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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2000
FOR THE QUARTER ENDED
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 0-20278
ENCORE WIRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2274963
(State of incorporation) (I.R.S. employer identification number)
1410 MILLWOOD ROAD
MCKINNEY, TEXAS 75069
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 562-9473
[X] 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 No
Number of shares of Common Stock outstanding as of April 30, 2000: 15,172,522
Page 1 of 16 Sequentially Numbered Pages
Index to Exhibits on Page 15
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ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 2000 (Unaudited) and December 31, 1999 ......................................3
Consolidated Statements of Income (Unaudited)
Quarters ended March 31, 2000 and
March 31, 1999.........................................................................5
Consolidated Statements of Cash Flows (Unaudited)
Quarters ended March 31, 2000 and March 31, 1999.......................................6
Notes to Consolidated Financial Statements......................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................................13
ITEM 6. Exhibits and Reports on Form 8-K...............................................................13
Signatures.......................................................................................................14
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
In Thousands of Dollars 2000 1999
(Unaudited) See Note 1
------------ ------------
ASSETS
Current assets:
Cash.......................................... $ 1,126 $ 1,256
Accounts receivable (net of allowance of
$482 and $485)............................ 53,795 46,592
Inventories (Note 2).......................... 49,143 54,638
Prepaid expenses and other assets............. 215 368
------------ ------------
Total current assets...................... 104,279 102,854
Property, plant and equipment-on the basis of cost:
Land.......................................... 3,583 3,583
Construction in Progress...................... 2,921 2,191
Buildings and improvements.................... 26,028 26,004
Machinery and equipment....................... 74,140 74,052
Furniture and fixtures........................ 1,888 1,865
------------ ------------
Total property, plant, and equipment...... 108,560 107,695
Accumulated depreciation and
amortization.......................... 30,519 28,305
------------ ------------
78,041 79,390
Other assets........................................... 162 145
------------ ------------
Total assets........................................... $ 182,482 $ 182,389
============ ============
See accompanying notes
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ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
March 31, December 31,
In Thousands of Dollars, Except Share Data 2000 1999
(Unaudited) See Note 1
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................... $ 20,167 $ 18,082
Accrued liabilities ...................................... 5,191 8,213
Current income taxes payable ............................. 1,800 514
Current deferred income taxes ............................ 1,818 1,818
-------------- --------------
Total current liabilities ................................ 28,976 28,627
Non-current deferred income taxes ................................. 5,739 5,739
Long term notes payable ........................................... 59,600 60,600
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (16,337,922
at March 31, 2000 and at
December 31, 1999) ................................ 163 163
Additional paid-in capital ........................................ 30,656 30,656
Treasury stock - 1,116,400 at March 31, 2000 and 1,006,000 at
December 31, 1999 ........................................ (9,844) (9,057)
Retained earnings ................................................. 67,192 65,661
-------------- --------------
Total stockholders' equity ............................... 88,167 87,423
-------------- --------------
Total liabilities and stockholders' equity ........................ $ 182,482 $ 182,389
============== ==============
Note: The consolidated balance sheet at December 31, 1999, as presented, is
derived from the audited consolidated financial statements at that date.
See accompanying notes
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ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended
March 31,
In Thousands of Dollars, Except Per Share Data 2000 1999
---------- ----------
Net sales ......................................................... $ 67,049 $ 63,524
Cost of goods sold ................................................ 57,862 53,498
Lower of cost or market reserve ................................... -- 844
---------- ----------
Gross profit ...................................................... 9,187 9,182
Selling, general, and administrative expenses ..................... 5,780 4,993
---------- ----------
Operating income .................................................. 3,407 4,189
Net interest expense .............................................. 1,015 518
---------- ----------
Income before income taxes ........................................ 2,392 3,671
Provision for income taxes ........................................ 861 1,413
---------- ----------
Net income ........................................................ $ 1,531 $ 2,258
========== ==========
Net income per common and common equivalent share - basic ......... $ 0.10 $ 0.14
========== ==========
Weighted average common and common equivalent shares - basic ...... 15,300 15,623
========== ==========
Net income per common and common equivalent share - diluted ....... $ 0.10 $ 0.14
========== ==========
Weighted average common and common equivalent shares - diluted .... 15,538 15,966
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Cash dividends declared per share ................................. $ -- $ --
========== ==========
See accompanying notes
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ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended
March 31,
In Thousands of Dollars 2000 1999
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OPERATING ACTIVITIES
Net income ................................................................... $ 1,531 $ 2,258
Adjustments to reconcile net income to cash provided by
(used) in operating activities:
Depreciation and amortization ........................................ 2,230 1,874
Provision for bad debts .............................................. -- --
Changes in operating assets and liabilities:
Accounts receivable .................................................. (7,202) (11,898)
Inventory ............................................................ 5,495 1,216
Accounts payable and accrued liabilities ............................. (936) (3,587)
Other assets and liabilities ......................................... 144 59
Current income taxes receivable/payable .............................. 1,285 3,549
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................. 2,547 (6,529)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ................................... (903) (2,983)
Increase in long-term investments ............................................ (18) --
Proceeds from sale of equipment .............................................. 31 28
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ................................ (890) (2,955)
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in long-term note payable ................................ (1,000) 9,200
Proceeds from issuance of common stock ....................................... -- 21
Purchase of treasury stock ................................................... (787) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .................. (1,787) 9,221
-------- --------
Net decrease in cash ............................................................. (130) (263)
Cash at beginning of period ...................................................... 1,256 1,431
-------- --------
Cash at end of period ............................................................ $ 1,126 $ 1,168
======== ========
See accompanying notes
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ENCORE WIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Encore Wire
Corporation have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation, have been included. Results of operations for
interim periods presented do not necessarily indicate the results that may be
expected for the entire year. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost, determined by the last-in,
first-out (LIFO) method, or market.
