favorable impact on the demand for its concrete reinforcing products. As customer requirements rise, the Company expects to gradually increase the operating volumes of its recently expanded PC strand manufacturing facility to its full capacity. During 1999, sales of the Company's most recent product addition, tire bead wire, steadily increased as the Company continued to gain customer acceptance and further its market penetration. The Company is currently incurring substantially all of the anticipated operating costs required to support its new business, therefore, the incremental impact of the projected increases in sales is expected to have a significant favorable impact on its financial performance. The Company's business strategy continues to be focused on: (1) expansion opportunities in existing businesses as well as in related products that leverage off of the Company's core competencies in the manufacture and marketing of wire products and (2) continued improvement in the financial performance of the Company's traditional businesses. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that reflect management's current assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected, stated or implied by the statements. Such risks and uncertainties include, but are not limited to, general economic conditions in the markets in which the Company operates; unanticipated changes in customer demand, order patterns and inventory levels; fluctuations in the cost and availability of the Company's primary raw material, hot rolled steel wire rod; the Company's ability to raise selling prices in order to recover increases in wire rod prices; the impact of the resolution of the Section 201 filing with the U.S. ITC on the cost and availability of wire rod; legal, environmental or regulatory developments that significantly impact the Company's operating costs; increased demand for the Company's concrete reinforcing products resulting from increased federal funding levels provided for in the TEA-21 highway spending legislation; the financial impact of the acquisition of the 25% interest in SRP and the Hickman, Kentucky manufacturing facility; the success of the Company's new product initiatives, including the PC strand, collated nail and tire bead wire expansions; the inability of the Company to expedite the qualification process with prospective customers for tire bead wire; the failure of the Company to receive regular and substantial orders for its new products; the impact of the Year 2000 issue; and the Company's ability to successfully integrate Florida Wire and Cable, Inc., assuming that the transaction is consummated. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (A) FINANCIAL STATEMENTS Consolidated Balance Sheets as of October 2, 1999 and October 3, 1998 12 Consolidated Statements of Earnings for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997 13 Consolidated Statements of Shareholders' Equity for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997 14 Consolidated Statements of Cash Flows for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997 15 Notes to Consolidated Financial Statements 16 Report of Independent Public Accountants 26 Schedule II - Valuation and Qualifying Accounts for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997 27 Report of Independent Public Accountants on Schedule 28
10 11 (B) SUPPLEMENTARY DATA Selected quarterly financial data is as follows: FINANCIAL DATA BY QUARTER (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AND PRICE DATA)
QUARTER ENDED ------------------------------------------------------- JANUARY 2 APRIL 3 JULY 3 OCTOBER 2 --------- --------- -------- ---------- 1999 OPERATING RESULTS Net sales $ 62,267 $ 66,162 $ 72,676 $ 69,887 Gross profit 6,566 9,204 10,729 9,148 Net earnings 1,524 2,517 3,388 2,557 PER SHARE DATA (BASIC AND DILUTED) Net earnings 0.18 0.30 0.40 0.30 Cash dividends 0.06 0.06 0.06 0.06 Stock prices High 6.38 7.13 9.63 9.88 Low 3.88 4.88 5.75 8.38
QUARTER ENDED ----------------------------------------------------- DECEMBER 27 MARCH 28 JUNE 27 OCTOBER 3 ----------- ---------- --------- ---------- 1998 OPERATING RESULTS Net sales $ 59,919 $ 62,996 $ 69,275 $ 73,957 Gross profit 1,475 1,327 4,017 6,534 Earnings (loss) before extraordinary item (1,687) (379) 5 2,389 Extraordinary loss - (408) - - Net earnings (loss) (1,687) (787) 5 2,389 PER SHARE DATA (BASIC AND DILUTED) Earnings (loss) before extraordinary item (0.20) (0.04) - 0.28 Extraordinary loss - (0.05) - - Net earnings (loss) (0.20) (0.09) - 0.28 Cash dividends 0.06 0.06 0.06 0.06 Stock prices High 8.63 7.81 8.44 6.69 Low 6.25 6.19 6.13 4.50
11 12 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
OCTOBER 2, OCTOBER 3, 1999 1998 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 827 $ 422 Accounts receivable, net 31,054 28,687 Inventories 36,360 30,566 Prepaid expenses and other 3,012 2,023 -------- -------- Total current assets 71,253 61,698 Property, plant and equipment, net 85,529 80,350 Other assets 11,114 5,083 -------- -------- Total assets $167,896 $147,131 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 25,035 $ 28,758 Accrued expenses 9,965 6,013 Current portion of long-term debt 620 620 -------- -------- Total current liabilities 35,620 35,391 Long-term debt 46,197 35,743 Deferred income taxes 7,734 5,726 Other liabilities 1,016 1,011 Commitments and contingencies Shareholders' equity: Preferred stock, no par value Authorized shares: 1,000 None issued - - Common stock, $2 stated value Authorized shares: 20,000 Issued and outstanding shares: 1999 8,457; 1998 8,443 16,914 16,885 Additional paid-in capital 38,314 38,232 Retained earnings 22,101 14,143 -------- -------- Total shareholders' equity 77,329 69,260 -------- -------- Total liabilities and shareholders' equity $167,896 $147,131 ======== ========
See accompanying notes to consolidated financial statements. 12 13 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED ------------------------------------------ OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ---------- ---------- ------------- Net sales $270,992 $ 266,147 $ 262,325 Cost of sales 235,345 252,794 243,473 -------- --------- --------- Gross profit 35,647 13,353 18,852 Selling, general and administrative expense 17,429 13,410 12,395 -------- --------- --------- Operating income (loss) 18,218 (57) 6,457 Interest expense 2,482 3,810 2,276 Other expense (income) 59 (4,375) 193 Earnings from continuing operations before income taxes 15,677 508 3,988 Provision for income taxes 5,691 180 1,452 -------- --------- --------- Earnings from continuing operations before extraordinary item 9,986 328 2,536 Discontinued operations: Loss from operations of Insteel Construction Systems net of income tax benefits of - (693) Loss on disposal of Insteel Construction Systems, including provision of $400 for operating losses during phase-out period (net of income tax benefit of $1,245) - - (2,184) -------- --------- --------- Loss from discontinued operations - - (2,184) -------- --------- --------- Earnings (loss) before extraordinary item 9,986 328 (341) Extraordinary loss on early extinguishment of debt (net of income tax benefit of $224) - (408) - -------- --------- --------- Net earnings (loss) $ 9,986 $ (80) $ (341) ======== ========= ========= Per share (basic and diluted): Earnings from continuing operations $ 1.18 $ 0.04 $ 0.30 Loss from discontinued operations - - (0.34) Extraordinary loss - (0.05) - -------- --------- --------- Net earnings (loss) $ 1.18 $ (0.01) $ (0.04) ======== ========= ========= Cash dividends per share $ 0.24 $ 0.24 $ 0.24 ======== ========= =========
See accompanying notes to consolidated financial statements. 13 14 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
YEAR ENDED ----------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ---------- ---------- ------------- COMMON STOCK: Balance, beginning of year $ 16,885 $ 16,873 $ 16,871 Stock options exercised 29 12 2 -------- -------- -------- Balance, end of year $ 16,914 $ 16,885 $ 16,873 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL: Balance, beginning of year $ 38,232 $ 38,200 $ 38,192 Stock options exercised 82 32 8 -------- -------- -------- Balance, end of year $ 38,314 $ 38,232 $ 38,200 ======== ======== ======== RETAINED EARNINGS: Balance, beginning of year $ 14,143 $ 16,249 $ 18,614 Cash dividends declared (2,028) (2,026) (2,024) Net earnings (loss) 9,986 (80) (341) -------- -------- -------- Balance, end of year $ 22,101 $ 14,143 $ 16,249 ======== ======== ========
See accompanying notes to consolidated financial statements. 14 15 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED ----------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 --------- ---------- ------------- CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Net earnings (loss) $ 9,986 $ (80) $ (341) Adjustments to reconcile net earnings (loss) to net cash provided by continuing operating activities: Depreciation and amortization 8,908 8,738 8,224 Extraordinary loss - 408 - Gain on sale of assets (75) (4,575) - Loss from discontinued operations - - 2,877 Net changes in assets and liabilities: Accounts receivable, net (2,338) 2,365 1,347 Inventories (4,168) 13,898 (12,758) Accounts payable and accrued expenses 217 (6,083) 7,924 Other changes 1,178 (154) 4 --------- --------- --------- Total adjustments 3,722 14,597 7,618 --------- --------- --------- Net cash provided by continuing operating activities 13,708 14,517 7,277 --------- --------- --------- CASH FLOWS FROM DISCONTINUED OPERATING ACTIVITIES: Net cash provided by discontinued operating activities - 366 1,100 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (7,344) (6,708) (27,076) Acquisition of business (8,397) - - Equity investments (3,250) - - Purchases of short-term investments (1,875) - - Proceeds from (issuance of) notes receivable (1,290) 222 638 Proceeds from sale of property, plant and equipment 316 8,858 - --------- --------- --------- Net cash provided by (used for) investing activities (21,840) 2,372 (26,438) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 106,435 107,132 115,256 Principal payments on long-term debt (95,981) (123,062) (95,525) Proceeds from exercise of stock options 111 44 10 Cash dividends paid (2,028) (2,026) (2,024) --------- --------- --------- Net cash provided by (used for) financing activities 8,537 (17,912) 17,717 --------- --------- --------- Net increase (decrease) in cash 405 (657) (344) Cash and cash equivalents at beginning of year 422 1,079 1,423 --------- --------- --------- Cash and cash equivalents at end of year $ 827 $ 422 $ 1,079 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,947 $ 4,843 $ 2,023 Income taxes 3,723 596 896
See accompanying notes to consolidated financial statements. 15 16 INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 (Amounts in thousands, except for per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR. Effective October 1, 1997, the Company adopted a 52 or 53 week fiscal year ending on the Saturday nearest the last day of September in each year. Prior to fiscal 1998, the Company's fiscal year was the 12-month period ending September 30. All references to years relate to fiscal years rather than calendar years. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. REVENUE RECOGNITION. Revenue is recognized when the related products are shipped. INVENTORIES. Inventories are valued at the lower of average cost (which approximates computation on a first-in, first-out basis) or market (net realizable value or replacement cost). PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 3 - 15 years; buildings, 10 - 30 years; land improvements, 5 - 15 years. Capitalized software is amortized over the shorter of the estimated useful life or 5 years. No interest costs were capitalized in 1999 or 1998. Capitalized interest costs were $492 in 1997. OTHER ASSETS. Other assets consist principally of investments in affiliated companies, long-term notes receivable, the cash surrender value of life insurance policies and various intangible assets. Investments in affiliated companies are accounted for using the equity method. Intangible assets are amortized on a straight-line basis over the expected periods to be benefited. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts for cash and cash equivalents, accounts and notes receivable, accounts payable and other accrued liabilities approximate fair value because of their short maturities. The estimated fair value of long-term debt is primarily based upon quoted market prices as well as borrowing rates currently available to the Company for bank loans with similar terms and maturities. The carrying amount of long-term debt approximates its estimated fair value. INCOME TAXES. Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. EARNINGS PER SHARE. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" in 1998. SFAS No. 128 replaces the primary and fully diluted earnings per share ("EPS") computations with basic and diluted EPS. Basic EPS are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS are computed by dividing net earnings by the weighted average number of common shares and other dilutive equity securities outstanding during the period. Securities that have the effect of increasing EPS are considered to be antidilutive and are not included in the computation of diluted EPS. 16 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (2) EXTRAORDINARY LOSS - EARLY EXTINGUISHMENT OF DEBT In 1998, the Company retired its $10.0 million 8.25% senior secured notes due 2002, funding the prepayment under its unsecured revolving credit facility. The Company recorded an extraordinary loss of $408 after income taxes, or approximately 5 cents per share, related to the redemption premium and write-off of deferred financing costs. (3) DISCONTINUED OPERATIONS In 1997, the Company sold the assets of its Insteel Construction Systems division ("ICS"), which manufactured and marketed the Insteel 3-D(R) building panel. ICS has been classified as a discontinued operation in the accompanying financial statements in accordance with Accounting Principles Board ("APB") Opinion No. 30. The Company recorded a provision of $2,184 for the estimated loss on disposal of ICS (net of a $1,245 tax benefit) which included a $400 provision for anticipated operating losses prior to disposal. The operating results of the discontinued ICS division are as follows:
YEAR ENDED ---------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ----------- ---------- ------------- Net sales $ - $ - $ 580 Cost of sales - - 743 ----------- ---------- ------- Gross loss - - (163) Selling, general and administrative expense - - 720 ----------- ---------- ------- Operating loss - - (883) Interest expense - - 82 Other expense - - 123 ----------- ---------- ------- Loss from operations of Insteel Construction Systems before income taxes - - (1,088) Benefit for income taxes - - (395) =========== ========== ======= Loss from operations of Insteel Construction Systems $ - $ - $ (693) =========== ========== =======
(4) INVESTMENT IN STRUCTURAL REINFORCEMENT PRODUCTS In January 1999, the Company acquired a 25% interest in Structural Reinforcement Products, Inc. ("SRP"), a manufacturer of welded wire fabric products for the construction industry. Under the terms of the purchase agreement, the Company acquired 25% of the common stock in SRP for $3.3 million. In addition, the Company provided SRP with $1.5 million of debt financing and $1.9 million of collateral to support its existing credit facility in assuming a proportionate share of SRP's debt-related obligations. The Company may be obligated to increase its investment for its equity position by up to $500 depending upon SRP's future financial performance. The Company is accounting for its investment in SRP on an equity basis and, accordingly, is including its share of SRP's earnings in its consolidated earnings. In 1999, the Company recorded an equity loss of $149 in other expense on its consolidated statement of earnings. (5) ACQUISITION OF CONCRETE REINFORCING BUSINESS In April 1999, the Company acquired the assets of the concrete reinforcing business of Northwestern Steel and Wire Company ("Northwestern"). Under the terms of the purchase agreement, the Company acquired the inventory, property, plant and equipment of Northwestern's Hickman, Kentucky facility for approximately $8.4 million. In addition, the companies entered into a three-year agreement under which Northwestern will supply Insteel with a portion of its raw material requirements. 17 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (6) DEBT AND CREDIT FACILITIES Long-term debt, due dates and interest rates are as follows:
OCTOBER 2, OCTOBER 3, 1999 1998 ---------- ---------- Revolving credit agreement; expires November 2000 at variable interest rate (5.76% at October 2, 1999 and 7.53% at October 3, 1998) $42,897 $31,823 Industrial revenue refunding bonds; due dates through 2005 at 7.20% - 7.75% 1,960 2,240 Industrial development revenue refunding bonds; due dates through 2003 at variable interest rate (3.90% at October 2, 1999 and 3.80% at October 3, 1998) 1,360 1,700 Mortgage note 600 600 ------- ------- Total long-term debt 46,817 36,363 Less current maturities 620 620 ======= ======= Long-term debt, excluding current maturities $46,197 $35,743 ======= =======
During 1999, the Company's unsecured revolving credit facility was amended, increasing the maximum availability on its line of credit to $60.0 million through November 2000. Borrowings under the line of credit bear interest at a variable rate based on LIBOR and a commitment fee is payable on the unused portion. The interest spread over LIBOR and unused commitment fee are adjusted quarterly based on the Company's ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). At October 2, 1999, approximately $17.1 million was available under the facility. The revolving credit facility and certain other debt agreements contain restrictive covenants which, among other restrictions, limit the amount of additional debt relative to total capitalization and EBITDA and require tangible net worth to be maintained at or above specified amounts. At October 2, 1999, the Company was in compliance with all of the restrictive covenants. Property, plant and equipment with an aggregate carrying value of $24,937 is pledged as collateral under the Company's debt agreements. Aggregate maturities of long-term debt for the next five years are as follows: 2000, $620; 2001, $43,237; 2002, $340; 2003, $1,180; 2004, $0. (7) SHAREHOLDERS' EQUITY Shares of common stock outstanding are as follows:
YEAR ENDED ------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ---------- --------- ------------ Balance, beginning of year 8,443 8,437 8,435 Stock options exercised 14 6 2 ===== ===== ===== Balance, end of year 8,457 8,443 8,437 ===== ===== =====
(8) STOCK OPTION PLANS The Company has stock option plans under which employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under the 1985 employee and 1990 director stock option plans vest over five years and expire five years from the date of the grant. By action of the Board of Directors in 1994, no further options may be granted under these plans. Options granted under the 1994 employee and director stock option plans vest over five years and expire ten years from the date of the grant. 18 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) A summary of stock option activity follows:
EXERCISE PRICE PER SHARE ---------------------------------------------- OPTIONS WEIGHTED OUTSTANDING RANGE AVERAGE ------------ -------------------------- ----------- Balance, September 30, 1996 446 $ 6.88 - $ 10.68 $ 8.88 Granted 106 7.56 - 9.13 8.14 Exercised (13) 8.57 - 8.57 8.57 Cancelled (35) 7.00 - 10.44 9.31 ----------- Balance, September 30, 1997 504 6.88 - 10.68 8.71 Granted 232 4.69 - 7.31 5.49 Exercised (6) 7.00 - 7.88 7.43 Cancelled (104) 6.38 - 10.68 9.41 ----------- Balance, October 3, 1998 626 4.69 - 10.44 7.41 Granted 229 4.75 - 9.19 7.61 Exercised (14) 4.69 - 8.94 7.58 Cancelled (217) 4.69 - 10.44 8.85 =========== Balance, October 2, 1999 624 4.69 - 9.19 6.98 ===========
The weighted average characteristics of outstanding stock options at October 2, 1999 for various price ranges are as follows:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ----------------------------------------------- ---------------------------- WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE ---------------------------- ----------- ------------ ----------- ---------- ------------ $ 4.69 - $ 5.38 128 8.9 $ 4.80 54 $ 4.82 5.50 - 6.56 164 8.9 6.47 64 6.44 7.00 - 7.56 150 6.6 7.31 116 7.28 7.88 - 9.13 112 5.9 8.38 100 8.32 9.19 - 9.19 70 9.8 9.19 14 9.19
At October 2, 1999, 335 shares were available for future grants under the plans. Options exercisable were 348 at October 2, 1999 and 374 at October 3, 1998. The weighted average exercise price for these shares was $7.12 for 1999 and $8.28 for 1998. The Company has elected to follow APB No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock option plans. APB No. 25 specifies that no compensation expense is recognized when the exercise price of the stock options equals the market value of the underlying stock at the grant date, as in the case of options granted under the Company's plans. SFAS No. 123, "Accounting for Stock-Based Compensation," specifies the use of certain option valuation models to calculate estimated compensation expense to be reflected in pro forma net earnings and net earnings per share. The Company's pro forma information is as follows:
YEAR ENDED --------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 -------------- -------------- --------------- Net earnings (loss) as reported under: APB No. 25 $ 9,986 $ (80) $ (341) SFAS No. 123 9,763 (224) (445) Basic net earnings (loss) per share as reported under: APB No. 25 1.18 (0.01) (0.04) SFAS No. 123 1.16 (0.03) (0.05)
19 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The fair value of the options at the date of grant were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:
YEAR ENDED --------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ------------ ------------ --------------- Expected life (in years) 5.0 5.0 5.0 Risk-free interest rate 5.4% 5.5% 6.3% Expected volatility 0.40 0.30 0.30 Expected dividend yield 3.0% 3.0% 3.0%
The weighted average estimated fair values of options granted during 1999, 1998 and 1997 were $2.75, $1.61 and $2.48 per share, respectively. The above pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on net earnings and net earnings per share in future years, because they do not take into consideration pro forma compensation expense related to grants made prior to 1996. (9) INCOME TAXES The provision for income taxes for continuing operations consists of:
YEAR ENDED -------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ----------- ----------- ------------- CURRENT: Federal $ 3,488 $ 373 $ 1,673 State 471 (5) 112 ----------- ----------- ------------- 3,959 368 1,785 DEFERRED: Federal $ 1,569 $ 10 (522) State 163 (198) 189 ----------- ----------- ------------- 1,732 (188) (333) ----------- ----------- ------------- Provision for income taxes $ 5,691 $ 180 $ 1,452 =========== =========== =============
The provision for income taxes for continuing operations differs from the amount computed by applying the federal statutory rate to the Company's earnings from continuing operations before taxes as a result of the following differences:
YEAR ENDED ---------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ------------ ----------- ------------- Provision for income taxes at statutory rate $ 5,409 $ 173 $ 1,356 State income taxes, net of federal income tax benefit 308 (3) 74 Other, net (26) 10 22 =========== ========== ========= Provision for income taxes $ 5,691 $ 180 $ 1,452 =========== ========== =========
20 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) Deferred tax assets and liabilities are recognized for the differences between the tax basis of assets and liabilities and their reported financial statement amounts. Significant components of deferred tax assets and liabilities are as follows:
OCTOBER 2, OCTOBER 3, 1999 1998 ---------- ---------- DEFERRED TAX ASSETS: Accrued expenses or asset reserves for financial statements not yet deductible for tax purposes $ 3,493 $ 2,826 Alternative minimum tax credit carryforwards 516 1,788 ------- ------- Gross deferred tax assets 4,009 4,614 DEFERRED TAX LIABILITIES: Plant and equipment principally due to differences in depreciation and capitalized interest (9,426) (8,290) Other reserves (399) (557) Prepaid expenses for financial statements that were deducted for tax purposes (149) - ------- ------- Gross deferred tax liabilities (9,974) (8,847) ------- ------- Net deferred tax liability $(5,965) $(4,233) ======= =======
(10) EMPLOYEE BENEFIT PLANS RETIREMENT PLANS. The Company has one defined benefit pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware, ("the Delaware Plan"). The Delaware Plan provides benefits for eligible employees based primarily upon years of service and compensation levels. The Company's funding policy is to contribute amounts at least equal to those required by law. Prior to September 1999, the Company had another defined benefit pension plan, the Pension Plan of Insteel Industries, Inc. ("the Insteel Plan"). In October 1997, the Company froze all benefit accruals for additional years of credited service for plan participants. In August 1998, the Company terminated the plan, recognizing a gain based upon the curtailment of plan benefits and settlements that had been made to date. The Company recorded a $1.2 million gain in other income relating to the plan termination. The settlement of the plan was completed in September 1999 and $401 was recorded as a settlement loss. The following table provides a reconciliation of the projected benefit obligation, a reconciliation of plan assets, the funded status of the plans, and the amounts recognized in the Company's consolidated balance sheets at October 2, 1999 and October 3, 1998: 21 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data)
INSTEEL PLAN DELAWARE PLAN YEAR ENDED YEAR ENDED ------------------------ ------------------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $(4,960) $(10,222) $(3,728) $(3,001) Service cost - - (97) (93) Interest cost (316) (722) (240) (225) Actuarial loss (52) (3,663) (30) (514) Effect of settlement 5,328 5,620 - - Effect of curtailment - 3,796 - - Benefits paid - 231 156 105 ------- -------- ------- ------- Benefit obligation at end of year $ - $ (4,960) $(3,939) $(3,728) ======= ======== ======= ======= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 5,168 $ 9,873 $ 2,806 $ 3,235 Change in assets from disclosure to beginning of year (216) 343 - 121 Actual return on plan assets 312 776 398 (445) Employer contributions 64 - 32 - Effect of settlement (5,328) (5,593) - - Benefits paid - (231) (156) (105) ------- -------- ------- ------- Fair value of plan assets at end of year $ - $ 5,168 $ 3,080 $ 2,806 ======= ======== ======= ======= RECONCILIATION OF FUNDED STATUS TO NET AMOUNT RECOGNIZED: Funded status $ - $ 208 $ (859) $ (922) Unrecognized net loss - 97 (30) (45) Unrecognized prior service cost - - 12 15 Unrecognized transition obligation (asset) - (97) 18 30 ------- -------- ------- ------- Net amount recognized $ - $ 208 $ (859) $ (922) ======= ======== ======= ======= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF: Prepaid benefit cost $ - $ 208 $ - $ - Accrued benefit liability - - (859) (922) Intangible asset - - - - Accumulated other comprehensive loss - - - - ------- -------- ------- ------- Net amount recognized $ - $ 208 $ (859) $ (922) ======= ======== ======= =======
Net periodic pension cost includes the following components:
INSTEEL PLAN DELAWARE PLAN YEAR ENDED YEAR ENDED ------------------------------------------ -------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1998 1999 1998 1998 ---------- ---------- ------------- ---------- ---------- ------------- COMPONENTS OF NET PERIODIC PENSION COST: Service cost $ - $ - $ 555 $ 97 $ 93 $ 106 Interest cost 316 722 654 240 225 205 Actual return on plan assets (312) (776) (664) (398) 445 (200) Deferred asset loss (94) (6) - 178 (708) - Amortization of prior service cost - 25 (33) 3 3 3 Amortization of transition asset (49) (79) (80) 12 11 12 Recognized net actuarial loss 10 (103) - 52 (2) - Curtailment gain - (1,200) - - - - Settlement loss 401 - - - - - ----- ------- ----- ----- ----- ----- Net periodic pension cost $ 272 $(1,417) $ 432 $ 184 $ 67 $ 126 ===== ======= ===== ===== ===== =====
22 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) The weighted average assumptions used for the calculations for both plans are as follows:
YEAR ENDED -------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ---------- ---------- ------------- Assumptions at year-end: Discount rate 5.9%-6.5% 5.9% - 6.5% 7.5% Rate of increase in compensation levels N/A 5.0% 5.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0%
PROFIT-SHARING AND INCENTIVE PLANS. The Company has a profit-sharing plan and various incentive plans covering substantially all hourly and salary employees. Profit-sharing and incentive plan expense was $3,955 in 1999, $826 in 1998 and $993 in 1997. RETIREMENT SAVINGS PLAN. In 1996, the Company adopted the Retirement Savings Plan of Insteel Industries, Inc. ("the Plan") to provide retirement benefits and stock ownership for its employees. The Plan is an amendment and restatement of the Company's Employee Stock Ownership Plan ("ESOP"). As allowed under Sections 401(a) and 401(k) of the Internal Revenue Code, the Plan is a stock bonus plan that provides tax-deferred salary deductions for eligible employees. Employees may contribute up to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Code. For 1999, the Company provided a matching contribution of 50% of the first 5% of employee compensation paid to the Plan. In addition, the Plan allows for discretionary contributions to be made by the Company as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their compensation to the total compensation of all participants. Company contributions to the Plan were $405 in 1999, $496 in 1998 and $85 in 1997. MANAGEMENT SECURITY PROGRAM. The Company has a management security program for certain employees. Under the program, participants are entitled to cash benefits upon retirement at age 65, payable annually for 15 years. The program is funded by life insurance policies on the participants purchased by the Company. Management security program expense was $52 in 1999, $37 in 1998 and $84 in 1997. VEBA. The Company has a Voluntary Employee Beneficiary Association ("VEBA"). Under the plan, both employees and the Company may make contributions to pay for medical benefits. Company contributions to the VEBA were $410 in 1999, $0 in 1998 and $350 in 1997. (11) COMMITMENTS AND CONTINGENCIES LEASES. The Company leases a portion of its property, plant and equipment under operating leases that expire at various dates through 2026. Under most lease agreements, the Company pays insurance, taxes and maintenance. Rental expense for operating leases was $643 in 1999, $932 in 1998 and $1,068 in 1997. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 2000, $298; 2001, $199; 2002, $148; 2003; $51; 2004, $42; beyond, $544. LEGAL PROCEEDINGS. The Company is involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. Management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (12) EARNINGS PER SHARE The reconciliation of basic and diluted EPS as required under SFAS No. 128 is as follows:
YEAR ENDED ------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ---------- ---------- ------------- Earnings from continuing operations $9,986 $ 328 $ 2,536 Loss from discontinued operations - - (2,877) Extraordinary loss - (408) - ====== ======= ======= Net earnings (loss) $9,986 $ (80) $ (341) ====== ======= ======= Weighted average shares outstanding: Weighted average shares outstanding (basic) 8,449 8,442 8,436 Dilutive effect of stock options 38 - - ------ ------- ------- Weighted average shares outstanding (diluted) 8,487 8,442 8,436 ====== ======= ======= Earnings (loss) per share (basic and diluted): Earnings from continuing operations $ 1.18 $ 0.04 $ 0.30 Loss from discontinued operations - - (0.34) Extraordinary loss - (0.05) - ------ ------- ------- Net earnings (loss) $ 1.18 $ (0.01) $ (0.04) ====== ======= =======
Options to purchase 273 shares in 1999, 523 shares in 1998 and 463 shares in 1997 were antidilutive and were not included in the diluted EPS computation. (13) BUSINESS SEGMENT INFORMATION During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected information about operating segments and related disclosures about products and services, major customers and geographic areas. The adoption of SFAS No. 131 did not affect the Company's financial position, results of operations or financial statement disclosures as the Company operates exclusively in the wire products industry and currently reports as a single industry segment. There were no customers that accounted for 10% or more of the Company's net sales in 1999. One customer accounted for 11% of the Company's net sales in 1998 and 10% in 1997. (14) RELATED PARTY TRANSACTIONS Howard O. Woltz, Jr., Chairman of the Company, is a shareholder in ICS 3-D Panel Works, Inc. ("ICSPW"). As discussed in Note 3, in 1997, the Company sold its ICS division to ICSPW, a new corporation organized by the division's management group. Prior to the sale, the Audit Committee of the Company's Board of Directors reviewed the terms of the proposed transaction focusing particularly on the participation of Mr. Woltz as an investor. Based upon the continuing operating losses of ICS and the prospective benefit to the Company from the sale of the division, the Audit Committee concluded that (1) Mr. Woltz' participation was essential to the transaction and beneficial to the Company and (2) approval of the transaction was in the best interests of the Company. Based upon the Audit Committee's recommendation, the Board of Directors approved the transaction. In September 1998, the Company entered into a Conversion Agreement with SRP, an affiliated company, whereby SRP will produce welded wire fabric for the Company for a specified conversion fee. In 1999, the Company paid SRP approximately $1.6 million for the services provided under this agreement. 24 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except for per share data) (15) SUBSEQUENT EVENT In November 1999, the Company entered into a definitive agreement to acquire Florida Wire and Cable, Inc. ("FWC") from GS Technologies Operating Co., Inc., a subsidiary of GS Industries, Inc. ("GSI"). Under the terms of the definitive agreement, the Company will purchase all of the outstanding stock of FWC for $68.5 million subject to a purchase price adjustment to be determined based upon the closing balance sheet. The Company plans to finance the acquisition with funding provided by a $150.0 million senior secured credit facility that it expects to enter into with a group of banks. The additional funding available under the credit facility will be used to refinance the Company's existing indebtedness and fund other ongoing requirements following the completion of the transaction. The Company expects to complete the closing of the credit facility and acquisition in January 2000. In addition, GSI and the Company will enter into a five-year agreement under which GSI will supply FWC with a portion of its raw material requirements. (16) OTHER FINANCIAL DATA Balance sheet information:
October 2, October 3, 1999 1998 ---------- --------- Accounts receivable, net: Accounts receivable $ 31,429 $ 28,912 Less allowance for doubtful accounts (375) (225) ========= ========= Total $ 31,054 $ 28,687 ========= ========= Inventories: Raw materials $ 20,414 $ 15,514 Supplies 2,601 2,242 Work in process 1,578 1,525 Finished goods 11,767 11,285 ========= ========= Total $ 36,360 $ 30,566 ========= ========= Property, plant and equipment, net: Land and land improvements $ 5,360 $ 5,140 Buildings 38,741 36,225 Machinery and equipment 102,829 95,372 Construction in progress 3,021 1,660 --------- --------- 149,951 138,397 Less accumulated depreciation (64,422) (58,047) ========= ========= Total $ 85,529 $ 80,350 ========= =========
25 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Shareholders Insteel Industries, Inc.: We have audited the accompanying consolidated balance sheets of Insteel Industries, Inc. and subsidiaries as of October 2, 1999 and October 3, 1998 and the related consolidated statements of earnings, shareholders' equity, and cash flows for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insteel Industries, Inc. and subsidiaries as of October 2, 1999 and October 3, 1998, and the results of their operations and their cash flows for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Charlotte, North Carolina October 15, 1999. 26 27 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 30, 1997 ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS)
YEAR ENDED ------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 30, 1999 1998 1997 ------------- ----------- ------------ Balance, beginning of year $ 225 $ 242 $ 240 Additions charged to earnings 150 19 18 Accounts written off - (36) (16) ============= =========== ============ Balance, end of year $ 375 $ 225 $ 242 ============= =========== ============
27 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Shareholders Insteel Industries, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Insteel Industries, Inc. and subsidiaries as of October 2, 1999 and October 3, 1998, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997, and have issued our report thereon dated October 15, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a)(2) of this Form 10-K is the responsibility of the Company's management and is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The information included in this schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Charlotte, North Carolina October 15, 1999. 28 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information with respect to directors and nominees required for this item appears under the caption "Election of Directors" in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders and is herein incorporated by reference. Information on executive officers appears under the caption "Executive Officers of the Company" in Item 1 of this report. ITEM 11. EXECUTIVE COMPENSATION. The information required for this item appears under the caption "Executive Compensation"?in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders and is herein incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required for this item appears under the captions "Principal Shareholders" and "Security Ownership of Management" in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders and is herein incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required for this item appears under the captions "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Transactions with Management and Others" in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders and is herein incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A)(1) FINANCIAL STATEMENTS The financial statements as set forth under Item 8 are filed as part of this report. (A)(2) FINANCIAL STATEMENT SCHEDULES Supplemental Schedule II - Valuation and Qualifying Accounts appears on page 27 of this report. All other schedules have been omitted because they are either not required or not applicable. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended October 2, 1999. (C) EXHIBITS See exhibit index on page 31. (D) FINANCIAL STATEMENT SCHEDULES See Item 14 (a)(2) above. 29 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSTEEL INDUSTRIES, INC. Dated: December 15, 1999 By: H. O. WOLTZ III ----------------------- H. O. WOLTZ III Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on December X, 1999 below by the following persons on behalf of the registrant and in the capacities indicated: Name and Signature Position(s) - ----------------------------- ------------------------------------------- HOWARD O. WOLTZ, JR. Chairman of the Board - ------------------------- HOWARD O. WOLTZ, JR. H. O. WOLTZ III President, Chief Executive Officer and a - ------------------------- Director H. O. WOLTZ III MICHAEL C. GAZMARIAN Chief Financial Officer and Treasurer - ------------------------- (Principal Financial and Accounting Officer) MICHAEL C. GAZMARIAN LOUIS E. HANNEN Director - ------------------------- LOUIS E. HANNEN FRANCES H. JOHNSON Director - ------------------------- FRANCES H. JOHNSON CHARLES B. NEWSOME Director - ------------------------- CHARLES B. NEWSOME GARY L. PECHOTA Director - ------------------------- GARY L. PECHOTA W. ALLEN ROGERS II Director - ------------------------- W. ALLEN ROGERS II WILLIAM J. SHIELDS Director - ------------------------- WILLIAM J. SHIELDS C. RICHARD VAUGHN Director - ------------------------- C. RICHARD VAUGHN 30 31 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED OCTOBER 2, 1999
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3- ARTICLES OF INCORPORATION AND BYLAWS 3.1 Restated articles of incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated May 3, 1988). 3.2 Bylaws of the Company (as last amended April 26, 1999) (incorporated by reference to the exhibit of the same number contained in the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999). 3.3 Articles of Amendment to the restated articles of incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999). 4- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.2 Articles IV and VI of the Company's restated articles of incorporation, which are incorporated herein by reference to Exhibit 3.3. 4.3 Article 2, Section 8, of the registrant's bylaws, which is incorporated herein by reference to Exhibit 3.2. 4.4 Rights Agreement dated April 27, 1999 between Insteel Industries, Inc. and First Union National Bank (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 7, 1999). * 4.13 Loan Agreement dated as of September 1, 1988, between Liberty County Industrial Development Corporation ("Issuer") and Insteel Industries, Inc. pursuant to which the Issuer agreed to loan the proceeds from its $3,400,000 Industrial Development Revenue Refunding Bonds, Series 1988 (Insteel Industries, Inc. Project) (the "Bonds") to the Company and the Company agreed to repay such loan to the Issuer. * 4.14 Promissory Note dated October 26, 1988 and issued by the Company to the Issuer in the principal amount of $3,400,000, which note evidences the loan from the Issuer to the Company under the Loan Agreement (Exhibit 4.13). * 4.15 Purchase Contract dated October 26, 1988, among the Issuer, the Company, Texas Department of Commerce and Federated Tax-Free Trust ("Purchaser") pursuant to which the Purchaser agreed to purchase the Bonds issued by the Issuer. * 4.16 Letter of Credit and Reimbursement Agreement dated as of September 1, 1988, by and between the Company and First Union National Bank of North Carolina ("Bank") pursuant to which the Bank agreed to issue its Letter of Credit to secure payment of the Bonds and the Company agreed to reimburse the Bank for any and all drawings made under the Letter of Credit. # 4.24 Indenture of Trust between Industrial Development Authority of the City of Fredericksburg, Virginia and Crestar Bank as Trustee, dated as of September 1, 1990, relating to $4,205,000 Industrial Development Authority of the City of Fredericksburg, Virginia Industrial Development First Mortgage Revenue Refunding Bonds (Insteel Industries, Inc./Rappahannock Wire Company Project) Series of 1990. # 4.25 Refunding Agreement between Industrial Development Authority of the City of Fredericksburg, Virginia ("Issuer") and Insteel Industries, Inc., and Rappahannock Wire Company (since renamed Insteel Wire Products Company) (together, the "Companies"), dated as of September 1, 1990 pursuant to which the Issuer agreed to loan the proceeds from its $4,205,000 Industrial Development First Mortgage Revenue Refunding Bonds (Insteel Industries, Inc./Rappahannock Wire Company Project), Series of 1990 to the Companies and the Companies agreed to repay such loan to the Issuer. ## 4.41 Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996 providing for a $35,000,000 revolving line of credit and a $17,500,000 letter of credit and banker's acceptance facility. *** 4.42 First Amendment dated April 11, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996.
31 32 EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED OCTOBER 2, 1999
EXHIBIT NUMBER DESCRIPTION ------ ----------- *** 4.43 Second Amendment dated April 30, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. +++ 4.44 Third Amendment dated November 17, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.45 Fourth Amendment dated January 6, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.46 Fifth Amendment dated March 27, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.47 Sixth Amendment dated August 7, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. ### 4.48 Seventh Amendment dated October 27, 1998 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. 4.49 Eighth Amendment dated April 6, 1999 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. UNDERTAKING: The Company agrees to file upon request of the Commission any instrument with respect to long-term debt not registered for which the total amount authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 10- MATERIAL CONTRACTS ------------------ + 10.5 Employee Stock Ownership Plan of Insteel Industries, Inc., including Employee Stock Ownership Plan Trust Agreement. 10.6 1990 Director Stock Option Plan of Insteel Industries, Inc. (incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1991). ** 10.7 Profit Sharing Plan of Insteel Wire Products Company. ** 10.8 Profit Sharing Plan of Insteel Industries, Inc. ++ 10.9 1994 Employee Stock Option Plan of Insteel Industries, Inc. 10.11 Nonqualified Stock Option Plan (incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1995). ### 10.12 1994 Director Stock Option Plan of Insteel Industries, Inc. as Amended and Restated Effective as of April 28, 1998. +++ 10.21 Insteel Industries, Inc. Return on Capital Incentive Compensation Plan for Key Members of Management +++ 10.22 1997 Declaration of Amendment to Insteel Industries, Inc. Return on Capital Incentive Compensation Plan for Key Members of Management +++ 10.30 Insteel Industries, Inc. Director Compensation Plan 10.50 Stock Purchase Agreement dated January 15, 1999 between H.A. Schlatter, Quilni B.V., Structural Reinforcement Products, Inc. and Insteel Industries, Inc. 10.51 Asset Purchase Agreement dated April 6, 1999 between Insteel Industries, Inc. and Northwestern Steel and Wire Company and Northwestern Steel and Wire Company - Kentucky.
32 33 EXHIBIT INDEX, CONTINUED TO ANNUAL REPORT ON FORM 10-K OF INSTEEL INDUSTRIES, INC., FOR YEAR ENDED OCTOBER 2, 1999
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 21- List of Subsidiaries of Insteel Industries, Inc., at October 2, 1999. 23- Consents of Experts and Counsel: Independent Auditors' Consent. 23.1 Consent of Arthur Andersen LLP 27- Financial Data Schedule (for SEC use only) * Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1988. + Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1989. # Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1990. ** Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1993. ++ Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1994. ## Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. *** Incorporated by reference to the exhibit of the same number contained in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. +++ Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. ### Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended October 3, 1998.
33 EX-4.49 2 EIGHTH AMENDMENT DATED APRIL 6, 1999 1 EXHIBIT 4.49 CONSENT AND EIGHTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS CONSENT AND EIGHTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the "Amendment"), dated this 6th day of April, 1999, is made by and between INSTEEL INDUSTRIES, INC., a North Carolina corporation (the "Borrower"), and FIRST UNION NATIONAL BANK, a national banking association (the "Bank"), and amends the Amended and Restated Credit Agreement, dated January 26, 1996, as amended by First Amendment thereto, dated April 11, 1997, by Second Amendment thereto, dated as of April 30, 1997, by Third Amendment thereto, dated November 17, 1997, by Fourth Amendment thereto, dated January 6, 1998, by Fifth Amendment thereto, dated as of March 27, 1998, by Sixth Amendment thereto, dated August 7, 1998, and by Seventh Amendment thereto, dated October 27, 1999 (the Amended and Restated Credit Agreement, as amended, modified, restated or supplemented from time to time, being hereinafter referred to as the "Credit Agreement"). All capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Credit Agreement. RECITALS A. Pursuant to the Credit Agreement, the Bank has made available to the Borrower a Revolving Line of Credit in the amount of $55,000,000 and a Letter of Credit Facility in the amount of $5,000,000. B. Borrower has requested that the Bank (i) increase the Revolving Line of Credit Commitment from $55,000,000 to $60,000,000, and (ii) consent to the purchase by Borrower of substantially all of the Property from Northwestern Steel and Wire Company ("Northwestern") used in or relating to the steel and wire manufacturing business of Northwestern located in Hickman, Kentucky. C. The Bank has agreed to such requests and the Borrower and the Bank have therefore agreed to amend the Credit Agreement as set forth herein. STATEMENT OF AGREEMENT NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the Borrower and the Bank hereby agree as follows: ARTICLE I AMENDMENTS TO CREDIT AGREEMENT The Credit Agreement is amended as follows: 1.1 Defined Terms. Section 1.1 of the Credit Agreement is amended as follows: 2 (a) The following definition is added in the appropriate alphabetical sequence: "Acquisition Closing Date" shall mean the date on which all of the conditions precedent to the consummation of the transactions contemplated by that certain Asset Purchase Agreement, dated April 6, 1999, between Northwestern Steel and Wire Company ("Northwestern"), as seller, and Borrower, as buyer, are satisfied and Borrower purchases substantially all of the Property of Northwestern used in or relating to Northwestern's welded wire mesh manufacturing business located in Hickman, Kentucky, all as more particularly set forth in such Asset Purchase Agreement." (b) The definition of "Revolving Line of Credit Commitment" is amended in its entirety to read as follows: "Revolving Line of Credit Commitment" shall mean, on and after the Acquisition Closing Date, $60,000,000." ARTICLE II REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to the Bank that: 2.1 Acknowledgment of Obligations. As of the close of business on March 31, 1999, the aggregate principal amount of Revolving Loans owing by the Borrower was in the sum of $38,869,000, the aggregate amount of Letter of Credit Obligations owing by the Borrower was in the sum of $2,565,679.95, and the aggregate amount of Bankers' Acceptance Obligations owing by the Borrower was in the sum of $-0-, and that all such Obligations are due and owing by the Borrower to the Bank without any defense, deduction, offset or counterclaim of any nature. 2.2 Compliance With the Credit Agreement. As of the execution of this Amendment, the Borrower is in compliance in all material respects with all of the terms and provisions set forth in the Loan Documents to be observed or performed by the Borrower, except where the failure of the Borrower to comply has been waived in writing by the Bank. 2.3 Representations in Credit Agreement. The representations and warranties of the Borrower set forth in the Credit Agreement are true and correct in all material respects. 2.4 No Event of Default. No Default or Event of Default exists. 2 3 ARTICLE III CONSENT 3.1 Consent to Acquisition. In accordance with the terms and provisions of the Loan Agreement; Bank hereby consents to the purchase ("Acquisition") by Borrower of substantially all of the Property of Northwestern used in or relating to Northwestern's welded wire mesh manufacturing business located in Hickman, Kentucky, pursuant to the terms and conditions of that certain Asset Purchase Agreement, dated April 6, 1999 ("Purchase Agreement"), it being understood and agreed that such consent is in all respects subject to, and conditioned upon, the satisfaction of each of the following terms and conditions: (a) The Acquisition shall occur no later than May 1, 1999; (b) Immediately before and after giving effect to such Acquisition, no Default or Event of Default (excluding any Default or Event of Default occurring solely out of the transactions contemplated by the Acquisition) shall have occurred and be continuing; (c) Bank shall have received a copy of the final draft of the Purchase Agreement, and all exhibits and schedules thereto, which shall be in form and substance satisfactory to Bank and its counsel, and within five (5) Business Days following the consummation of the Acquisition, Bank shall have received the Purchase Agreement, duly executed by Borrower and Northwestern, and all exhibits and schedules thereto; (d) Bank shall have received copies of the corporate resolutions adopted by the boards of directors and shareholders of Northwestern and Borrower, in each case if resolutions of shareholders are required by applicable law, as to their respective corporate authority to enter into the Purchase Agreement and to consummate the transactions contemplated thereby, all in form and substance satisfactory to Bank and its counsel; (e) Bank shall have received copies of all bills of sales, deeds, assignments and other transfer and assumption documents as Bank and its counsel may request, relating to the Acquisition and the ownership of the assets and Property to be purchased by Borrower from Northwestern; (f) Bank shall have received such other documents, instruments and agreements as it or its counsel may reasonable request in connection with the foregoing matters. 3 4 ARTICLE IV MODIFICATION OF LOAN DOCUMENTS 4.1 Loan Documents. Any individual or collective reference to any of the Loan Documents shall hereafter mean such Loan Document as amended by this Amendment, and as further amended, restated, supplemented or modified from time to time, including, without limitation, all references to the Credit Agreement, which shall mean the Credit Agreement as amended hereby and as further amended from time to time. ARTICLE V GENERAL 5.1 Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Loan Documents shall continue in full force and effect in accordance with the provisions thereof. As used in the Credit Agreement and the other Loan Documents, "hereinafter", "hereto", "hereof", or words of similar import, shall mean the Credit Agreement or the other Loan Documents, as the case may be, as amended by this Amendment. 5.2 Applicable Law. This Amendment shall be governed by and construed in accordance with the internal laws and judicial decisions of the State of North Carolina. 5.3 Headings. The headings of this Amendment are for the purpose of reference only and shall not effect the construction of this Amendment. 5.4 Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which, taken together, shall constitute one and the same instrument. 5.5 Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER AND THE BANK EACH WAIVE THE RIGHT TO A JURY TRIAL IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AMENDMENT, THE CREDIT AGREEMENT OR THE OTHER LOAN DOCUMENTS. 4 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered under seal by their duly authorized officers to be effective as of the date first above written. ATTEST: INSTEEL INDUSTRIES, INC. [SEAL] By: /s/ ------------------------------------ Title: Chief Financial Officer and Treasurer ----------------------------- FIRST UNION NATIONAL BANK By: /s/ ------------------------------------ Title: Vice President ----------------------------- 5 EX-10.50 3 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.50 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement dated as of the 15th day of January, 1999 by and among H.A. Schlatter AG, a Swiss corporation, with its principal place of business at Brandstrasse 24, CH-8952 Schlieren, Switzerland ("HAS"), Quilni B.V., a Dutch corporation and a wholly owned subsidiary of HAS, with its principal place of business at Strawinskylaan 3105, Postbos 1469, NL - 1000 BL Amsterdam, The Netherlands ("Quilni"), Structural Reinforcement Products, Inc. a Delaware corporation, with its principal place of business at Forest Road, Hazleton, PA 18201 ("SRP") (HAS, Quilni and SRP, collectively "Sellers"), and Insteel Industries, Inc., a North Carolina corporation, with its headquarters at 1373 Boggs Drive, Mount Airy, NC 27030 ("Insteel" or "Buyer"). WITNESSETH: WHEREAS: Insteel and SRP both participate in the structural and building mesh market in the United States; WHEREAS: Insteel and SRP wish to develop the structural mesh market; and WHEREAS: Insteel wishes to purchase an equity interest in SRP to facilitate the expansion of SRP's business and to participate in the benefits of such expansion; 2 NOW THEREFORE, based on the premises and mutual covenants below, the parties agree as follows: 1. Insteel's Purchase of Equity Interest in SRP. 1.1 Purchase. Subject to the terms and conditions of this Agreement, Insteel agrees to acquire a 25% interest in SRP from Quilni, the owner of all of the authorized, issued and outstanding common stock of SRP for three million two hundred fifty thousand US dollars ($3,250,000.00). At closing, Quilni shall transfer to Insteel seven hundred fifty (750) shares of the common stock of SRP, par value US $15.00, and deliver a certificate representing said ownership interest in SRP to Insteel (the "Shares"). Contemporaneous with the closing, Insteel shall wire transfer the aforesaid consideration to the account of Quilni or to an account designated by Quilni. 1.2 Adjustments to Price. The price of Insteel's equity investment in SRP shall be increased if SRP attains operating profit levels set forth in this paragraph. If in fiscal year 1999, SRP attains an operating profit of two million eight hundred thousand U.S. dollars ($2,800,000.00), then Insteel prior to March 1, 2000, shall wire transfer to the account of Quilni set forth in paragraph 1.1 an additional five hundred thousand U.S. dollars ($500,000.00). If in fiscal year 2000 SRP attains an operating profit of four million two hundred fifty thousand U.S. dollars ($4,250,000.00), then Insteel prior to 2 3 March 1, 2001, shall wire transfer to the account of Quilni set forth in paragraph 1.1 an additional five hundred thousand U.S. dollars ($500,000.00). SRP's fiscal year ends on December 31. Insteel's failure to make the required payments in the event the above specified profit levels are attained shall be a material breach of this Agreement. If the stated operating profit thresholds are not achieved in 1999 and 2000, no additional consideration will be required of Insteel for the purchase of its equity interest in SRP. For the purpose of this Section, "operating profit" means the operating profit of SRP as set forth in the financial statements of SRP for the applicable year, which statements must be audited by SRP's independent public accounting firm and accompanied by a report of such firm certifying that the financial statements are in conformity with GAAP and containing no material qualification. Notwithstanding the due dates for Insteel's additional investments set forth above, Insteel shall not be required to make the additional payments earlier than 10 business days after receipt of such financial statements. 1.3 Closing. Closing of this transaction (the "Closing") shall take place via Federal Express on or before January 15, 1999 (the "Closing Date"). 3 4 2. Post-Closing Undertakings. 2.1 Put/Call Rights. As used herein: (1) "Exercise Period" shall mean that period of time commencing two years from the Closing Date and continuing until the earlier of: (A) the date Insteel shall have acquired by purchase ownership of more than twenty-five percent (25%) of the outstanding shares of the voting stock of SRP; or (B) four years from the Closing Date; (2) "Subordinated Note" shall mean that certain Subordinated Promissory Note, dated as of January 15, 1999, from SRP payable to Insteel in the original, aggregate principal amount of One Million Five Hundred Thousand and 00/100 U.S. Dollars ($1,500,000.00); and (3) "Pledged CD" shall mean a Certificate of Deposit in the amount of One Million Eight Hundred Seventy-Five Thousand and 00/100 U.S. Dollars ($1,875,000.00) pledged by Insteel in favor of PNC Bank pursuant to Insteel's obligation under Section 3.1 of this Agreement. (a) Insteel's Put. Quilni agrees to purchase the Shares from Insteel and HAS agrees to acquire the Subordinated Note by assignment from Insteel and to provide a substitute CD for the Pledged CD from Insteel, at Insteel's option, exercised by written notice to Quilni and HAS at any time during the Exercise Period. Insteel shall have the right to put the Shares to Quilni and HAS for a price equal to Insteel's aggregate cost for the Shares, as determined in accordance with Paragraph 1 hereof (the "Shares Price"). 4 5 (b) Exercise of Insteel's Put. Insteel shall evidence the exercise of its right to put the Shares to Quilni pursuant to Paragraph 2.1(a) hereinabove by sending a written notice to HAS, Quilni and SRP indicating that Insteel has elected to put the Shares to Quilni. Such notice shall be made by certified mail, postage prepaid, return receipt requested, or delivered against receipt by hand. Upon receipt of said notice, Insteel, HAS, Quilni and SRP shall have 120 days from the date of said notice to take and complete each of the following actions: (i) Insteel shall deliver the Shares to Quilni, free and clear of all liens, pledges, security interests, options and other restrictions and endorsed in blank. Upon Insteel's delivery of the Shares to Quilni, Quilni or HAS shall remit to Insteel the Shares Price by wire transfer to an account designated by Insteel; (ii) Insteel shall assign the Subordinated Note, together with any and all other borrowed money indebtedness of SRP from Insteel, and documents evidencing the same (collectively, the "Debts"), to HAS pursuant to the terms of the Debts, and Insteel and HAS shall execute an Assignment and Acceptance Agreement substantially in the form attached hereto as Exhibit B (the "Assignment"), and incorporated herein by this reference. Upon delivery of the assigned Debts and the Assignment to HAS, HAS shall remit to Insteel an amount equal to the 5 6 principal balance of the Debts, together with all interest accrued thereon to date, by wire transfer to an account designated by Insteel; and (iii) HAS shall substitute, or cause to be substituted, a certificate of deposit in the amount of the Pledged CD, or such other sum representing twenty-five percent (25%) of the collateral required from time to time to be pledged to PNC Bank by SRP and HAS pursuant to that certain Revolving Credit and Security Agreement dated August 31, 1998 among SRP, HAS and PNC Bank and that certain Loan and Security Agreement between PNC Bank and SRP dated November 3, 1995 (the "Collateral"), which shall be pledged by HAS in favor of PNC Bank in place of the Collateral pledged by Insteel in favor of PNC Bank pursuant to Paragraph 3.1 below, at which time Insteel shall immediately withdraw the Collateral pledged by Insteel pursuant to this Agreement. (c) Quilni's Call. During the Exercise Period, Quilni shall have the right to call the Shares from Insteel in exchange for the Shares Price. 6 7 (d) Exercise of Quilni's Call. Quilni shall evidence the exercise of its right to call the Shares from Insteel pursuant to Paragraph 2.1(c) hereinabove by sending a written notice to HAS, Insteel and SRP indicating that Quilni has elected to call the Shares from Insteel. Such notice shall be made by certified mail, postage prepaid, return receipt requested, or delivered against receipt by hand. Upon receipt of said notice, Insteel, HAS, Quilni and SRP shall have 120 days from the date of said notice to take and complete each of the following actions: (i) Insteel shall deliver the Shares to Quilni, free and clear of all liens, pledges, security interests, options and other restrictions and endorsed in blank. Upon Insteel's delivery of the Shares to Quilni, Quilni or HAS shall remit to Insteel the Shares Price by wire transfer to an account designated by Insteel; (ii) Insteel shall assign the Debts to HAS pursuant to the terms of the Debts, and Insteel and HAS shall execute the Assignment. Upon delivery of the assigned Debts and the Assignment to HAS, HAS shall remit to Insteel an amount equal to the principal balance of the Debts together with all interest accrued thereon to date, by wire transfer to an account designated by Insteel; and 7 8 (iii) HAS shall substitute, or cause to be substituted, the Collateral, which shall be pledged by HAS in favor of PNC Bank in place of the Collateral pledged by Insteel in favor of PNC Bank pursuant to Paragraph 3.1(i) below, at which time Insteel shall immediately withdraw the Collateral pledged by Insteel pursuant to this Agreement. (e) Joint and Several Obligations. All of HAS's and Quilni's obligations hereunder and any liabilities in connection herewith to pay in full the Shares Price to Insteel, to remit to Insteel the principal balance of the Debts together with all interest accrued, and to substitute the Collateral upon the exercise of Insteel's put or Quilni's call and Insteel's delivery of the Shares to Quilni as set forth herein shall be joint and several. (f) Waiver. In the event Quilni decides to exercise its call option, it will notify Insteel in the manner set forth above in Paragraph 2(d), and Insteel shall have the right within 120 days of receipt of such notification to waive its right to put the Shares and thereby terminate Quilni's right to call the Shares. Moreover, Quilni's right to call the Shares shall terminate upon Insteel's subsequent written commitment to establish a new structural mesh facility in accordance with the terms of Paragraph 5.2 below. 2.2 Board Representation. Immediately following the Closing, Quilni and Insteel shall by Unanimous Consent of the Stockholders in lieu of Special Meeting in 8 9 the form attached as Exhibit A, enlarge SRP's Board of Directors to six (6) members, of which HAS through Quilni shall appoint four members and Insteel shall appoint two. Upon Quilni's and HAS's fulfillment of their respective obligations under Paragraph 2.1, Insteel's right to name two representatives to the Board of Directors shall expire Paragraph 2.1, and Insteel shall have no further rights to be represented on SRP's Board. In addition, the Unanimous Consent shall provide that there shall be an Executive Committee of three Directors, one of whom shall be appointed by Insteel and two by HAS through Quilni. For as long as Insteel has the right to representation on SRP's Board of Directors, Insteel shall have the option of naming Mr. H. O. Woltz, Jr. as its designee to be an additional Director. If Insteel so elects, Insteel and Quilni shall execute a Unanimous Consent of Stockholders which shall: (1) enlarge SRP's Board to eight (8) members; and (2) shall name Mr. H. O. Woltz, Jr. and Mr. H. R. Schlatter, or their respective designees, to fill the two new Board seats. 2.3 Restrictions on Stock Transfers; Issuance of Additional Stock and Debt. (a) Until such time as either party shall have exercised its put or call rights in Paragraph 2.1, after which Insteel shall no longer be a stockholder of SRP, neither Insteel nor Quilni shall sell, transfer, assign, encumber, pledge or hypothecate its 9 10 ownership interest in any of the Shares without the prior written consent of the other parties to this Agreement. Any transfer in violation of this provision shall be null and void and of no force or effect, and SRP shall refuse to reflect on its books any transfer of Shares which have been made in violation hereof. (b) SRP shall not issue additional shares of Common Stock without obtaining the prior written consent of Insteel. (c) No party shall take any action, including incurring or guaranteeing indebtedness or extending credit, that would increase Insteel's liability under Paragraph 3.1 without obtaining the prior written consent of Insteel. 3. Financings. 3.1 Insteel's Assumption of SRP's Liabilities. Consistent with Insteel's ownership interest in SRP, Insteel agrees to assume a proportional share of SRP's subordinated debt to HAS and to pledge a proportional share of the Collateral. Initially, and for so long as Insteel owns twenty-five percent (25%) of SRP's shares of common stock, Insteel shall be responsible for twenty-five percent (25%) of such subordinated debt and Collateral. In the event as contemplated in Paragraph 5.1, Insteel increases its equity ownership interest in SRP, Insteel shall increase the level of its undertakings hereunder proportionally. Notwithstanding anything contained herein to the contrary, 10 11 Insteel shall not be required to assume or secure any liability of SRP after the date of exercise of the put or call rights provided for in Paragraph 2.1. 3.2 Initial Undertakings. Initially, Insteel shall take the following actions: (i) With respect to PNC Bank's grant of credit to SRP in connection with the Pennsylvania Industrial Development Authority financing and that certain Revolving Credit and Security Agreement dated August 31, 1998, at Closing, Insteel shall substitute a certificate of deposit in the amount of one million eight hundred seventy-five thousand U.S. dollars, ($1,875,000.00) in place of certificates of deposit in said amount pledged by HAS in favor of PNC Bank, which collateral represents twenty-five percent (25%) of seven million five hundred thousand U.S. dollars ($7,500,000.00) of collateral currently required to be pledged to PNC Bank by HAS, provided, however, that in the event that the level of Collateral required to be pledged by PNC Bank shall be reduced in the future, Insteel's pledge obligation hereunder shall be reduced proportionally; and (ii) With respect to the direct loan of six million U.S. dollars ($6,000,000.00) from HAS to SRP, Insteel and HAS shall enter into the Assignment and Acceptance Agreement in the form attached hereto as Exhibit B, under which HAS shall assign to Insteel a twenty-five percent (25%) interest in said direct loan, that is, one million five hundred thousand U.S. dollars ($1,500,000.00), by making a payment to HAS at 11 12 Closing of one million five hundred thousand U.S. dollars ($1,500,000.00) by wire transfer to an account designated by HAS in exchange for SRP's promissory note in the form of Exhibit C hereto (the "Insteel Loan"). SRP shall remain indebted to HAS in the amount of four million five hundred thousand U.S. dollars ($4,500,000.00). SRP shall issue to HAS at Closing a new note in the form of Exhibit D hereto upon surrender and cancellation of the original note. At Closing, Insteel shall execute a subordination agreement in a form satisfactory to PNC Bank, under which one million five hundred thousand U.S. dollars ($1,500,000.00) of SRP's indebtedness under the Insteel Loan shall be subordinated to SRP's indebtedness to PNC Bank. 3.3 Insteel's Support of SRP. Reference is made to that certain Support Agreement dated as of August 31, 1998, by and among HAS, SRP and PNC Bank, under which HAS has the obligation to maintain SRP's Cash Flow Coverage (as defined in the Loan Agreement). In the event that HAS is required to contribute additional equity or subordinated indebtedness to SRP thereunder, HAS shall by written notice so inform Insteel, and Insteel shall contribute twenty-five percent (25%) of the amounts HAS is required to contribute (or such other proportional amounts as are called for under Paragraph 3.1 hereof). HAS and Insteel agree that any such contribution shall take the form of subordinated indebtedness, and that the parties shall 12 13 consult on the terms and conditions of such indebtedness following HAS's notice to Insteel hereunder. 3.4 Future Financings. It is the expectation of the parties that Insteel's equity investment in SRP will enable SRP to restructure its future bank financing on more favorable terms. SRP and HAS will not extend or modify that certain Revolving Credit and Security Agreement dated August 31, 1998 among SRP, HAS and PNC Bank without the prior written consent of Insteel. With respect to the subordinated indebtedness from SRP to Insteel and HAS, the parties shall endeavor to repay such indebtedness in advance of the current maturity dates. If this is not possible, however, the parties agree to work together with current and future potential bank lenders to reduce such subordinated indebtedness to the fullest extent possible consistent with prudent refinancing of SRP's operations. Notwithstanding Insteel's minority representation on SRP's Board of Directors, Insteel shall participate fully in all refinancing discussions concerning SRP. 4. Marketing and Manufacturing Cooperation. 4.1 Structural Mesh. SRP hereby appoints Insteel as its sales representative for SRP structural mesh products, to enable Insteel to offer customers a wider range of structural mesh products, to serve existing customers better, and to expand SRP's structural mesh business. SRP shall provide engineering and customer 13 14 support to Insteel reasonably requested by Insteel's sales personnel; any orders generated as a result shall be filled by SRP and invoiced directly to customers, without compensation or remuneration to Insteel or to its sales personnel. SRP and Insteel shall continue to establish independently the pricing, terms, delivery conditions and manufacturing schedules of each of the products covered by this section. The parties anticipate that increased sales for structural mesh products will enable SRP to establish a fourth production line at its Hazleton facilities at a cost not to exceed US two million dollars ($2,000,000). 4.2 Building Mesh. To achieve more efficient economies of manufacturing building mesh, to provide better service to existing customers and to develop new markets for building mesh, Insteel agrees to purchase the entire capacity of SRP's MG 330 line. To that end, Insteel and SRP are contemporaneously entering into the Conversion Agreement in the form of Exhibit E. SRP shall cease any further marketing of building mesh products and provide Insteel with all relevant information regarding customers and markets for building mesh, so that Insteel can further develop the market for building mesh. 5. Future Expansion of SRP's Business. 5.1 Insteel's Position in SRP. The parties contemplate that Insteel will increase its equity position in SRP in the future, but the parties acknowledge that 14 15 Insteel is not obligated to increase its equity position in SRP. The terms and conditions regarding the sale of additional equity in SRP to Insteel shall be negotiated between the parties at the time Insteel wishes to increase its equity participation in SRP. HAS, through Quilni, wishes to maintain its majority ownership in SRP until such time as SRP's sales structural mesh grow to approximately ten percent (10%) of rebar sales in the market served by SRP. 5.2 New Structural Mesh Facility. The parties shall work towards the development of a new structural mesh facility in Texas, or elsewhere, after SRP's financial results improve to projected levels. The parties anticipate that Insteel will own the majority interest in such new facility ("SRP #2"). 6. Representations and Warranties of Sellers. Each Seller jointly and severally represents and warrants to Buyer as follows: 6.1 Organization. Each of the Sellers is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite power and authority and all necessary governmental approval to carry on its business as it has been and is now being conducted. Each of the Sellers is duly qualified or licensed as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of its business makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing, 15 16 would not (a) have a material adverse effect on the assets, business, financial condition, operations or prospects of such Seller, (b) materially impair the ability of such Seller to perform its obligations under this Agreement and (c) prevent or delay the consummation of transactions contemplated under this Agreement (each of the foregoing being a "Material Adverse Effect"). 6.2 Capitalization; Options and Other Rights. (a) The total authorized shares of capital stock of the SRP consist of three thousand (3000) shares of its Common Stock, all of which shares are issued and outstanding (the "Common Stock"). All the shares of Common Stock have been duly and validly authorized and issued and are fully paid and nonassessable. None of the shares of Common Stock has been issued in violation of the preemptive rights of any stockholder of SRP. All of the shares of Common Stock were issued in compliance in all material respects with all applicable Federal and state securities laws and regulations. Quilni is the owner, beneficially and of record, of all rights, titles and interests in and to the Common Stock, including the Shares, and has good and marketable title thereto, free and clear of all Liens. (b) There are no existing agreements, subscriptions, options, warrants, calls, commitments, trusts (voting or otherwise), or rights of any kind whatsoever (including antidilution rights) to which SRP or Quilni is a party providing for the issuance, 16 17 disposition or acquisition of securities of SRP. There are no outstanding securities of SRP or any other entity which are convertible into or exchangeable for other securities of Sellers, nor are there any agreements, subscriptions, options, warrants, calls, commitments or rights of any kind (including antidilution rights) granting to any person any interest in or the right to purchase or otherwise acquire or receive from SRP or Quilni any such securities, nor to the knowledge of SRP or Quilni, are there any proxies, agreements or understandings with respect to the voting of any of the shares of Common Stock. 6.3 Authority. (a) Sellers have full power and authority to execute, deliver and perform this Agreement. The execution, delivery and performance of this Agreement by HAS, Quilni and SRP have been duly authorized and approved by their respective Boards of Directors and, no other corporate proceedings on the part of HAS, Quilni and SRP are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Sellers and is the legal, valid and binding obligation of Sellers enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). 17 18 (b) The execution, delivery and performance by HAS, Quilni and SRP of this Agreement does not and will not (i) violate or conflict with any provision of their respective Certificate of Incorporation (or other charter document) or By-laws, (ii) violate any law, rule, regulation, order, writ, injunction, judgment or decree of any court, governmental authority or regulatory agency, or (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any note, bond, indenture, Liens (as defined below), mortgage, lease, permit, guaranty or other agreement, instrument or obligation to which HAS, Quilni or SRP is a party or by which any of SRP's properties may be bound, except for violations, breaches or defaults which, individually or in the aggregate, will not have a Material Adverse Effect. (c) The execution and delivery of this Agreement by Sellers does not, and the performance of this Agreement will not require any consent, approval, authorization or permission of, or filing with or notification to any governmental or regulatory authority, domestic or foreign, except for any such consent, approval, authorization, permission, notice or filing which if not obtained or made would not have a Material Adverse Effect. 6.4 Charter Documents. SRP has previously furnished Insteel a true, complete and correct copy of its Certificate of Incorporation and By-laws and such 18 19 Certificate of Incorporation and By-laws are in full force and effect. SRP is not in violation of any provision of its Certificate of Incorporation or its By-laws. 6.5 Financial Statements. (a) SRP has previously furnished to Insteel true and complete copies of its Balance Sheets, Statements of Operations and Statements of Cash Flows as of and for each of the years in the six year period ending December 31, 1997, together with the notes thereto and the report prepared in connection therewith by the independent certified public accountants of SRP (the "Financial Statements"). (b) The Financial Statements were prepared in accordance with GAAP. The Financial Statements were prepared on the basis of SRP's books and records and present fairly, in all material respects, the financial position of SRP as of the dates thereof and the results of its operations and changes in cash flows and stockholders' equity for the periods then ended in conformity with GAAP. 6.6 Absence of Undisclosed Liabilities. Except as set forth in the notes to the Financial Statements, SRP does not have any liability or obligation of any nature (whether absolute, accrued or contingent or otherwise) which is in excess of amounts shown or reserved therefor in the Financial Statements other than (a) liabilities or obligations not required under GAAP on a basis consistent with that of preceding 19 20 accounting periods to be reported on such Financial Statements and (b) liabilities or obligations incurred after the date of the Balance Sheet dated December 31, 1997 reasonably incurred in the ordinary course of business and consistent with past practice. 6.7 Operations and Obligations. (a) Since December 31, 1997, (i) there has been no event or condition relating to the business, financial condition, operating results, earnings, customers, employee and sales representative relations, business prospects, business condition, financing arrangements or otherwise that has had or reasonably could be expected to have a Material Adverse Effect on SRP (other than as a result of business and economic conditions generally affecting the structural and building mesh industry); and (ii) there has been no impairment, damage, destruction, loss or claim, or condemnation or other taking adversely affecting in any material respect any of SRP's assets, whether or not covered by insurance. 20 21 (b) Since December 31, 1997, SRP has conducted its business only in the ordinary course and in conformity with past practice. Without limiting the generality of the foregoing, since December 31, 1997, SRP has not: (i) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any option, warrant or other right to purchase, any of its capital stock or other equity interest or any security convertible into its capital stock or other equity interest; (ii) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any bonds, notes or other debt securities, or borrowed or agreed to borrow any funds, other than in the ordinary course of business consistent with past practice or entered into any lease the obligations of which, in accordance with generally accepted accounting principles, would be capitalized; (iii) discharged or satisfied any Lien or paid any obligation or liability (absolute or contingent) other than current liabilities reflected on the 1997 Balance Sheet and current liabilities incurred since December 31, 1997 in the ordinary course of business consistent with past practice; 21 22 (iv) declared or made, or agreed to declare or make, any payment of dividends or distributions to its stockholders, or purchased or redeemed, or agreed to purchase or redeem, any of its Common Stock; (v) except in the ordinary course of business consistent with past practice entered into any lease, contract, agreement or commitment or made or permitted any material amendment or termination of any lease, contract, agreement or commitment to which SRP is a party or entered into any transaction with any employee, officer, or director of any of the Sellers; (vi) undertaken or committed to undertake capital expenditures exceeding $100,000 for any single project or related series of projects, except as disclosed in Schedule 6.7(b)(vi); (vii) sold, leased (as lessor), transferred or otherwise disposed or, mortgaged or pledged or imposed or suffered to be imposed any Lien on, any of the assets reflected on the December 31, 1997 Balance Sheet or any assets acquired by SRP after December 31, 1997, except for inventory and personal property sold or otherwise disposed of for fair value in the ordinary course of its business consistent with past practice; 22 23 (viii) canceled any debts owed to or claims held by SRP (including the settlement of any claims or litigation); (ix) accelerated or delayed collection of accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of its business consistent with past practice; (x) delayed or accelerated payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of its business consistent with past practice; (xi) entered into or become committed to enter into any other material transaction except in the ordinary course of business; (xii) maintained the levels of supplies or other materials included in the inventory of SRP in accordance with past practice; (xiii) except for increases in the ordinary course of business consistent with past practice, and as disclosed in Schedule 6.7(b)(xiii), instituted any increase in any compensation payable to any employee or sales representative or consultant of SRP or in any profit-sharing, bonus, incentive, deferred compensation, 23 24 insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to any such person; (xiv) made any change in the accounting principles or made any material change in accounting practices used by SRP, in each case, from those applied in the preparation of the Financial Statements; (xv) incurred intercompany charges or conducted its cash management practices and accounting methods other than in the usual and ordinary course of business in accordance with past practice; (xvi) made any loans or advances to, or guarantees for the benefit of, any person or entity; (xvii) changed or authorized any change in its Certificate of Incorporation or By-Laws; or (xvii) agreed to do any of the foregoing. 24 25 6.8 Properties. (a) Title to Assets; Liens. SRP has good and marketable title to all of the properties and assets (real or personal, tangible or intangible) owned by it (including, without limitation, those properties and assets shown on the December 31, 1997 Balance Sheet included in the Financial Statements), and a valid leasehold or other possessory interest in all other properties and assets used, operated or occupied by it, located on its premises or otherwise shown on such Balance Sheet, except for tangible personal property sold or disposed of in the ordinary course of business and consistent with past practice. All of SRP's properties and assets (whether real or personal, tangible or intangible, owned, leased or otherwise acquired) are free and clear of any liens, claims, charges, security interests, mortgages, pledges or other encumbrances or restrictions of any nature whatsoever (collectively, "Liens"), other than (i) easements of record affecting Owned Real Property (as defined below) that do not affect the full use and enjoyment of such Owned Real Property for the purposes for which it is currently used or detract from its value; (ii) Liens for taxes not yet due and payable; and (iii) Liens described in Schedule 6.8(a). There are no existing breaches or defaults under, and no events or circumstances have occurred which, with or without notice or lapse of time or both, would constitute a breach of or a default under, any instrument, agreement or other document that creates, evidences or constitutes any such Lien or that evidences, secures or governs the terms of any indebtedness or obligation secured by any such Lien (any such instrument, agreement or other document being referred to herein as a 25 26 "Lien Instrument"). The sale of the Shares by Quilni to Insteel will not, with respect to any Lien Instrument, (i) constitute a breach thereof or a default hereunder, (ii) permit (with or without notice, lapse of time or both), cause or result in (A) the acceleration of any indebtedness or other obligation evidenced, secured or governed thereby or (B) the foreclosure or other enforcement of any such Lien, (iii) permit or cause the terms thereof to be renegotiated, or (iv) require the consent of the holder of any such indebtedness or obligation or any third party. (b) Real Property. Schedule 6.8(b) contains a true and correct description of all (i) real property owned by SRP (the "Owned Real Property"), (ii) real property leased by SRP (the "Leased Real Property"), (iii) leases relating to the Leased Real Property (collectively, the "Real Property Leases"), (iv) Liens upon or affecting any of the Owned Real Property, (v) agreements, oral or written, pursuant to which any person or entity (other than SRP) leases, subleases, occupies or has the right to occupy any Owned Real Property or Leased Real Property, and (vi) agreements and other undertakings, oral or written, to sell, lease, sublease, assign, encumber or otherwise dispose of any Owned Real Property, Leased Real Property or Real Property Lease. The Owned Real Property and the Leased Real Property are zoned for the various purposes for which the buildings and other improvements located thereon (the "Improvements") are presently being used, and such uses thereof are in compliance with all applicable zoning and land use laws, ordinances and regulations. All improvements are in good repair, and in good operating condition, ordinary wear and 26 27 tear excepted, and to the knowledge of SRP free from latent and patent defects. No part of any Improvement encroaches on an real property not included in the Owned Real Property or the Leased Real Property. Each of the Real Property Leases is valid, binding and enforceable in accordance with its terms and is in full force and effect, and there are no offsets or defenses by either landlord or tenant thereunder. There are no existing breaches of or defaults under, and no events or circumstances have occurred which, with or without notice or lapse of time or both, would constitute a breach of or a default under, any of the Real Property Leases. (c) Tangible Personal Property. SRP owns or leases all buildings, machinery, equipment and other tangible assets necessary for the conduct of its business (the "Tangible Property"). Each item of Tangible Property is in good operating order, condition and repair, ordinary wear and tear excepted, is suitable for immediate use in the ordinary course of business of SRP, is free from defects (latent and patent), is merchantable and is of a quality and quantity usable in the ordinary course of business of SRP. No item of Tangible Property is in need of repair or replacement, other than as part of routine maintenance in the ordinary course of business. 6.9 Accounts Receivable. All accounts receivable and trade accounts reflected on the December 31, 1997 Balance Sheet included in the Financial Statements (less any such receivables collected since such date) and all accounts receivable and trade accounts presently owing and to be owing to SRP on the Closing 27 28 Date (collectively, the "Receivables"), in each case net of the reserves established and reflected on such Balance Sheet, are, and on the Closing Date will be, legal, valid and binding obligations. All such Receivables were and will be created in the ordinary course of business. There are no set-offs, counterclaims or disputes asserted with respect to any Receivable, and no discount or allowance from any Receivable has been or will be made or agreed to. The reserves established for doubtful or uncollected accounts as shown on such Balance Sheet, as adjusted for the passage of time through the Closing Date in accordance with the past practice of SRP, are consistent in amount to those historically established with respect to the accounts receivable of the business of SRP. 6.10 Absence of Default. Each of the leases, contracts and other agreements to which SRP is a party constitutes a valid and binding obligation of the parties thereto and is in full force and effect and will continue in full force and effect after the Closing, in each case, without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other person or entity. Except as set forth in Schedule 6.10, SRP has fulfilled and performed in all material respects its obligations under each such lease, contract or other agreement to which it is a party to the extent such obligations are required by the terms thereof to have been fulfilled or performed through the date hereof (except for any such lease, contract or other agreement which, by its terms, will expire prior to the Closing, and SRP is not alleged to be in breach or default 28 29 under, nor is there alleged to be any basis for termination of, any such lease, contract or other agreement. To the knowledge of SRP, no other party to any such lease, contract or other agreement has breached or defaulted thereunder. No event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both would constitute such a default or breach by SRP or, to the knowledge of SRP, by any such other party under any lease, contract or other agreement. SRP is not currently renegotiating any such lease, contract or other agreement or paying liquidated damages in lieu of performance thereunder. Complete and correct copies of each such lease, contract or other agreement and any amendments thereto have heretofore been made available to Insteel. 6.11 Financial Projections. Sellers have made available to Insteel certain financial projections with respect to its business which projections were prepared by SRP for internal use only and based upon the assumptions reflected therein. Sellers make no representation or warranty regarding the accuracy of such projections or as to whether such projections will be achieved or otherwise, except that Sellers represent and warrant that such projections were prepared in good faith and are based on assumptions believed by it to be reasonable. 29 30 6.12 Litigation. (a) Except as set forth in Schedule 6.12, as of the date hereof (i) there are no actions, suits, arbitrations, legal or administrative proceedings or investigations pending or, to the knowledge of SRP, threatened against SRP; and (ii) none of SRP's assets, properties or business is subject to any judgment, order, writ, injunction or decree of any court, governmental agency or arbitration tribunal. Except as set forth in Schedule 6.12, SRP is neither a plaintiff in any such proceeding nor contemplating commencing legal action against any other party. (b) SRP is not a party to any suit, action, arbitration or legal, administrative, governmental or other proceeding or investigation pending or, to its knowledge threatened, which reasonably could have a Material Adverse Effect. (c) There is no judgment, order, writ, injunction or decree or any court, governmental agency or arbitration tribunal to which SRP is subject which reasonably could have a Material Adverse Effect. (d) To the knowledge of SRP, other than disclosed in the Schedules hereto, there are no facts or circumstances which can serve as the basis for any claim against SRP or, by virtue of the execution, delivery and performance of this Agreement, against Insteel. 30 31 6.13 Compliance with Law. (a) SRP has complied in all material respects with, and is not in violation of, in any material respect, any laws, ordinance or governmental rule or regulation (collectively, "Laws") to which it or its business is subject; and (b) SRP has obtained and is in material compliance in all material respects with all licenses, permits, certificates or other governmental authorizations or approvals (collectively "Authorizations") necessary for the ownership or use of its assets and properties or the conduct of its business; and (c) SRP has not received notice of violation of, or investigation of a possible violation or knows of no violation of, any Laws to which it or its business is subject or any Authorization necessary for the ownership or use of its assets and properties or the conduct of its business. 6.14 Tax Matters. Consistent with the advice of SRP's auditors, (i) SRP has timely filed all tax returns required to be filed, (ii) all such tax returns are complete and accurate in all material respects and all taxes required to be withheld or shown to be due on such tax returns have been timely withheld or paid; (iii) all taxes (whether or not shown on any tax return) owed or required to be withheld by SRP have been timely 31 32 paid or withheld; (iv) SRP has not waived or been requested to waive any statute of limitations in respect of taxes and is not currently the beneficiary of any extension of time for filing and has not agreed to an extension, a tax assessment or deficiency; (v) there is no action, suit, investigation, audit, dispute, claim or assessment pending, proposed or threatened with respect to taxes of SRP; (vi) any deficiencies asserted or assessments made as a result of any examination of the tax returns referred to in clause (i) have been paid in full; (vii) there are no Liens for taxes upon the assets or SRP except Liens relating to current taxes not yet due; (viii) all taxes which SRP are required by law to withhold or to collect for payment have been duly withheld and collected and have been paid or accrued, reserved against and entered on the books of SRP in accordance with GAAP. 6.15 Employees. (a) SRP has complied in all material respects with all applicable laws, rules and regulations respecting employment and employment practices, terms and conditions of employment, wages and hours, and is not liable for any arrears of wages or any taxes or penalties for failure to comply with any such laws, rules or regulations; (b) SRP believes that its relation with its employees are satisfactory; 32 33 (c) there are no charges, complaints, or controversies pending or, to the knowledge of any of Sellers, threatened involving SRP and any of its employees, which controversies have or could not have a Material Adverse Effect; (d) SRP is not a party to any collective bargaining agreement or other labor union contract or "shop agreement" applicable to persons employed by SRP; (e) to the knowledge of any of the Sellers, there are no activities or proceedings of any labor union to organize any employees of SRP; (f) there are no unfair labor practice complaints pending against SRP before the National Labor Relations Board; (g) there is no strike, slowdown, work stoppage or lockout existing, or, to the knowledge of any of the Sellers, threatened, by or with respect to any employees of SRP; (h) no charges are pending before or, to the knowledge of any of the Sellers, threatened to be brought before or by, the Equal Employment Opportunity Commission or any state or local agency responsible for the prevention of unlawful employment practices with respect to SRP; 33 34 (i) there are no claims pending against SRP before any workers' compensation board; (j) SRP has not received notice that any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws intends to conduct an investigation of or relating to SRP and, to the knowledge of any of the Sellers, no such investigation is planned or in progress; (k) No key employee or senior manager of SRP has indicated a desire or plan to resign from SRP, whether as a result of this transaction or otherwise; and (l) There have been no "mass layoffs" of SRP employees or any "plant closings" by SRP, as such terms are defined in the Work Adjustment and Retaining Notification Act ("WARN"), within the past 90 days, nor has there been any event during the past six years which requires the giving of notice under WARN. 6.16 Environmental Laws. SRP is not in violation of, and has not violated, any applicable federal, state, county or local statutes, laws, regulations, rules, ordinances, codes, licenses or permits of any governmental authorities relating to environmental matters, including by way of illustration and not by way of limitation the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation Recovery Act, the Clean Air Act, the Clean Water Act, the 34 35 Occupational Safety and Health Act, the Toxic Substances Control Act, any "Superfund" or "Superlien" law, or any other federal, state or local statute, law, ordinance, code, rule, regulation, order, decree or guideline (whether published or unpublished) regulating, relating to or imposing liability or standards of conduct concerning Hazardous Materials, in each case as amended from time to time. For purposes of this Agreement, "Hazardous Materials" includes but is not necessarily limited to asbestos, asbestos containing materials ("ACM"), polychlorinated biphenyls, lead-based paints, any petroleum, petroleum by-product (including, but not limited to, crude oil, diesel oil, fuel oil, gasoline, lubrication oil, oil refuse, used motor oil, oil mixed with other waste, oil sludge, and all other liquid hydrocarbons, regardless of specific gravity), natural or synthetic gas, or other hazardous or toxic substances, materials, wastes, pollutants or contaminants defined under or regulated by the Environmental Laws. 6.17 Subsidiaries. SRP does not own or hold, nor has it ever held or owned, any shares of stock or any other security or interest in any other entity, or any rights to acquire any such security or interest. 6.18 Books and Records. The minute books of SRP are true, correct, complete and current in all material respects and contain accurate and complete records of all material actions taken by its shareholders, its board of directors and each committee of its board of directors, and all signatures contained in such minute books 35 36 are the true signatures of the persons whose signatures they purport to be. The stock transfer books of SRP are true, correct, complete and current in all material respects. The books and records of SRP are true, accurate and complete in all material respects and, where appropriate, have been maintained in accordance with GAAP applied on a consistent basis. 6.19 Inventories. All items included in the inventories of SRP (a) are in good condition, not obsolete and noneffective, (b) are usable or saleable in the ordinary course of business and at the current operating profit margins of SRP, (c) are located on the premises of SRP, (d) have been acquired for SRP only in bona fide transactions entered into in the ordinary course of business; and (e) finished goods inventories meet applicable industry standards, including ASTM and ACI. 6.20 Intellectual Property. Schedule 6.20 sets forth a list of all (a) trademarks, service marks, trade names, logos and other designations owned or used by SRP, and all United States, foreign and state registrations relating thereto, (b) copyrighted works owned by SRP and registrations issued by the United States Copyright Office or the office of any foreign jurisdiction for any of the copyrights, and (c) inventions owned or used by SRP which are the subject of United States or foreign letters patent or applications therefor, together with the applicable patent number, application number, application date and issue date (collectively, "Intellectual Property"). SRP owns all right, title and interest in and to each item included in the Intellectual Property, free and 36 37 clear of any Liens or licenses. The Intellectual Property consists of all of the intellectual property rights necessary to conduct the business of SRP. All registrations relating to the Intellectual Property are validly issued and remain in full force and effect, except as disclosed in Schedule 6.20. Each trademark has been in continuous use on all goods described in the applicable registrations. There are no claims or suits pending or, to the knowledge of Sellers, threatened against SRP challenging SRP's ownership of or unencumbered right to use any of the Intellectual Property, nor does there exist any basis therefor. There are no claims or suits pending or, to the knowledge of Sellers, threatened against SRP alleging that any of the Intellectual Property infringes any rights of any third parties, nor does there exist any basis therefor. 6.21 Insurance. All insurance policies maintained by SRP with respect to the business of SRP are valid, binding and enforceable in accordance with their terms and are in full force and effect, and all premiums due thereon have been paid and will be paid through the Closing Date. 6.22 Employee Benefit Plans. Except as set forth in Schedule 6.22, there are no Plans, as defined below, contributed to, maintained or sponsored by SRP, to which SRP is obligated to contribute or with respect to which SRP has any liability or potential liability, whether direct or indirect, including all Plans contributed to, maintained or sponsored by each member of the controlled group of companies, within the meaning of Sections 414(b), 414(c), and 414(m) of the Internal Revenue Code of 1986, as 37 38 amended (the "Code"), of which SRP is a member to the extent SRP has any potential liability with respect to such Plans. For purposes of this Agreement, the term "Plans" shall mean: employee benefit plans as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not funded and whether or not terminated. 6.23 Related Party Transactions. There are no contracts, leases, or agreements with or any commitment to (a) any officer or director of any of Sellers, (b) any person related by blood or marriage to any such officer or director, or (c) any corporation, partnership, trust or other entity in which SRP or any of the foregoing persons has an equity or participating interest. 6.24 Brokers. No finder, broker, agent or other intermediary has acted for or on behalf of any of Sellers in connection with the negotiation or consummation of this Agreement, and there are no claims for any brokerage commission, finder's fee or similar payment due from Sellers. 6.25 Year 2000. To the knowledge of Sellers, all Systems (as defined below) and all components thereof will function in accordance with applicable specifications, documentation and warranties prior to, during and after the calendar year 2000. Prior to, during and after the calendar year 2000, each of the Systems will accept date-related records and information for the years 2000 and following and perform 38 39 computations respecting or based on such date-related information in a correct and appropriate manner. No change in any calendar year shall adversely affect the performance of any Systems nor cause any Systems or any of their components to operate in a manner not in accordance with applicable specifications, documentations or warranties. For the purpose of this paragraph, "Systems" includes all proprietary and third-party software and automated machines or systems of any kind, including but not limited to systems relating to the operation of buildings and facilities (such as elevators, escalators, manufacturing control systems and automated HVAC systems). 6.26 Representations and Warranties of Quilni and HAS. Quilni and HAS each jointly and severally represents and warrants to Insteel as follows: (a) Both Quilni and HAS have previously furnished to Insteel true and complete copies of their respective 1996 and 1997 financial statements, together with the notes thereto and the reports prepared in connection therewith by the independent certified public accountants for Quilni and HAS, which in each case have been accurately translated into English (collectively, the "Parent Financial Statements"). The Parent Financial Statements were prepared on the basis of the books and records of Quilni and HAS, respectively, and present fairly, in all material respects, the financial position of Quilni and HAS, respectively, as of the dates thereof and the results of operations and changes in cash flows and stockholders' equity for the periods then 39 40 ended in conformity with generally accepted accounting principles in effect in their respective jurisdictions. (b) Except as set forth in the notes to the Parent Financial Statements, neither Quilni nor HAS has any liability or obligation of any nature (whether absolute, accrued or contingent or otherwise) which is in excess of amounts shown or reserved therefor in the Parent Financial Statements other than (i) liabilities or obligations not required under applicable accounting principles on a basis consistent with that of preceding accounting periods to be reported on such Parent Financial Statements and (ii) liabilities or obligations incurred after the date of the December 31, 1997 Balance Sheets of Quilni and HAS, reasonably incurred in the ordinary course of business and consistent with past practice. 6.27 Disclosure. No representation, warranty or statement made by any of Sellers in this Agreement or any document furnished or to be furnished to Insteel pursuant to this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements contained in this Agreement or such other document not misleading. The fact that Sellers have delivered copies of certain documents to Insteel shall not alone constitute disclosure of facts required to be disclosed on any Schedule to this Agreement, unless such document is expressly referenced in such Schedule. Receipt by Insteel of such 40 41 documents and notice of their contents (other than by reference on a Schedule) shall in no way limit Sellers' other obligations or Insteel's other rights under this Agreement. 7. Representations and Warranties of Insteel. Insteel represents and warrants to Sellers as follows: 7.1 Organization. Insteel is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. 7.2 Authority. (a) Insteel has full corporate power and authority to execute, deliver and perform this Agreement. The execution, delivery and performance of this Agreement by it has been duly authorized and approved by its Executive Committee acting on behalf of and with the authority of its Board of Directors, and no other corporate proceedings on the part of Insteel is necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by Insteel and is the legal, valid and binding obligation of Insteel enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). 41 42 (b) The execution, delivery, performance by Insteel do not, and will not, (i) violate or conflict with any provisions of its Articles of Incorporation or By-laws, (ii) violate any law, rule, regulation, order, writ, injunction, judgment or decree of any court, governmental authority, or regulatory agency, or (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any note, bond, indenture, lien, mortgage, lease, permit, guaranty or other agreement, instrument or obligation, oral or written, to which Insteel is a party or by which any of the properties of Insteel may be bound, except for: (1) violations, breaches or defaults which, individually or in the aggregate, will not have a Material Adverse Effect on Insteel and its respective subsidiaries taken as a whole; and (2) the consent of third parties, which consent has been obtained. (c) The execution and delivery of this Agreement by Insteel does not, and the performance by Insteel of this Agreement will not, require any consent, approval, authorization or permission, or filing with or notification to, any governmental or regulatory authority, except for any such consent, approval, authorization, permission, notice or filing which if not obtained or made would not have a Material Adverse Effect. 42 43 7.3 Litigation. (a) Insteel is not a party to any suit, action, arbitration or legal, administrative, governmental or other proceeding or investigation pending or, to its knowledge threatened, which reasonably could adversely affect or restrict its ability to consummate the transactions contemplated by this Agreement or to perform its-obligations hereunder. (b) There is no judgment, order, writ, injunction or decree of any court, governmental agency or arbitration tribunal to which Insteel is subject which might adversely affect or restrict its ability to consummate the transactions contemplated by this Agreement or to perform its obligations hereunder. 7.4 Investment Intent. Insteel is acquiring the Shares for its own account and not with a view to their distribution within the meaning of applicable federal and state securities laws. 7.5 Brokers. No finder, broker, agent or other intermediary has acted for or on behalf of Insteel in connection with the negotiation or consummation of this Agreement, and there are no claims for any brokerage commission, finder's fee or similar payment due from Insteel. 43 44 8. Indemnification. (a) Indemnification by Sellers. Each of Quilni and HAS (the "Seller Indemnitors") shall jointly and severally indemnify, defend and hold harmless Buyer and its officers, directors and affiliates (the "Buyer Indemnitees") from, against and with respect to any and all loss, damage, claim, obligation, liability, cost and expense (including without limitation reasonable attorneys' fees and costs and expenses incurred in investigating, preparing, defending against or prosecuting any litigation, claim, proceeding or demand), of any kind or character (a "Loss') arising out of or in connection with any of the following: (i) any breach of any of the representations or warranties of Sellers contained in or made pursuant to this Agreement; or (ii) any failure by Sellers to perform or observe, or to have performed or observed, in full, any covenant, agreement or condition to be performed or observed by each pursuant to this Agreement, including but not limited to Sellers' obligations under Paragraph 2.1. (b) Indemnification by Buyer. Buyer shall indemnify, defend and hold harmless Sellers and their officers, directors and affiliates (the "Seller Indemnitees") 44 45 from, against and with respect to any Loss arising out of or in connection with any of the following: (i) any breach of any of the representations and warranties of Buyer contained in or made pursuant to this Agreement; or (ii) any failure by Buyer to perform or observe, or to have performed or observed, in full, any covenant, agreement or condition to be performed or observed by it pursuant to this Agreement, including but not limited to Buyer's obligations under Paragraph 2.1. (c) Notice of Claim. Any party seeking to be indemnified hereunder (the "Indemnified Party") shall, within 15 days following discovery of the matters giving rise to a Loss, promptly notify the party from whom indemnity is sought (the "Indemnity Obligor") in writing of any claim for recovery, specifying in reasonable detail the nature of the Loss and the amount of the liability estimated to arise therefrom. The Indemnified Party shall provide to the Indemnity Obligor as promptly as practicable thereafter all information and documentation reasonably requested by the Indemnity Obligor to verify the claim asserted. (d) Defense. If the facts pertaining to a Loss arise out of the claim of any third party, or if there is any claim against a third party available by virtue of the 45 46 circumstances of the Loss, the Indemnity Obligor may, by giving written notice to the Indemnified Party within 30 days following its receipt of the notice of such claim, elect to assume the defense or the prosecution of such claim, including the employment of counsel or accountants at its cost and expense; provided, however, that during the interim the Indemnified Party shall use its best efforts to take all action (not including settlement) reasonably necessary to protect against further damage or loss with respect to the Loss. The Indemnified Party shall have the right to employ counsel separate from counsel employed by the Indemnity Obligor in any such action and to participate in such action, but the fees and expenses of such counsel shall be at the Indemnified Party's own expense, unless in the opinion of separate counsel for the Indemnified Party a conflict of interest would prevent a single counsel from representing both the Indemnity Obligor and the Indemnified Party, in which case the Indemnity Obligor shall be responsible for the fees and expenses of such separate counsel for the Indemnified Party. All the parties to this Agreement shall cooperate in the defense or prosecution of such claim and shall furnish such records, information and testimony and shall attend such conferences, discovery proceedings and trials as may be reasonably requested in connection therewith. The Indemnity Obligor shall not be liable for any settlement of any such claim effected without its prior written consent, which shall not be unreasonably withheld. 46 47 9. Closing. 9.1 Pre-Conditions to Closing. The obligations of Insteel to consummate the transactions contemplated by this Agreement will be subject to the satisfaction of each of the following conditions as of the Closing: (1) there shall have been no material adverse change in the business or financial condition of SRP since the date hereof; (2) SRP shall not be in default of its obligations to PNC Bank under that certain Revolving Credit and Security Agreement dated August 31, 1998; and (3) SRP's search for a new Chief Executive Officer shall be completed, or if not completed, shall be progressing with diligence. 9.2 Obligations at Closing. At the Closing, the following deliveries shall occur: (a) SRP and Buyer each shall deliver to the other an executed Conversion Agreement in the form attached hereto as Exhibit E. (b) Quilni shall deliver to Buyer the stock certificate(s) representing the Shares, duly endorsed in blank or accompanied by stock powers duly executed in blank, sufficient to transfer to Buyer ownership of the Shares on the books of SRP. 47 48 (c) Each of Sellers shall deliver to Buyer (i) a copy of all corporate resolutions authorizing the execution, delivery and performance of this Agreement by it and the consummation of the transactions contemplated in this Agreement, accompanied by the certification of a duly authorized officer, director or other representative of each Seller to the effect that such resolutions are in full force and effect and have not been amended, modified or rescinded; (ii) a good standing certificate with respect to SRP from the Secretary of State of Delaware; and (iii) the legal opinions of Moore & Bruce, LLP, Stibbe Simont Monahan Duhot and Schellenberg & Haissly in the forms attached to this Agreement as Exhibit F. (d) Buyer shall deliver or cause to be delivered to SRP (i) a copy of all corporate resolutions authorizing the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated in this Agreement, accompanied by the certification of the secretary of Buyer to the effect that such resolutions are in full force and effect and have not been amended, modified or rescinded; (ii) the legal opinion of Womble Carlyle Sandridge & Rice, PLLC, in the form attached hereto as Exhibit G; and (iii) the purchase price payable as provided in Paragraph 1.1. (e) Buyer, HAS and SRP shall execute the Assignment and Acceptance Agreement in the form of Exhibit B hereto. 48 49 (f) SRP shall deliver a promissory note to Insteel in the form of Exhibit C hereto, and Insteel shall wire transfer U.S. one million five hundred thousand dollars ($1,500,00.00) to HAS. (g) Quilni shall deliver to Buyer a "Certificate Regarding Stock that is not a U.S. Real Property Interest" in the form attached hereto as Exhibit H. 10. Miscellaneous. 10.1 Amendments. This Agreement may be amended or modified only by a written instrument executed by all the party hereto which states specifically that it is intended to amend this Agreement. 10.2 Expenses. Except as otherwise expressly herein provided, each party to this Agreement shall pay its own expenses, including, without limitation, the fees and expenses of its agents, representatives, counsel and accountants, incidental to the preparation or carrying out of this Agreement. 10.3 Assignment. Neither party may assign any right under this Agreement, and any purported assignment will be null and void and a material breach hereof. 49 50 10.4 Entire Agreement. Except as may be expressly provided otherwise herein, this Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No prior or contemporaneous representations, inducements, promises or agreements, oral or otherwise, between the parties will be of any force or effect. This agreement supersedes in its entirety the Agreement in Principle between HAS and Insteel dated March 17, 1998. 10.5 Effect of Partial Invalidity. If any one or more of the provisions of this Agreement should be ruled wholly or partly invalid or unenforceable by a court or other government body of competent jurisdiction, then the validity and enforceability of all provisions of this Agreement not ruled to be invalid or unenforceable shall be unaffected. 10.6 Applicable Law. This Agreement shall be interpreted and enforced in accordance with the law of the Commonwealth of Pennsylvania applicable to agreements negotiated, executed and performed in Pennsylvania. 10.7 No Waiver. The failure of either party at any time to require performance by the other party of any provision of this Agreement shall in no way affect the right of such party to require performance of that provision. A waiver by either party of any breach of any provision of this Agreement shall not be construed as a waiver of any 50 51 continuing or succeeding breach of such provision, a waiver of the provision itself or waiver of any right under this Agreement. 10.8 Survival of Representations. All representations and warranties of the parties contained in this Agreement or otherwise made in writing in connection with the transactions contemplated by this Agreement shall survive the execution and delivery of this Agreement. 10.9 Publicity. Each of Sellers and Insteel agrees it will not make any press release or other announcement with respect to the transactions contemplated by this Agreement without the prior approval of the other party, except as required by applicable law. 10.10 Resolution of Disputes. Any controversy or claim arising out of or relating to this Agreement shall be determined by arbitration in Charlotte, North Carolina in accordance with The International Arbitration Rules of the American Arbitration Association; provided, however, that if either Quilni or HAS, or both, are parties to the dispute, the dispute shall be settled by arbitration in Zurich, Switzerland under the commercial arbitration rules and procedures of the International Chamber of Commerce, Paris, France. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 51 52 10.11 Severability. In the event that any provision in this Agreement shall be determined to be invalid, illegal or unenforceable in any respect, the remaining provisions of this Agreement shall not be in any way impaired, and the illegal, invalid or unenforceable provision shall be fully severed from this Agreement and there shall be automatically added a replacement provision as similar in terms and intent to such severed provision as may be legal, valid and enforceable. 10.12 Section Headings. The section headings contained in this Agreement are for reference purposes only and shall not in any way control the meaning or interpretation of this Agreement. 10.13 Counterparts. This Agreement may be signed in separate counterparts, each of which so executed and delivered shall constitute an original. All such counterparts shall together constitute one and the same instrument. 10.14 Notices. All correspondence and documentation shall be in the English language. Notices shall be sent to: Insteel Industries, Inc. 1373 Boggs Drive Mount Airy, NC 27030 Attention: H.O. Woltz III President and Chief Executive Officer Facsimile: (336) 786-2144 52 53 with a copy to: Richard N. Drake, Esq. Womble, Carlyle Sandridge & Rice, PLLC 200 West Second Street Winston-Salem, NC 27102 Facsimile: (336) 733-8385 Schlatter AG Brandstrasse 24 CH-8952 Schlieren Switzerland Attn.: Franz Buchmann Chief Marketing Officer Facsimile: 011-41-732-71 88 Quilni B.V. Strawinskylaan 3105Postbos 1469NI - 1000 BI Amsterdam The Netherlands Attention: L. Fricot H.J. Wirix Managing Directors Facsimile: 011-31-20-406-45-55 Structural Reinforcement Products, Inc. Forest Road Hazleton, PA 18201 Attention: CEO Facsimile: (717) 450-2095 with a copy to: Charles M. Bruce 1072 Thomas Jefferson Street, N.W. Washington, DC 20007 Facsimile: (202) 965-7745 IN WITNESS WHEREOF, the parties have executed this Agreement on the date indicated above. INSTEEL INDUSTRIES, INC. By: /s/ H. O. WOLTZ III --------------------------------- H. O. Woltz III President and Chief Executive Officer 53 54 H. A. Schlatter AG By: /s/ HANS R. SCHLATTER ---------------------- Hans R. Schlatter Director Quilni B.V. By: /s/ HANS R. SCHLATTER ---------------------- Hans R. Schlatter Per Power of Attorney STRUCTURAL REINFORCEMENT PRODUCTS, INC. By: /s/ CHARLES M. BRUCE ---------------------- Charles M. Bruce Chairman 54 EX-10.51 4 ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.51 ASSET PURCHASE AGREEMENT BY AND AMONG INSTEEL INDUSTRIES, INC., NORTHWESTERN STEEL AND WIRE COMPANY, AND NORTHWESTERN STEEL AND WIRE COMPANY - KENTUCKY, DATED AS OF APRIL 6, 1999 2 TABLE OF CONTENTS ARTICLE I............................................................1 SALE AND PURCHASE OF THE PURCHASED ASSETS.......................1 1.1 Transfer of Assets....................................1 1.2 Purchased Assets......................................1 (a) Real Estate......................................1 (b) Tangible Personal Property.......................1 (c) Contracts........................................2 (d) Permits..........................................2 (e) Records..........................................2 (f) Claims...........................................2 (g) Goodwill.........................................2 (h) Spike Machines...................................2 (i) Other Assets.....................................2 1.3 Excluded Assets.......................................2 (a) Cash.............................................2 (b) Accounts Receivable..............................2 (c) Insurance........................................3 (d) Assets of Benefit Plans..........................3 (e) Certain Records..................................3 (f) Certain Contracts................................3 (g) Other Assets.....................................3 1.4 Separately Purchased Assets...........................3 1.5 Liabilities...........................................3 ARTICLE II...........................................................4 CONSIDERATION...................................................4 2.1 Purchase Price........................................4 2.2 Allocation............................................4 2.3 Prorations............................................4 2.4 Noncompetition........................................4 2.5 Collection of Accounts Receivable.....................5 ARTICLE III..........................................................5 REPRESENTATIONS AND WARRANTIES OF SELLERS.......................5 3.1 Organization and Good Standing........................5 3.2 Authority.............................................6 3.3 Effect of Agreement...................................6 3.4 Financials; Books.....................................6 3.5 Title to and Sufficiency of Assets....................6 3.6 Real Estate...........................................7 3.7 Tangible Property.....................................7 3.8 Inventories...........................................7 3 3.9 Contracts and Leases.................................. 7 3.10 Litigation............................................ 8 3.11 Compliance with Laws; Permits......................... 8 3.12 Taxes................................................. 8 3.13 Environmental Protection.............................. 8 3.14 Insurance............................................. 8 3.15 Labor and Employment Matters.......................... 9 3.16 Employees; Benefits...................................10 3.17 Absence of Changes....................................10 3.18 Related Party Transactions............................11 3.19 Disclosure............................................11 ARTICLE IV...........................................................11 REPRESENTATIONS AND WARRANTIES OF BUYER.........................11 4.1 Organization and Good Standing........................11 4.2 Authority.............................................11 4.3 Effect of Agreement...................................11 ARTICLE V............................................................11 COVENANTS OF SELLERS AND BUYER..................................11 5.1 Sellers' Covenants....................................11 (a) Conduct of Business..............................12 (b) Access and Information...........................13 (c) No Other Solicitations...........................13 (d) Employees........................................13 5.2 Buyer Covenants.......................................13 (a) Inventory Valuation..............................13 (b) Employees........................................13 ARTICLE VI...........................................................14 CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS.....................14 6.1 Representations, Warranties and Covenants.............14 6.2 Absence of Litigation.................................14 6.3 Absence of Change.....................................14 6.4 Consents and Approvals................................14 6.5 Title Insurance; Survey...............................14 6.6 Environmental Audit...................................14 6.7 Removal of Liens......................................15 6.8 Legal Opinion.........................................15 6.9 Rod Supply Agreement..................................15 ARTICLE VII..........................................................15 CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS....................15 7.1 Representations, Warranties and Covenants.............15 7.2 Absence of Litigation.................................15 4 7.3 Consents and Approvals...............................15 7.4 Inventory Value......................................15 7.5 Legal Opinion........................................15 ARTICLE VIII.........................................................15 CLOSING.........................................................15 8.1 Closing..............................................15 8.2 Deliveries...........................................16 ARTICLE IX...........................................................16 INDEMNIFICATION.................................................16 9.1 Indemnification by Sellers...........................16 9.2 Indemnification by Buyer.............................17 9.3 Notice of Claim......................................17 9.4 Defense..............................................17 9.5 Limitations..........................................18 ARTICLE X............................................................18 MISCELLANEOUS...................................................18 10.1 Definitions..........................................18 10.2 Survival of Representations..........................19 10.3 Joint and Several Liability..........................19 10.4 Bulk Sales...........................................19 10.5 Risk of Loss.........................................19 10.6 Brokers..............................................19 10.7 Tax Filings..........................................20 10.8 Expenses.............................................20 10.9 Publicity............................................20 10.10 Best Efforts.........................................20 10.11 Notices..............................................20 10.12 Governing Law........................................21 10.13 Counterparts.........................................21 10.14 Assignment...........................................21 10.15 Third Party Beneficiaries............................21 10.16 Headings.............................................22 10.17 Amendments...........................................22 10.18 Specific Performance.................................22 10.19 Severability.........................................22 10.20 Entire Agreement.....................................22 SCHEDULES - --------- Schedule 1.2(a) Real Estate Schedule 1.2(b) Tangible Personal Property Schedule 1.2(c)(i) Contracts 5 Schedule 1.2(c)(ii) Commitments Schedule 1.2(d) Permits Schedule 1.2(h) Spike Machines and Nail Machine Schedule 1.3(g) Other Excluded Assets Schedule 1.4 Inventories Schedule 3.3 Required Consents Schedule 3.7 Tangible Personal Property Not Immediately Suitable Schedule 3.11 Compliance with Laws; Permits Schedule 3.13 Environmental Protection Schedule 3.14 Insurance Schedule 3.15(a) Collective Bargaining Agreements Schedule 3.15(f) Employment Agreements Schedule 3.16 Employees; Benefits Schedule 3.17 Absence of Changes EXHIBITS - -------- Exhibit 1.4 Inventory Valuation Methodology Exhibit 2.2 Allocation of Purchase Price Exhibit 2.3 Real Estate Tax Proration Adjustment Agreement Exhibit 3.2 Rod Supply Agreement Exhibit 6.8(a) and (b) Opinions of Sellers' Counsel Exhibit 7.5 Opinions of Buyer's Counsel 6 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (together with all Schedules and Exhibits hereto, this "Agreement"), dated as of April 6, 1999, is entered into by and among NORTHWESTERN STEEL AND WIRE COMPANY, an Illinois corporation ("Parent") and its wholly owned subsidiary, NORTHWESTERN STEEL AND WIRE COMPANY - - KENTUCKY, a Delaware corporation ("Sub") (Parent and Sub individually being a "Seller" and collectively referred to as, "Sellers") and INSTEEL INDUSTRIES, INC., a North Carolina corporation ("Buyer"). R E C I T A L S: 1. Sellers, through the facility located at 3325 State Route 1099, Hickman, Kentucky 42050 (the "Hickman Facility"), are engaged in the business of manufacturing and distributing concrete reinforcing mesh products (the "Business"). 2. Sellers desire to sell, and Buyer desires to purchase, substantially all of the assets of Sellers used in the operation of the Business, on the terms and conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual covenants of the parties set forth in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sellers and Buyer hereto agree as follows: ARTICLE I SALE AND PURCHASE OF THE PURCHASED ASSETS 1.1 Transfer of Assets. Sellers agree to sell, assign, transfer and deliver to Buyer, and Buyer agrees to purchase and accept from Sellers, at the Closing (as defined below) certain properties and assets of Sellers as particularly described below and used by Sellers in connection with the operations of the Business, but excluding certain assets described in Section 1.3. The assets being sold hereunder are collectively referred to as the "Purchased Assets," and the assets described in Section 1.3 are collectively referred to as the "Excluded Assets." 1.2 Purchased Assets. The Purchased Assets specifically include, but are not limited to, the following: (a) Real Estate. The real property owned by Sellers and used in connection with the Business, which is more particularly described on Schedule 1.2(a), together with all easements and appurtenances thereto and all buildings, fixtures and other improvements thereon (the "Real Estate"). (b) Tangible Personal Property. All machinery, equipment, spare parts, furniture, office equipment, supplies, materials, vehicles and other items of tangible personal property of every kind owned by Sellers and used in connection with the 7 Business, including without limitation those listed on Schedule 1.2(b) (the "Tangible Personal Property"), and any additions or replacements made between the date of this Agreement and the Closing Date (defined below), together with any express or implied warranty by the manufacturers or sellers of any item thereof. (c) Contracts. All of Sellers' interests in the contracts, purchase orders, leases of personal property, other leases and other agreements related to the Business described on Schedule 1.2(c)(i) (the "Contracts") and commitments (whether for the supply of wire mesh or otherwise) related to the Business described on Schedule 1.2(c)(ii). (d) Permits. All permits, authorizations, certificates, approvals and licenses relating to the operation of the Business, including, without limitation, those listed on Schedule 1.2(d) (the "Permits"), to the extent assignable. (e) Records. All records, technical data, asset ledgers, books of account, inventory records, budgets, customer and supplier records, payroll and personnel records, computer programs, correspondence and other files of Sellers created or maintained in connection with the Business. (f) Claims. All of Sellers' rights to any causes of action or claims against third parties arising in connection with the Business. (g) Goodwill. Any and all of Sellers' goodwill in and going concern value of the Business. (h) Spike Machines. Sellers' two spike machines and one Gladder six inch nail machine, as listed on Schedule 1.2(h) and used in connection with the Business. (i) Other Assets. All other assets of any kind or description, tangible or intangible, which are owned by Sellers and used exclusively in the operations of the Business. 1.3 Excluded Assets. Notwithstanding anything to the contrary contained herein, all of the assets and properties of Sellers which are not included in the Purchased Assets or the Separately Purchased Assets shall be retained by Sellers and shall not be sold and transferred to Buyer hereunder, including, without limitation: (a) Cash. All cash on hand and on deposit in banks, cash equivalents and investments. (b) Accounts Receivable. All accounts receivable due to Sellers in connection with the Business (the "Receivables"), and the full benefit of any security therefor. 2 8 (c) Insurance. All insurance policies relating to the Business. (d) Assets of Benefit Plans. Pension, profit sharing or savings plans and trusts and the assets thereof. (e) Certain Records. Minute books and stock books of Sellers or any of its predecessors in interest. (f) Certain Contracts. Any contracts entered into by Sellers or by which Sellers or any of the Purchased Assets are bound, other than the Contracts. Buyer specifically shall not acquire from Sellers by sale, transfer, assignment or otherwise, or be required to assume any right, obligation, interest in or liability related to any labor or employment related agreement to which Sellers are a party, including, but not limited to the CBA's (as defined in Section 3.15 below). (g) Other Assets. The assets listed on Schedule 1.3(g). 1.4 Separately Purchased Assets. The following assets owned by Sellers used exclusively in the Business (the "Separately Purchased Assets," and except with respect to the Allocation of Purchase Price is shown on Exhibit 2.2, comprising a portion of the Purchased Assets) shall be inventoried by Buyer prior to the Closing, and purchased at the Closing by Buyer for a sum of money separate and apart from the Purchase Price, which amount shall be calculated using the methodology described in Exhibit 1.4, attached hereto and incorporated herein by reference ("Inventory Valuation Methodology"): Inventories. All inventories of the Business as of the Effective Time (defined below), including, without limitation, all finished goods, work in process and raw materials (said raw materials being specifically limited to wire rod) (the "Inventory"), the location and an approximation of which are described on Schedule 1.4, except that Buyer shall only purchase up to 3000 tons of wire rod pursuant to this Section 1.4. 1.5 Liabilities. The Purchased Assets shall be sold and conveyed to Buyer free and clear of all liabilities, obligations, liens, security interests and encumbrances whatsoever (collectively, "Liens", or individually, a "Lien"); provided, however, that Buyer will assume at the Closing and agree to pay, perform and discharge when due the obligations under the Contracts that are unperformed as of the Closing Date and (a) obligations to complete jobs requiring the furnishing of materials or services, which jobs have been accepted in the ordinary course of business of the Business but have not been completed as of the Closing Date, including certain commitments related to the Business described on schedule 1.2(c)(ii), (b) obligations under purchase orders for materials and supplies necessary to the operation of the Business, which purchase orders have been entered into in the ordinary course of business of the Business but have not been satisfied as of the Closing Date, and (c) the outstanding amounts due and owing under that certain maintenance contract by and between H.A. Schlatter and Sellers dated December 17, 1998 (the "Maintenance Project Contract") (the items in clauses (a), (b) and (c), collectively, the "Commitments"). All obligations and liabilities assumed by Buyer hereunder are sometimes referred to herein as the "Assumed Liabilities." Except as specifically set forth above, Sellers 3 9 shall retain responsibility for all liabilities accrued as of the Effective Time and for all liabilities arising from Sellers' ownership and operation of the Business and the Purchased Assets prior to the Effective Time (including, without limitation, all salaries, severance, employee benefits and all other obligations with respect to Sellers' employees), whether or not accrued and whether or not disclosed. All obligations and liabilities retained by Sellers are sometimes referred to herein as the "Retained Liabilities." ARTICLE II CONSIDERATION 2.1 Purchase Price. The aggregate purchase price (the "Purchase Price") for the Purchased Assets, excluding the Separately Purchased Assets, shall be an amount equal to the sum of (a) SIX MILLION FOUR HUNDRED EIGHTY THOUSAND AND 00/100 DOLLARS ($6,480,000.00), plus (b) the Prepaid Maintenance Contract Amount, which shall be adjusted as of the Closing Date to reflect the actual amount paid by Sellers under the Maintenance Project Contract as of the Closing Date. The Purchase Price shall be payable on the Closing Date by wire transfer of immediately available funds to a single account designated by Sellers. 2.2 Allocation. The Purchase Price shall be allocated among the Purchased Assets as described on Exhibit 2.2, attached hereto and incorporated herein by this reference. 2.3 Prorations. The operation of the Business and the income and expenses attributable thereto until the Effective Time shall be for the account of Sellers and thereafter for the account of Buyer. Expenses which are typically prorated between the parties, including without limitation such items as real estate or ad valorem property taxes, prepaid items, utility charges, and rents shall be prorated between Sellers and Buyer as of the Effective Time. Such prorations shall be made and paid insofar as is possible at the Closing, and in any event within 30 days thereafter. Real estate taxes for 1999 not yet due and payable shall be prorated between the parties as of the Effective Time, based upon the 1998 tax values and tax rates affecting the Real Estate. Sellers and Buyer hereby agree to adjust such real estate tax proration based upon the 1999 real estate tax values and tax rates within 30 days of such information becoming available, and to sign the Real Estate Tax Proration Adjustment Agreement in the form attached hereto as Exhibit 2.3. 2.4 Noncompetition. As a condition to Buyer's obligation to purchase the Purchased Assets and in order to ensure to Buyer the full benefits of the Purchased Assets, and the Business, Sellers hereby covenant and agree that for a period of five (5) years following the Closing Date (the "Non-Compete Period"), they will not in any manner, directly or indirectly, whether as an owner, manager, lender, consultant, partner or agent, engage in the business of manufacturing or distributing concrete reinforcing mesh wire products in the following areas: (a) east of the Mississippi River in the United States of America, and (b) without limitation to (a), within one thousand (1,000) miles of Hickman, Kentucky. Nothing contained in this paragraph 2.4, however, shall preclude Sellers from consummating a Business Combination between Sellers and an entity which, at the time of such Business Combination, is in the business of producing and selling welded wire reinforcing mesh for concrete, which entity shall not be subject to the restrictions set forth in this Paragraph 2.4. Additionally, Sellers shall not sell, 4 10 transfer or dispose of the mesh production equipment owned by Sellers and currently located at Sterling, Illinois or Rock Falls, Illinois (the "Mesh Equipment") to any person or entity for use within the continent of North America without the prior written consent of Buyer. Sellers shall have the right to sell the Mesh Equipment directly to or for export to a person or entity which is neither located within the continent of North America, nor engaging in or transacting business in North America, provided that Sellers obtain from any such third party purchaser or transferee of the Mesh Equipment the written warranty and assurance that the Mesh Equipment shall not be returned to North America by such third party purchaser or transferee of the Mesh Equipment, and provided further that neither Sellers, nor any subsidiary, affiliate or agent of Sellers directly or indirectly facilitate the return of the Mesh Equipment to North America. Sellers acknowledge that any breach of the covenants of this Section will result in irreparable damage and continuing injury to Buyer. Therefore, in the event of any breach or threatened breach of the covenants in this Section, Sellers acknowledge that Buyer shall be entitled, without limiting any other remedies available to Buyer, to an injunction restraining Sellers from committing any such violation, and Sellers hereby consent to the issuance of such injunction. Sellers acknowledge and agree that (a) the covenants of this Section are reasonably necessary for the protection of Buyer and its business, (b) such covenants are reasonably limited with respect to the activities prohibited, the duration thereof, the geographical area thereof, the scope thereof and the effect thereof on Sellers and the public, (c) the purpose and effect of such covenants is solely to protect Buyer for a limited period of time from unfair competition by Sellers and (d) the purchase of the Purchased Assets is expressly conditioned upon Sellers agreeing to abide by and be bound by all of the covenants and provisions of this Section. In the event that any provision of this Section shall be determined by any court to be unenforceable, this Section shall be interpreted to extend over the maximum time periods for which it may be enforceable, and to the maximum extent in any and all other respects as to which it may be enforceable, all as shall be determined by such court. Notwithstanding anything contained herein to the contrary, the covenants and obligations of Sellers contained within this Section 2.4 shall survive the Closing. 2.5 Collection of Accounts Receivables. After the Closing, on a weekly basis, Sellers agree to pay to Buyer any payments on Buyer's accounts receivable remitted to Sellers. On a weekly basis, Buyer agrees to pay to Sellers any payments on Sellers' accounts receivable remitted to Buyer. With respect to any payments on accounts receivable received by Buyer or Sellers relating to customers common to both Buyer and Sellers, if the remittance relating to such accounts receivable payment does not specify which account receivable such payment relates to, such payment shall not be deposited by the recipient thereof until the application thereof has been mutually agreed to by Buyer and Sellers. Buyer and Sellers shall provide each other with reasonable access to their respective books and records for the purposes of reconciling the accounts receivable relating to the Business. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS Sellers represent and warrant to Buyer as follows: 3.1 Organization and Good Standing. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois and Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Sellers have 5 11 all requisite corporate power and authority to own, operate and lease the Purchased Assets and to conduct the operations of the Business as presently conducted and each Seller is duly qualified to do business as a foreign corporation and is in good standing in the state of Kentucky. 3.2 Authority. Sellers have all requisite power and authority to execute and deliver this Agreement and the Rod Supply Agreement, substantially in the form attached hereto as Exhibit 3.2 (collectively, the "Seller Agreements"), and to perform the transactions contemplated thereby. The execution, delivery and performance of the Seller Agreements, and the consummation of the transactions contemplated thereby, have been duly authorized by all necessary corporate and shareholder action on the part of Sellers. The Seller Agreements have been duly executed and delivered by Sellers and each constitutes a valid and binding obligation of Sellers, enforceable against Sellers in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity limiting the availability of equitable remedies. 3.3 Effect of Agreement. The execution, delivery and performance of the Seller Agreements do not and will not: (a) conflict with the Articles of Incorporation or Bylaws of Sellers; (b) to Sellers' Knowledge violate any law or any rule or regulation of any governmental body or administrative agency, or conflict with any judicial or administrative order or decree relating to the Business or the Purchased Assets; (c) constitute a breach or default under any Contract or any other agreement or instrument by which Sellers are bound or the Purchased Assets are affected, except to the extent that individually or in the aggregate would not have a material adverse effect on the Business or the Purchased Assets; (d) create any Lien on any of the Purchased Assets; or (e) except as set forth on Schedule 3.3, require any consent, notice to or filing with any governmental authority or administrative agency or any third party on behalf of Sellers relating to the Business which, if not obtained or made, would have a material adverse effect on the Business or the Purchased Assets. The matters described on Schedule 3.3 are referred to as the "Required Consents". 3.4 Financials; Books. The audited consolidated balance sheet of Parent as of July 31, 1997 and July 31, 1998 and the related statements of operations, stockholders' equity and cash flows for the fiscal years then ended (collectively, the "Financial Statements"), true and complete copies of which have been delivered to Buyer, (a) are true, complete and correct; (b) are in accordance with the books and records of the Sellers; (c) present fairly the assets, liabilities and financial condition of Sellers as of the respective dates thereof, and the results of operations for the periods then ending; and (d) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved. Sellers have no liability or obligation relating to the Business or the Purchased Assets that is not reflected or reserved against in Parent's consolidated balance sheet as of July 31, 1998, except for those that are not required by generally accepted accounting principles to be included therein. The books and records of Sellers relating to the Purchased Assets are true, accurate and complete and have been maintained in accordance with generally accepted accounting principles applied on a consistent basis. 3.5 Title to and Sufficiency of Assets. Sellers have good and marketable title to all of the Purchased Assets, free and clear of any Liens, all of which shall be removed on or before the Closing Date, except for: (a) easements of record affecting the Real Estate that do not affect the full use 6 12 and enjoyment of the Real Estate for the purposes for which it is currently used or detract from its value; (b) Liens for taxes not yet due and payable; (c) Liens related to the Assumed Liabilities; (d) mechanic's, material mans, repair man's and other similar Liens related to the Commitments; and (e) any minor imperfection of title or similar Lien which individually or in the aggregate with other such Liens does not impair the value or marketability of the property subject to such Lien or interfere with the use of such property in the conduct of the Business. ((a), (b), (c), (d), and (e) collectively, the "Permitted Liens"). The Purchased Assets constitute substantially all of the assets of any nature required to operate the Business in the manner presently operated by Sellers. There are no applicable sales taxes, recording fees or filing fees required to be paid on the transfer of the Purchased Assets. 3.6 Real Estate. Schedule 1.2(a) contains true and correct descriptions of all real property owned by Sellers and used in connection with the Business, and all buildings, fixtures and improvements thereon (the "Improvements"). To Sellers' Knowledge, all Improvements conform to all applicable state and local laws, health and safety ordinances and zoning and building ordinances. To Sellers' Knowledge, none of the Improvements encroach on the property of any third person. The Real Estate is zoned for the purposes for which it is presently being used. Sellers do not lease any real property used in connection with the Business. 3.7 Tangible Property. All Improvements, all other tangible property included in the Purchased Assets and all items of tangible property leased under leases to be assumed by Buyer (a) are in good operating order, condition and repair, ordinary wear and tear excepted, (b) are suitable for immediate use in the ordinary course of business of the Business, except for those items of tangible property listed on Schedule 3.7, and (c) to Sellers' Knowledge are free from defects. 3.8 Inventories. All items included in the Inventory (a) are useable within the ordinary course of business of the Business, except for obsolete items and items of below-standard quality (including scraps that are not saleable in the ordinary course of business of the Business) (b) are located on the premises described on Schedule 1.4 and (c) have been acquired by Sellers only in bona fide transactions entered into in the ordinary course of business of the Business. All of the Inventory which are finished goods comply with and meet all standards set by ASTMA-185. All of the Inventory which are wire rod inventories are in such condition as to be immediately suitable for the production of concrete reinforcing mesh in the ordinary course of Sellers' Business. 3.9 Contracts and Leases. Schedule 1.2(c) lists all contracts, commitments, agreements (including agreements for borrowing of money or the extension of credit), leases, licenses, understandings and obligations, whether written or oral, to which Sellers are a party, or by which the Purchased Assets are bound or affected, that are material to the operation of the Business. Sellers have delivered to Buyer true and complete copies of all written Contracts and Commitments, and true and complete memoranda of all oral Contracts, including any and all amendments thereto. Each of the Contracts and Commitments is valid and enforceable in accordance with its terms and is in full force and effect. There are no existing defaults, and no events or circumstances have occurred which, with or without notice or lapse of time or both, would constitute defaults, under any of the Contracts or Commitments in any material respect. The assignment of the Contracts and Commitments by Sellers to Buyer will not, with respect to any Contract or Commitment (i) constitute a default or accelerate the 7 13 obligations thereunder, (ii) require the consent of any person or party, except for the Required Consents, or (iii) affect the continuation, validity and effectiveness thereof or the terms thereof. 3.10 Litigation. There are no claims, actions, suits or investigations ("Claims") pending, or to Sellers' Knowledge, threatened, against Sellers or the Business or affecting the Purchased Assets, nor does there exist any basis for a Claim. No Claim, either individually or when considered in the aggregate with other Claims, if resolved adversely to Sellers, will materially and adversely affect the financial condition, properties (including without limitation the Purchased Assets) or business of Sellers or the Business. 3.11 Compliance with Laws: Permits. Except as set forth in Schedule 3.11: (i) there is not outstanding or to Sellers' Knowledge, threatened, any order or decree of any court, governmental agency or arbitration tribunal against or involving Sellers in connection with the Business or the Purchased Assets; (ii) Sellers are currently, and to Sellers' Knowledge, have been at all times, in substantial compliance with all laws, rules, regulations and licensing requirements of all federal, state, local and foreign authorities applicable to the properties and operations of the Business; (iii) Sellers have obtained all permits, certificates and licenses that are material to the conduct of the Business and the ownership of the Purchased Assets, all of which are described on Schedule 1.2(d); (iv) There is no fact or circumstance peculiar to Sellers which would cause any permit, certificate or license to be revoked or not be reissued to Buyer on the same terms and conditions in all material respects that are currently set forth in said permits; and (v) Sellers are not in violation of any of the Permits in any material respect, and no proceedings are pending or, to Sellers' Knowledge, threatened to revoke or limit any Permit. 3.12 Taxes. Sellers have properly completed and timely filed all tax returns and reports required to be filed by it (the "Tax Returns"). All Tax Returns are accurate, complete and correct as filed, and Sellers have paid in full or made adequate provision in the Financial Statements for all amounts shown to be due thereon. Sellers have not been notified by any governmental authority that an audit or review of any tax matter is contemplated. 3.13 Environmental Protection. Except as set forth in Schedule 3.13:(i) no substances that are defined by laws or regulations as toxic materials, hazardous wastes or hazardous substances or otherwise a danger to health or the environment (including without limitation any asbestos, oils, petroleum-derived compounds in a liquid state at normal temperature and pressure or pesticides) (collectively, "Hazardous Materials") have been or are generated, located in, on or about the Real Estate, the Improvements or other Purchased Assets; (ii) the Real Estate has not been used for the storage, manufacture or disposal of Hazardous Materials, and no Hazardous Materials have been transported off site from the Real Estate; (iii) specifically, but without limitation, there are and have been no underground storage tanks located on the Real Estate; and (iv) Sellers have complied in all material respects with all federal, state and local environmental laws and regulations. 3.14 Insurance. Schedule 3.14 describes all insurance policies maintained by Sellers with respect to the Business and the Purchased Assets. Such policies are valid and enforceable in accordance with their terms, are in full force and effect, and all premiums due thereon have been paid and will be paid through the Effective Time. 8 14 3.15 Labor and Employment Matters. With respect to employment matters: (a) Certain employees of Sellers who work in the Business are covered under the Collective Bargaining Agreements described on Schedule 3.15(a) of the Disclosure Schedule (the "CBA's"). Sellers have provided to Buyer true, correct and complete copies of the executed CBA's, including true, correct and complete copies of any and all written modifications and interpretations thereof and descriptions of any and all oral modifications and interpretations thereof. (b) There is no labor strike, dispute, slowdown, stoppage or similar labor difficulty pending or, to Sellers' Knowledge, threatened against or affecting the Business, nor have there been any such events pending or threatened during the six months prior to the effective date of this Agreement. (c) Sellers are in substantial compliance with all federal, state and local laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours, and there are no unfair labor practice, employment discrimination, wage-hour, occupational safety and health, or other labor or employment related charges, grievances, complaints or other administrative claims or proceedings against Sellers pending or, to Sellers' Knowledge, threatened. (d) No union representation question or issue is pending with respect to any of the employees of Sellers employed in the Business. (e) Sellers employ less than fifty (50) employees at the Hickman Facility, as the same are defined by the Worker Adjustment and Retraining Notification Act of 1988, as amended and the rules and regulations thereunder (the "WARN Act"), and no WARN Act notices are required to be issued to employees employed at the Hickman Facility in connection with transactions contemplated hereby. (f) Except as set forth on Schedule 3.15(f) no employee employed in the Business has any written employment agreement nor any agreement as to the length of notice required to terminate his or her employment, other than those disclosed by Sellers in Schedule 3.15(f), or than such as results by law from the employment and termination of employment of an employee without agreement as to such notice. (g) All levies, assessments and penalties under relevant workers' compensation legislation in respect of the employees employed in the Business have been paid or to Sellers' Knowledge reflected and accrued in the books and records of Sellers. All claims, potential claims, current assessment rates and special assessments under such legislation have been disclosed to Buyer. (h) All vacation pay (including accrued vacation pay), bonuses, commissions and other employee compensation payments (except for executive 9 15 incentive compensation) in respect of employees employed in the Business are reflected and have been accrued in the books and records of Sellers. 3.16 Employees; Benefits. Schedule 3.16 sets forth (or Sellers have previously delivered to Buyer) a list of the name, age, position, rate of compensation and any incentive compensation arrangements, bonuses or commissions, of each person who is employed by or associated with the Business. Except as set forth on Schedule 3.16, there are no Plans, as defined below, contributed to, maintained or sponsored by Sellers with respect to the employees at the Hickman Facility, to which Sellers are obligated to contribute or with respect to which Sellers have any liability or potential liability, whether direct or indirect, including all Plans contributed to, maintained or sponsored by each member of the controlled group of companies, within the meaning of Sections 414(b), 414(c), and 414(m) of the Code, of which Sellers are members to the extent Sellers have any potential liability under such Plans. For purposes of this Agreement, the term "Plans" shall mean: (a) employee benefit plans as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not funded and whether or not terminated, (b) employment agreements, and (c) personnel policies or fringe benefit plans, policies, programs and arrangements, whether or not subject to ERISA, whether or not funded, and whether or not terminated, including without limitation, stock bonus, deferred compensation, pension, severance, bonus, vacation, travel, incentive, and health, disability and welfare plans. 3.17 Absence of Changes. Except as set forth on Schedule 3.17, since July 31, 1998, Sellers have conducted the operations of the Business only in the ordinary course, and have not: (a) Suffered any material damage to any asset of the Business, whether or not covered by insurance; (b) Sold or disposed of any assets used in the operation of the Business other than in the ordinary course of business consistent with past practices; (c) Made any general wage increase for its employees as a group other than in the ordinary course of business consistent with past practices or pursuant to the terms of the CBA's; (d) Amended or terminated any material contract, lease or agreement relating to the conduct of the Business or the Purchased Assets; (e) Incurred any obligation or liability relating to the conduct of the Business, except normal trade or business obligations incurred in the ordinary course of business; (f) Introduced any new method of management, operations or accounting relating to the conduct of the Business; (g) Suffered any material adverse change in the condition (financial or otherwise), results of operations of the Business or the Purchased Assets; or 10 16 (h) Agreed, whether in writing or otherwise, to take any action described in this Section, other than pursuant to this Agreement. 3.18 Related Party Transactions. The Contracts and Commitments do not include any agreement with, or any other commitment to (a) any officer or director of Sellers; (b) any person related by blood or marriage to any such officer or director; or (c) any corporation, partnership, trust or other entity in which Sellers or any such officer, director or related person has an equity or participating interest. 3.19 Disclosure. No representation, warranty or statement made by Sellers in the Seller Agreements contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements contained herein or therein not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Sellers as follows: 4.1 Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. 4.2 Authority. Buyer has all requisite power and authority to execute and deliver this Agreement and the Rod Supply Agreement (collectively, the "Buyer Agreements") and to perform the transactions contemplated thereby. The execution, delivery and performance of the Buyer Agreements, and the consummation of the transactions contemplated thereby, have been duly and validly authorized by all necessary corporate and shareholder action on the part of Buyer. The Buyer Agreements have been duly executed and delivered by Buyer and each constitutes a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. 4.3 Effect of Agreement. The execution, delivery and performance of the Buyer Agreements do not and will not (a) conflict with the Articles of Incorporation or Bylaws of Buyer; (b) To Buyer's Knowledge, violate any law or any rule or regulation of any governmental body or administrative agency, or conflict with any judicial or administrative order or decrees relating to Buyer; (c) require any consent, notice to or filing with any governmental authority on behalf of Buyer; or (d) constitute a breach or default under any contract or any other agreement or instrument by which Buyer is bound, except to the extent that individually or in the aggregate would not have a material adverse effect on the ability of the Buyer to consummate the transactions contemplated herein. ARTICLE V COVENANTS OF SELLERS AND BUYER 5.1 Sellers' Covenants. Sellers covenant and agree with Buyer as follows: 11 17 (a) Conduct of Business. Between the date of this Agreement and the Effective Time, Sellers shall: (i) Conduct the operations of the Business in the normal and customary manner in the ordinary course of business; (ii) Maintain the tangible Purchased Assets and any tangible assets leased under leases to be assumed by Buyer in good operating order, repair and condition; (iii) Keep in full force and effect the insurance described in Section 3.14; (iv) Perform all of its obligations under all Contracts and Commitments and not amend any provision thereof; (v) Use their best efforts to preserve Sellers' corporate organizations intact and maintain their relationships with their employees, suppliers and customers; (vi) Promptly advise Buyer of any material adverse change in the condition (financial or otherwise) of the Business or the Purchased Assets; (vii) Promptly advise Buyer of the occurrence of any event or circumstance which affects the consummation of the transactions contemplated by this Agreement or which, if in existence on the date of this Agreement, would have been required to have been disclosed in a Schedule to this Agreement; (viii) Not create or permit to exist any Lien with respect to any of the Purchased Assets, except for the Permitted Liens; (ix) Not sell or dispose of any Purchased Assets, except in the ordinary course of business of the Business; (x) Promptly advise Buyer of any change in the list of employees referred to in Section 3.16 or in the compensation payable to any such employee; (xi) Not borrow any funds related to the Purchased Assets and secured by the Purchased Assets except as reasonably necessary for the ordinary operation of business in a manner, and in amounts, in keeping with historical practices; and (xii) Extend credit terms to its customers in the ordinary course of business consistent with past practices. 12 18 (xiii) Provide to Buyer employment records and, where appropriate, I-9 forms, as set forth in 29 C.F.R. Section 274a.2(b)(1)(viii)(7), for all of Sellers' hourly employees employed at the Business. (b) Access and Information. Sellers shall permit Buyer and its counsel, accountants and other representatives full access during normal business hours to all the properties, assets, books, records, agreements and other documents of Sellers relating to the Business. Sellers shall furnish to Buyer and its representatives all information concerning the Purchased Assets or the Business as Buyer may reasonably request. Sellers shall permit and facilitate communications between Buyer and Sellers' suppliers, customers and other persons having relationships with the Business. (c) No Other Solicitations. Until the earlier of the Closing Date or the termination of this Agreement, Sellers and their managers and representatives shall not solicit or encourage any offer, proposal or inquiry from, or engage in any discussions or negotiations with, any person regarding the sale or lease of the Purchased Assets or the Business. (d) Employees. Sellers shall retain and shall assume, bear and discharge all liabilities for claims incurred with respect to all of their Plans other than liabilities for claims incurred by their employees on and after the date they become employees of Buyer. For purposes of this Section 5.1(d), a claim will be deemed "incurred" on the date that the event that gives rise to the claim occurs. 5.2 Buyer Covenants. Buyer covenants and agrees with Sellers as follows: (a) Inventory Valuation. Buyer (i) shall use its best efforts to complete the physical inventory of the Inventory no less than four (4) business days prior to Closing; (ii) shall use its best efforts to deliver to Sellers, at least two (2) business day prior to the scheduled Closing, its good faith calculation, in accordance with the Inventory Valuation Methodology, of the Inventory Value; (iii) agrees to allow Sellers and their representatives to participate with Buyer in Buyer's physical inventory of the Inventory; and (iv) agrees to give access to Sellers and its representatives to all of Buyer's books, records and other documentation used in connection with Buyer's determination of the Inventory Value. Notwithstanding anything contained herein to the contrary, the Inventory Value shall be adjusted as of the Closing Date to reflect the actual Inventory being purchased by Buyer hereunder as of the Closing Date. (b) Employees. Buyer will not and does not agree to accept and abide by any obligation imposed by virtue of the CBA's. Buyer does, however, covenant and agree to offer employment on the Closing Date, under terms and conditions initially established by Buyer, to all of Sellers' hourly bargaining unit employees who are employed by Sellers at the Hickman Facility as of the Closing Date. In the event that Buyer's offers of employment are accepted by a sufficient number of employees to render Buyer a successor employer to Sellers, then Buyer shall recognize the United Steelworkers of America as the bargaining representative for the Hickman Facility production and maintenance employees. 13 19 ARTICLE VI CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS The obligations of Buyer to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions on or before the Closing Date. 6.1 Representations, Warranties and Covenants. The representations and warranties of Sellers contained in this Agreement shall have been true and correct on the date of this Agreement and shall be true and correct on the Closing Date as though made on and as of the Closing Date, and Sellers shall deliver to Buyer certificates duly executed by authorized officers of Sellers evidencing compliance with this condition. Sellers shall have duly performed and complied with all covenants and obligations required by this Agreement to be performed or complied with by it on or prior to the Closing. 6.2 Absence of Litigation. No action or proceeding shall be pending by or before any court or other governmental body or agency seeking to restrain, prohibit or invalidate the transactions contemplated by this Agreement or which would materially adversely affect the right of Buyer to own, operate or control the Purchased Assets or the Business after the Closing Date. 6.3 Absence of Change. Between the date of this Agreement and the Closing, no material adverse change shall have occurred in the business, operations or financial or other condition of the Business or the Purchased Assets, nor shall there have occurred any material casualty loss or destruction of, or damage to, any of the Purchased Assets. 6.4 Consents and Approvals. All Required Consents of Sellers and all consents, approvals, authorizations or notifications of any other third parties, without which Sellers would not be able to consummate the transactions contemplated by this Agreement, shall have been made or obtained by Sellers or shall have occurred. 6.5 Title Insurance; Survey; Transfer Tax. Sellers shall order prior to Closing, for delivery to Buyer at Sellers' own expense, a title commitment binder for all of the Real Estate. Buyer shall have obtained at its own expense a title insurance policy in amount no less than $2,278,000.00 insuring good and marketable title in fee simple absolute to all the Real Estate, free and clear of all title defects or objections, Liens or other encumbrances of any nature whatsoever. Correct surveys shall have been obtained at Buyer's sole expense and certified to Buyer, showing the boundaries of and the location of the Real Estate and the locations of all Improvements, showing no encroachment by the Improvements on property of others. Sellers shall pay the cost of any transfer taxes or documentary stamps related to the transfer of the Purchased Assets. 6.6 Environmental Audit. Buyer shall have obtained at its own expense a Phase I environmental audit of the Real Estate and Improvements, including an environmental sampling of monitoring wells existing at the Hickman Facility, to be performed by an environmental engineering firm of Buyer's choice, and the results of such audit shall be satisfactory in all respects to Buyer. 14 20 6.7 Removal of Liens. All Liens indicated to exist by record searches made by Buyer prior to the Closing Date, except the Permitted Liens, shall have been removed, and Sellers shall have provided evidence satisfactory to Buyer of such removal. 6.8 Legal Opinion. Buyer shall have received from the law firm of Katten Muchin & Zavis, counsel to Sellers, opinions, dated the Closing Date, in the forms of Exhibit 6.8(a) and 6.8(b). 6.9 Rod Supply Agreement. Sellers shall duly execute and deliver to Buyer a Rod Supply Agreement substantially in the form attached hereto as Exhibit 3.2. ARTICLE VII CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS The obligations of Sellers to consummate the transaction contemplated by this Agreement are subject to the satisfaction of each of the following conditions on or before the Closing Date. 7.1 Representations, Warranties and Covenants. The representations and warranties of Buyer contained in this Agreement shall have been true and correct on the date of this Agreement, and shall be true and correct on the Closing Date as through made on and as of the Closing Date, and Buyer shall have duly performed and complied with all covenants and obligations required by this Agreement to be performed or complied with by it on or before the Closing Date. 7.2 Absence of Litigation. No action or proceeding shall be pending by or before any court or other governmental body or agency seeking to restrain, prohibit or invalidate the transactions contemplated by this Agreement. 7.3 Consents and Approvals. All Required Consents shall have been obtained prior to or at the Closing. 7.4 Inventory Value. Prior to the Closing, Buyer shall have performed in accordance with Section 1.4, the physical inventory of the Inventory, and shall have delivered to Sellers Buyer's good faith calculation, in accordance with the Inventory Valuation Methodology, of the Inventory Value, and such calculation shall be mutually acceptable to Buyer and Sellers. 7.5 Legal Opinion. Sellers have received from Womble Carlyle Sandridge & Rice, PLLC, counsel to Buyer, an opinion, dated the Closing Date, in the form of Exhibit 7.5. ARTICLE VIII CLOSING 8.1 Closing. The closing of the sale of the Purchased Assets (the "Closing") shall take place at the offices of Womble Carlyle Sandridge & Rice, Winston-Salem, North Carolina at 10:00 15 21 a.m., local time, on April 30, 1999, or such other date as may be mutually agreed upon by the parties hereto (the "Closing Date"). For purposes of passage of title, risk of loss, allocation of expenses and other economic effects, the Closing when completed shall be deemed to have occurred at 12:01 a.m., local time, on the Closing Date (the "Effective Time"). 8.2 Deliveries. At the Closing, Buyer shall execute and deliver to Sellers the Buyer Agreements, and Sellers shall execute and deliver to Buyer the Seller Agreements. Further, each party shall execute and deliver to the other such instruments of conveyance or assumption and other documents as may be required or contemplated by this Agreement, all of which shall be in form and substance satisfactory to the other party. ARTICLE IX INDEMNIFICATION 9.1 Indemnification by Seller. Sellers shall jointly and severally indemnify, defend and hold harmless Buyer and its officers, directors and affiliates (the "Buyer Indemnitees") from, against, and with respect to any and all loss, damage, claim, obligation, liability, cost and expense (including without limitation reasonable attorney's fees and costs and expenses incurred in investigating, preparing, defending against or prosecuting any litigation, claim, proceeding or demand), of any kind or character (a "Loss") arising out of or in connection with any of the following: (a) any breach of any of the representations or warranties of Sellers contained in or made pursuant to this Agreement; (b) except as provided in Section 2.4, any failure by Sellers to perform or observe, in full, any covenant, agreement or condition to be performed or observed by it pursuant to this Agreement; (c) the Retained Liabilities, and all other liabilities and obligations of Sellers, or any kind or nature whatsoever, whether accrued, absolute, contingent or otherwise, known or unknown, except for (i) obligations under the Contracts arising on or after the Effective Time, and (ii) the Assumed Liabilities; (d) noncompliance by Sellers with the provisions of any applicable bulk sales laws (if applicable) or Sellers' covenants contained in Section 10.3 hereinbelow; (e) any transportation of Hazardous Materials or any handling, storage, treatment, release or disposal of Hazardous Materials in any way related to the Business or the Purchased Assets by or on behalf of Seller or its predecessors before the Effective Time; (f) Sellers' violation of, Sellers' alleged violation of, or Sellers' liability under any federal, state or local environmental laws and regulations occurring before 16 22 the Effective Time, even if such violation, alleged violation or liability is not discovered, or a claim with respect thereto is not asserted until after the Effective Time; or (g) the exposure of (and resulting consequences to) any persons, including, without limitation, employees of Sellers, to any Hazardous Materials in connection with the conduct of the Business by Sellers, or any of its predecessors before the Effective Time, including, without limitation, any such exposure to Hazardous Materials resulting from contact with products sold by the Business before the Effective Time. 9.2 Indemnification by Buyer. Buyer shall indemnify, defend and hold harmless Sellers and their officers, directors and affiliates (the "Seller Indemnitees") from, against and with respect to any Loss arising out of or in connection with any of the following: (a) any breach of any of the representations and warranties of Buyer contained in or made pursuant to this Agreement; (b) any failure by Buyer to perform or observe, in full, any covenant, agreement or condition to be performed or observed by it pursuant to this Agreement; (c) all obligations under the Contracts arising on or after the Effective Time, and the Assumed Liabilities; or (d) Buyer's ownership and operation of the Business and the Purchased Assets on and after the Effective Time. 9.3 Notice of Claim. Any party seeking to be indemnified hereunder (the "Indemnified Party") shall, within twenty (20) days following discovery of the matters giving rise to a Loss, notify the party from whom indemnity is sought (the "Indemnity Obligor") in writing of any claim for recovery, specifying in reasonable detail the nature of the Loss and the amount of the liability estimated to arise therefrom. 9.4 Defense. If the facts pertaining to a Loss arise out of the claim of any third party, or if there is any claim against a third party available by virtue of the circumstances of the Loss, the Indemnity Obligor may, by giving written notice to the Indemnified Party within thirty (30) days following its receipt of written notice of such claim, elect to assume the defense or the prosecution thereof, including the employment of counsel or accountants at its cost and expense; provided, however, that during the interim the Indemnified Party shall use its best efforts to take all action (not including settlement) reasonably necessary to protect against further damage or loss with respect to the Loss. The Indemnified Party shall have the right to employ counsel separate from counsel employed by the Indemnity Obligor in any such action and to participate therein, unless the claim involves Taxes, but the fees and expenses of such counsel shall be at the Indemnified Party's own expense. Whether or not the Indemnity Obligor chooses so to defend or prosecute such claim, all the parties hereto shall cooperate in the defense or prosecution thereof. The Indemnity Obligor shall not be liable for any settlement of any such claim effected without its prior written consent. The Indemnity Obligor shall have the right to settle, compromise or discharge a third party claim (other than any third party claim in which 17 23 criminal conduct is alleged) without the Indemnified Party's consent if such settlement, compromise or discharge (a) constitutes a complete and unconditional discharge and release of the Indemnified Party, (b) provides for no relief other than the payment of monetary damages, and (c) such monetary damages are paid in full by the Indemnity Obligor. 9.5 Limitations. (a) Notwithstanding anything to the contrary set forth in this Agreement, Sellers shall not be required to indemnify and hold harmless Buyer pursuant to this Agreement for any Losses, until such Losses shall exceed, in the aggregate, $50,000.00 (the "Basket Exclusion"), at which time Sellers shall be required to jointly and severally indemnify and hold harmless Buyer for all such Losses subject only to the limitations specified hereafter. (b) Sellers shall not be required to indemnify and hold harmless Buyer pursuant to this Agreement for any Losses, if and to the extent such Losses, in the aggregate, exceed the Purchase Price. (c) The amount of any Losses payable hereunder shall be net of any tax benefit derived (or reasonably expected to be derived) by the Indemnified Party on account of or in connection with such Losses. (d) Any Indemnified Party shall use reasonable efforts to collect the proceeds of any insurance which would have the effect of reducing Losses (in which case such proceeds shall reduce such Losses) and if indemnification payments have been received prior to the collection of such proceeds, shall remit to the Indemnity Obligor the amount of such proceeds (net of the cost of collection thereof) to the extent of indemnification payments received in respect of such Losses. (e) Except as otherwise provided in Section 2.4, the indemnification provided in this Article IX shall be the sole and exclusive remedy and recourse for any and all claims relating to or arising out of Losses incurred pursuant to this Article IX by any party. ARTICLE X MISCELLANEOUS 10.1 Definitions. For purposes of this Agreement, the following terms have the meanings specified: "BUSINESS COMBINATION" - means any merger or consolidation of a corporation with or into any other corporation, or the sale or lease of all or any substantial part of the corporation's assets to, or any payment, sale or lease to the corporation or any subsidiary thereof in exchange for securities of the corporation of any assets of any other entity. 18 24 "BUYER'S KNOWLEDGE" - means (i) the actual knowledge of H.O. Woltz III, Michael Gazmarian and Gary Kniskern and (ii) the existence of facts, events, occurrences or matters with respect to which any of the persons referred to above should reasonably be expected to have knowledge in the ordinary conduct of his duties. "INVENTORY VALUE" - means Buyer's good faith calculation, in accordance with the Inventory Valuation Methodology, of the Inventory as of the Closing Date. "PREPAID MAINTENANCE CONTRACT AMOUNT" - means the amount of money prepaid by Seller as of the Closing Date under that certain Maintenance Project Contract in the amount of $83,920.00, subject to adjustment, if any, as set forth in Section 2.1. "SELLER'S KNOWLEDGE" - means (i) the actual knowledge of Michael S. Venie, Tom Vercillo, Andrew Moore, Tom Reddington and Frederick Rocchio and (ii) the existence of facts, events, occurrences or matters with respect to which any of the persons referred to above should reasonably be expected to have knowledge in the ordinary conduct of his duties. 10.2 Survival of Representations. All representations and warranties of the parties hereto contained in this Agreement or otherwise made in writing in connection with the transactions contemplated hereby shall survive the execution and delivery of this Agreement for a period of two (2) years, except with respect to Section 3.12 concerning taxes and except with respect to Section 3.13 concerning the environment, both of which shall survive the Closing for the applicable statute of limitations periods concerning such tax and environmental matters. 10.3 Joint and Several Liability. Sellers expressly acknowledge and agree that all statements, representations and warranties of Sellers contained in the Seller Agreements are the statements, representations and warranties of each of Parent and Sub. Sellers further acknowledge and agree that both Parent and Sub shall be jointly and severally obligated to comply with and perform all undertakings, obligations and covenants of Sellers contained in the Seller Agreements, and that both Parent and Sub shall be jointly and severally liable for all losses, damages, costs and fees of any kind and nature whatsoever incurred by Buyer, for either Parent's or Sub's failure to perform said undertakings, obligations and covenants. 10.4 Bulk Sales. The parties agree to waive the requirements, if any, of all applicable bulk sales laws. As an inducement to Buyer to enter into such waiver, Sellers expressly covenant that (a) they will not be rendered insolvent by the transactions contemplated by this Agreement, and (b) all debts, obligations and liabilities relating to the Business that are not expressly assumed by Buyer under this Agreement will be promptly paid and discharged by Sellers as and when they become due. 10.5 Risk of Loss. The risk of loss, damage or condemnation of any of the Purchased Assets from any cause whatsoever shall be borne by Sellers at all times prior to the Effective Time. 10.6 Brokers. Each party represents and warrants to the other (a) that no brokers or agents have been retained or employed by it, and (b) that there are no claims for any brokerage 19 25 commission, finder's fee or similar payment due or claimed to be due from it with respect to this transaction. 10.7 Tax Filings. Each of the parties acknowledges its understanding of the requirement under Section 1060 of the Internal Revenue Code for the filing by each of Form 8594 for its respective tax year in which the Closing occurs. Each of Sellers and Buyer agrees to allocate the Purchase Price among the Purchased Assets in accordance with Exhibit 2.2. 10.8 Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense, whether or not the sale of the Purchased Assets is consummated. 10.9 Publicity. Any press releases or other announcements concerning the transactions contemplated by this Agreement shall be approved by Buyer and Sellers prior to their issuance. 10.10 Best Efforts; Cooperation. Each party agrees to use its best efforts to satisfy the conditions to the Closing set forth in this Agreement and otherwise to consummate the transactions contemplated by this Agreement. Each party further agrees to furnish the other party with such cooperation and assistance after the Closing Date with respect to matters related to the Business or the Purchased Assets as the other party may reasonably request from time to time. 10.11 Notices. All notices, demands and other communications made hereunder shall be in writing and shall be given either by personal delivery, by nationally recognized overnight courier (with charges prepaid) or by telecopy (with telephone confirmation), and shall be deemed to have been given or made when personally delivered, the day following the date deposited with such overnight courier service or when transmitted to telecopy machine and confirmed by telephone, addressed to the respective parties at the following addresses (or such other address for a party as shall be specified by like notice): If to the Sellers (which shall constitute notice to both Parent and Sub): Northwestern Steel and Wire Company 121 Wallace Street P.O. Box 618 Sterling, IL 61081-0618 Attention: Mr. Michael S. Venie Telephone: 815/625-2500 ext. 2649 Telecopy: 815/625-0440 With a copy (which shall not constitute notice) to: Katten Muchin & Zavis 525 West Monroe Street, Suite 1600 Chicago, IL 60661-3693 Attention: Mr. Herb Wander 20 26 Telephone: 312/902-5267 Telecopy: 312/902-1061 If to Buyer: Insteel Industries, Inc. 1373 Boggs Drive Mt. Airy, NC 27030 Attention: Mr. H.O. Woltz III Telephone: 336/786-2141 ext. 3041 Telecopy: 336/786-2144 With a copy (which shall not constitute notice) to: Womble Carlyle Sandridge & Rice, PLLC 1600 BB&T Financial Center 200 West Second Street Winston-Salem, NC 27102 Attention: Mr. Richard N. Drake Telephone: 336/721-3592 Telecopy: 336/733-8385 With a separate copy (which shall not constitute notice) to: McGuire Woods Battle and Boothe 3700 NCNB Plaza Charlotte, NC 28280 Attention: Mr. Richard Kane Telephone: 704/373-8957 Telecopy: 704/332-2611 10.12 Governing Law. This agreement shall be governed by the laws of the State of North Carolina without regard to the principles of conflicts of laws. 10.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.14 Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement may not be assigned by any of the parties hereto without the prior written consent of all other parties hereto, and any purported assignment without such consent shall be void. 10.15 Third Party Beneficiaries. None of the provisions of this Agreement or any document contemplated hereby is intended to grant any right or benefit to any person or entity which is not a party to this Agreement. 21 27 10.16 Headings. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of this Agreement and shall not in any way affect the meaning or interpretation of this Agreement. 10.17 Amendments. Any waiver, amendment, modification or supplement of or to any term or condition of this Agreement shall be effective only if in writing and signed by all parties hereto, and the parties hereto waive the right to amend the provisions of this Section orally. 10.18 Specific Performance. Sellers acknowledge that the Purchased Assets are unique and that if Sellers fail to consummate the transactions contemplated by this Agreement such failure will cause irreparable harm to Buyer for which there will no adequate remedy at law. Buyer shall be entitled, in addition to its other remedies at law, to specific performance of this Agreement if Sellers shall, without cause, refuse to consummate the transactions contemplated by this Agreement. 10.19 Severability. In the event that any provision in this Agreement shall be determined to be invalid, illegal or unenforceable in any respect, the remaining provisions of this Agreement shall not be in any way impaired, and the illegal, invalid or unenforceable provision shall be fully severed from this Agreement and there shall be automatically added in lieu thereof a provision as similar in terms and intent to such severed provision as may be legal, valid and enforceable. 10.20 Entire Agreement. This Agreement and the Schedules and Exhibits hereto, constitute the entire contract between the parties hereto pertaining to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings between the parties with respect to such subject matter, including without limitation the letter of intent dated January 18, 1999, which are hereby expressly terminated. [Signature page to follow] 22 28 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed by its duly authorized officer as of the date first above written. SELLERS: NORTHWESTERN STEEL AND WIRE COMPANY, an Illinois corporation By:/s/ Michael S. Venie ------------------------------ Title: Sr. Vice President --------------------------- NORTHWESTERN STEEL AND WIRE COMPANY - KENTUCKY, a Delaware corporation By:/s/ Michael S. Venie ------------------------------ Title: Sr. Vice President --------------------------- BUYER: INSTEEL INDUSTRIES, INC., a North Carolina Corporation By:/s/ H. O. Woltz III ----------------------------- Title: President -------------------------- 23 EX-21 5 LIST OF SUBSIDIARIES OF INSTEEL INDUSTRIES, INC. 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF INSTEEL INDUSTRIES, INC. The following is a list of subsidiaries of the Company as of October 2, 1999, each of which is wholly owned by the Company:
STATE OR OTHER JURISDICTION OF NAME INCORPORATION - --------------------------------- ------------------------------- Insteel Wire Products Company North Carolina Intercontinental Metals Corporation North Carolina
EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP The Board of Directors and Shareholders Insteel Industries, Inc.: We consent to incorporation by reference in the registration statements on Forms S-8 (Nos. 33-01032, 33-40410, 33-35316, 33-61887, 33-61889 and 333-48011) of Insteel Industries, Inc. of our reports dated October 15, 1999, relating to the consolidated balance sheets of Insteel Industries, Inc. and subsidiaries as of October 2, 1999 and October 3, 1998, and the related consolidated statements of earnings, shareholders' equity and cash flows for the three years ended October 2, 1999, October 3, 1998 and September 30, 1997, and related schedule for the years ended October 2, 1999, October 3, 1998 and September 30, 1997, which reports appear in the October 2, 1999 annual report on Form 10-K of Insteel Industries, Inc. ARTHUR ANDERSEN LLP Charlotte, North Carolina December 15, 1999. EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K OF INSTEEL INDUSTRIES, INC. FOR THE FISCAL YEAR ENDED OCTOBER 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR OCT-02-1999 OCT-04-1998 OCT-02-1999 827 0 31,429 375 36,360 71,253 149,951 64,422 167,896 35,620 0 0 0 16,914 60,415 167,896 270,992 270,992 235,345 235,345 0 0 2,482 15,677 5,691 9,986 0 0 0 9,986 1.18 1.18
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