Inventories (in thousands) consisted of the following:
March 31, December 31,
2000 1999
-------------- --------------
Raw materials ........................ $ 6,416 $ 9,015
Work-in-process ...................... 3,141 5,961
Finished goods ....................... 37,755 36,545
-------------- --------------
47,312 51,521
Increase to LIFO cost ................ 1,990 3,276
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49,302 54,797
Lower of Cost or Market Adjustment ... (159) (159)
-------------- --------------
$ 49,143 $ 54,638
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An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
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NOTE 3 - INCOME PER SHARE
Income (loss) per common and common equivalent share is computed using
the weighted average number of shares of common stock and common stock
equivalents outstanding during each period. If dilutive, the effect of stock
options, treated as common stock equivalents, is calculated using the treasury
stock method.
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter Ending Quarter Ending
3/31/00 3/31/99
Numerator:
Net Income $ 1,531,000 $ 2,258,000
=============== ===============
Denominator:
Denominator for basic earnings per share - weighted
average shares 15,300,343 15,622,543
Effect of dilutive securities:
Employee stock options 237,381 343,160
--------------- ---------------
Denominator for diluted earnings per share - weighted
average shares 15,537,724 15,965,703
=============== ===============
NOTE 4 - LONG TERM NOTE PAYABLE
Effective August 31, 1999, the Company through its indirectly
wholly-owned subsidiary, Encore Wire Limited, a Texas limited partnership,
completed an unsecured loan facility with a group of banks (the "Financing
Agreement"). The Financing Agreement replaced the Company's existing credit
facility, and the Company is a guarantor of the indebtedness. The Financing
Agreement provides for maximum borrowings of the lesser of $65.0 million or the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the banks.
The calculated maximum borrowing amount available at March 31, 2000, as computed
under the Financing Agreement, was $65.0 million. The Financing Agreement is
unsecured and contains customary covenants and events of default. The Company
was in compliance with these covenants as of March 31, 2000. Pursuant to the
Financing Agreement, the Company is prohibited from declaring, paying or issuing
cash dividends. At March 31, 2000, the balance outstanding under the Financing
Agreement was $59.6 million. Amounts outstanding under the Financing Agreement
are payable on May 31, 2001 with interest due quarterly based on the bank's
prime rate or LIBOR Rate options, at the Company's election.
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NOTE 5 - STOCK REPURCHASE AUTHORIZATION
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 900,000 shares, or approximately 5.6%, of
its outstanding common stock dependent upon market conditions. Subsequent Board
actions increased this authorization. As of March 31, 2000, the Company had
repurchased an aggregate of 1,116,400 shares of its common stock in the open
market, completing this program.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a low-cost manufacturer of copper electrical building
wire and cable. The Company is a significant supplier of residential wire for
interior wiring in homes, apartments and manufactured housing and commercial
wire for commercial and industrial buildings.
Price competition for electrical wire and cable is intense, and the
Company sells its products in accordance with prevailing market prices. Copper
is the principal raw material used by the Company in manufacturing its products.
Copper accounted for approximately 60.6%, 66.2%, 73.8%, 77.4% and 76.8% of the
Company's cost of goods sold during fiscal 1999, 1998, 1997, 1996 and 1995,
respectively. The price of copper fluctuates, depending on general economic
conditions and in relation to supply and demand and other factors, which has
caused monthly variations in the cost of copper purchased by the Company. The
Company cannot predict copper prices in the future or the effect of fluctuations
in the cost of copper on the Company's future operating results.
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the three month period ended
March 31, 2000 and 1999. Reference should also be made to the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
Net sales for the first quarter of 2000 amounted to $67.0 million
compared with net sales of $63.5 million for the first quarter of 1999. This
increase was due to an increase in the selling price per copper pound for the
Company's products offset in part by a sales volume decrease of 10.8%. The
higher selling price per copper pound of product sold was primarily due to a
significant increase in the price of copper in the first quarter of 2000
compared to the first quarter of 1999. Sales volume decreased primarily as a
result of the Company's election to reduce shipments during the quarter,
primarily in February, to support announced price increases. The average sales
price per copper pound of product sold was $1.53 in the first quarter of 2000,
compared to $1.29 in the first quarter of 1999. Fluctuations in sales prices are
primarily a result of changing copper raw material prices and product price
competition.
Cost of goods sold was $57.9 million in the first quarter of 2000,
compared to $54.3 million in the first quarter of 1999. Copper costs increased
to $35.8 million in the first quarter of 2000 compared to $34.7 million in the
first quarter of 1999. This increase was due to the higher price of copper in
the first quarter of 2000 compared to the first quarter of 1999, offset in part
by the decreased pounds of copper sold. The average cost per copper pound
purchased increased to $.85 in the first quarter of 2000 from $.67 in the first
quarter of 1999. Copper costs as a percentage of net sales decreased to 53.4% in
the first quarter of 2000 from 54.7% in the first quarter of 1999. This decrease
as a percentage of net sales in the first quarter of 2000 from the comparable
quarter in 1999 was primarily due to an increased differential between what the
Company paid per pound of copper purchased and the Company's net sales price per
copper pound sold. This differential increased in the first quarter of 2000 due
to improved competitive pricing for the Company's products. Other raw material
costs as a percentage of net sales decreased to 15.0% in the first quarter of
2000, compared with 16.7% in the first quarter of 1999. This decrease as a
percentage of sales was a result of other raw material costs per copper pound
increasing slightly offset by an increase in the sales price per copper pound
(the
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denominator) as discussed above. Depreciation, labor and overhead costs as a
percentage of net sales decreased to 15.9% in the first quarter of 2000 from
16.5% in the first quarter of 1999. This decrease was due to an increase in
depreciation, labor and overhead per pound of copper sold relating to the
Company's expansion projects, offset by a higher sales price per copper pound of
product sold as discussed above.
Inventories are stated at the lower of cost, determined by the last in,
first out (LIFO) method, or market. As permitted by generally accepted
accounting principles, the Company maintains its inventory costs and cost of
goods sold on a first in, first out (FIFO) basis and makes a quarterly LIFO
adjustment to adjust total inventory and cost of goods sold to LIFO. As a result
of increases in the price of copper during the first quarter of 2000, the value
of all inventory at March 31, 2000 using the LIFO method was greater than its
FIFO value by approximately $2.0 million, resulting in a corresponding increase
in the cost of goods sold of $1.3 million. At March 31, 2000, LIFO value
exceeded the market value of the inventory by $159,000. At December 31, 1999
there was a reserve in the amount of $159,000 for this excess. Thus, at March
31, 2000 no addition was made to this reserve. As a result of decreases in the
price of copper during the first quarter of 1999, the value of all inventory at
March 31, 1999 using the LIFO method was greater than its FIFO value by
approximately $8.9 million, resulting in a corresponding decrease in the cost of
goods sold of $2.3 million. At March 31, 1999, LIFO value exceeded the market
value of the inventory by approximately $3.5 million. At December 31, 1998 there
was a reserve in the amount of $2.6 million for this excess. Thus, at March 31,
1999 an addition was made to this reserve in the amount of $844,000 which
decreased the cost of inventory to market and increased the cost of goods sold.
Future reductions in the price of copper could require the Company to record a
lower of cost or market adjustment against the related inventory balance, which
would result in a negative impact on net income. Additionally, a reduction in
the quantity of inventory in any period could cause copper that is carried in
inventory at costs different from the cost of copper in that period to be
included at the different price in cost of goods sold for that period.
Gross profit remained constant at $9.2 million, or 13.7% of net sales,
for the first quarter of 2000 and 14.5% of net sales for the first quarter of
1999. The decrease in gross profit as a percentage of net sales was due
primarily to decreased sales volume in the first quarter of 2000, as discussed
above, partially offset by improved pricing for the Company's products.
General and administrative expenses increased to $1.5 million, or 2.2%
of net sales, in the first quarter of 2000 compared to $1.2 million, or 1.9% of
net sales, in the first quarter of 1999. This increase was due primarily to
increased costs relating to the Company's information systems upgrade and
infrastructure put in place for increased sales volume. Selling expenses for the
first quarter of 2000 were $4.3 million, or 6.4% of net sales, compared to $3.8
million, or 6.0% of net sales, in the first quarter of 1999. The increase was
due primarily to the increase in freight costs resulting from increased energy
costs and higher commissions relating to a higher sales price per copper pound
as described above.
Net interest expense was $1.0 million in the first quarter of 2000
compared to $518,000 in the first quarter of 1999. The increase was due to a
higher average debt balance outstanding during the first quarter of 2000 than
the comparable period during 1999, reduced by the capitalization of interest
related to the Company's construction during the first quarter of 1999. This
increase in average debt funded capital expenditures and additional working
capital in prior quarters. The amount of working capital increased due to
increased inventory and an increased accounts receivable balance.
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The Company's effective tax rate decreased to 36.0% in the first
quarter of 2000 from 38.5% in the first quarter of 1999. The lower effective tax
rate in 2000 resulted in part from a subsidiary restructuring completed in the
third quarter of 1999.
As a result of the foregoing factors, the Company's net income
decreased to $1.5 million in the first quarter of 2000 from $2.3 million in the
first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a substantial inventory of finished products to
satisfy customers' prompt delivery requirements. As is customary in the
industry, the Company provides payment terms to most of its customers that
exceed terms that it receives from its suppliers. Therefore, the Company's
liquidity needs have generally consisted of operating capital necessary to
finance these receivables and inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company's manufacturing
operations. The Company has satisfied its liquidity and capital expenditure
needs with cash generated from operations, borrowings under its revolving credit
facilities and sales of its common stock.
Effective August 31, 1999, the Company, through its indirectly
wholly-owned subsidiary, Encore Wire Limited, a Texas limited partnership,
completed an unsecured loan facility with a group of banks (the "Financing
Agreement"). The Financing Agreement replaced the Company's existing credit
facility, and the Company is a guarantor of the indebtedness. The Financing
Agreement provides for maximum borrowings of the lesser of $65.0 million or the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the banks.
The calculated maximum borrowing amount available at March 31, 2000, as computed
under the Financing Agreement, was $65.0 million. The Financing Agreement is
unsecured and contains customary covenants and events of default. The Company
was in compliance with these covenants as of March 31, 2000. Pursuant to the
Financing Agreement, the Company is prohibited from declaring, paying or issuing
cash dividends. At March 31, 2000, the balance outstanding under the Financing
Agreement was $59.6 million. Amounts outstanding under the Financing Agreement
are payable on May 31, 2001 with interest due quarterly based on the bank's
prime rate or LIBOR Rate options, at the Company's election.
Cash provided by operations was $2.5 million in the first quarter of
2000 compared to cash used by operations in the amount of $6.5 million in the
first quarter of 1999. This increase in cash provided by operations primarily
resulted from a decrease in net income offset by a smaller increase in accounts
receivable during the first quarter of 2000 compared to 1999 and a larger
decrease in inventory in the first quarter of 2000 compared to the same period
in 1999. Cash used in investing activities decreased from $3.0 million in the
first quarter of 1999 to $890,000 in the first quarter of 2000. In both
quarters, these funds were used primarily to increase the Company's production
capacity and, in the case of the first quarter of 1999, for the Company's
vertical integration projects. Cash provided by financing activities in the
first quarter of 1999 was due primarily to borrowings under the Company's line
of credit. Cash used by financing activities in the first quarter of 2000 was
used to repay borrowings under the Company's line of credit ($1.0 million) and
to purchase treasury stock ($787,000).
During 2000, the Company expects its capital expenditures will consist
of additional manufacturing equipment for its residential and commercial wire
operations. The total capital expenditures in 2000 are estimated to be less than
$7.5 million. The Company also expects its working capital requirements to
increase during 2000 as a result of expected continued increases in sales.
Moreover, the Company expects that the inventory levels necessary to support
sales of additional wire products will continue to grow. The price of
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copper will impact these working capital requirements. The Company believes that
the cash flow from operations and the financing that it expects to receive from
its banks under the Financing Agreement will satisfy working capital and capital
expenditure requirements for the next twelve months.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains various "forward-looking statements"
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934) and information that are based on
management's belief as well as assumptions made by and information currently
available to management. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected. Among the key factors that may have a direct bearing on the Company's
operating results are fluctuations in the economy and in the level of activity
in the building and construction industry, demand for the Company's products,
the impact of price competition and fluctuations in the price of copper.
PART II. OTHER INFORMATION
ITEM 1. LEGAL MATTERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) No reports on Form 8-K were filed by the Company during the
three months ended March 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENCORE WIRE CORPORATION
------------------------------------------
(Registrant)
Date: May 12, 2000 /s/ VINCENT A. REGO
------------------------------------------
Vincent A. Rego, Chairman of the Board and
Chief Executive Officer
Date: May 12, 2000 /s/ DANIEL L. JONES
------------------------------------------
Daniel L. Jones, President and
Chief Operating Officer
Date: May 12, 2000 /s/ SCOTT D. WEAVER
------------------------------------------
Scott D. Weaver, Vice President - Finance,
Treasurer and Secretary
(Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule