SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (Fee required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No fee required)
For the transition period from _______ to ____
Commission File Number: 020278
ENCORE WIRE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<Table>
DELAWARE 75-2274963
(State of incorporation) (I.R.S. Employer Identification No.)
1410 MILLWOOD ROAD 75069
MCKINNEY, TEXAS (Zip Code)
(Address of principal executive offices)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 562-9473
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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 this
Form 10-K.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended).
Yes [X] No [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant computed by reference to the price at which the common equity was
last sold as of the last business day of the Registrant's most recently
completed second fiscal quarter was $217,201,953 (the characterization of
officers and directors of the Registrant for purposes of this computation should
not be construed as an admission for any other purpose that any such person is
in fact an affiliate of the Registrant).
Number of shares of Common Stock outstanding as of March 7, 2003: 15,119,065
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents, parts of which are incorporated herein by reference,
and the part of this report into which the document is incorporated:
(1) Proxy statement for the 2003 annual meeting of stockholders -- Part III
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
NUMBER
------
PART I............................................................................................................1
ITEM 1. BUSINESS..........................................................................................1
General...........................................................................................1
Strategy..........................................................................................1
Products..........................................................................................2
Manufacturing.....................................................................................2
Customers.........................................................................................3
Marketing and Distribution........................................................................3
Employees.........................................................................................3
Raw Materials.....................................................................................4
Competition.......................................................................................4
Intellectual Property Matters.....................................................................4
Internet Address..................................................................................4
ITEM 2. PROPERTIES........................................................................................5
ITEM 3. LEGAL PROCEEDINGS.................................................................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................5
EXECUTIVE OFFICERS OF THE COMPANY.................................................................5
PART II...........................................................................................................6
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................6
Equity Compensation Plan Information..............................................................6
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA..............................................................7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............8
General...........................................................................................8
Results of Operations.............................................................................8
Off-Balance Sheet Arrangements...................................................................10
Liquidity and Capital Resources..................................................................10
Critical Accounting Policies.....................................................................11
Recent Accounting Pronouncements.................................................................12
Information Regarding Forward Looking Statements.................................................12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............28
PART III.........................................................................................................28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..................................................28
ITEM 11. EXECUTIVE COMPENSATION...........................................................................28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.............................................28
ITEM 14. CONTROLS AND PROCEDURES..........................................................................28
PART IV..........................................................................................................29
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K......................................................................................29
SIGNATURES....................................................................................30
CERTIFICATIONS................................................................................32
</Table>
ii
PART I
ITEM 1. BUSINESS
GENERAL
Encore Wire Corporation is a Delaware corporation, incorporated in
1990, with its principal executive office and plant located at 1410 Millwood
Road, McKinney, Texas 75069. Its telephone number is (972) 562-9473. As used in
this Annual Report, unless otherwise required by the context, the terms
"Company" and "Encore" refer to Encore Wire Corporation and its consolidated
entities, including Encore Wire Limited, a Texas limited partnership ("Encore
Wire Limited") through which the Company's operations are conducted.
Encore is a low-cost manufacturer of copper electrical building wire
and cable. The Company is a significant supplier of both residential wire for
interior electrical wiring in homes, apartments and manufactured housing, and
commercial wire for electrical distribution in commercial and industrial
buildings.
The principal customers for Encore's wire are wholesale electrical
distributors, which serve both the residential and commercial wire markets. The
Company sells its products primarily through manufacturers' representatives
located throughout the United States and, to a lesser extent, through its own
direct in-house marketing efforts.
Encore's strategy is to further expand its share of the markets for
residential wire and for commercial wire primarily by emphasizing a high level
of customer service and low-cost production and, to a lesser extent, the
addition of new products that complement its current product line. The Company
maintains product inventory levels sufficient to meet anticipated customer
demand and believes that the speed and completeness with which it fills customer
orders are key competitive advantages critical to marketing its products.
Encore's low-cost production capability features an efficient plant design
incorporating highly automated manufacturing equipment, an integrated production
process and a small, incentivized work force.
During the fourth quarter of 2002, the Company completed the Plant 3
manufacturing expansion capital project. This project involved the building of a
new 192,000 square foot building and the installation of machinery and
equipment. A portion of the machines in the new plant were moved from existing
buildings to de-bottleneck certain production processes which had become
cramped. New machines were also purchased and installed. This project was
undertaken to maintain the efficient plant design discussed above and to ensure
the Company has sufficient capacity to allow for continued growth in volume of
both existing products and some new closely related products.
STRATEGY
Encore's strategy for expanding its share of the residential wire and
commercial wire markets emphasizes customer service coupled with low-cost
production.
Customer Service. Responsiveness to customers is a primary focus of
Encore, with an emphasis on building and maintaining strong customer
relationships. Encore seeks to establish customer loyalty by achieving
a high order fill rate and rapidly handling customer inquiries, orders,
shipments and returns. The Company maintains product inventories
sufficient to meet anticipated customer demand and believes that the
speed and completeness with which it fills orders are key competitive
advantages critical to marketing its products.
Low-Cost Production. Encore's low-cost production capability features
an efficient plant design and a small, incentivized work force.
Efficient Plant Design. Encore's highly automated wire manufacturing
equipment is integrated in an efficient design that reduces materials
handling, labor and in-process inventory.
Incentivized Work Force. Encore's hourly manufacturing employees are
eligible to receive incentive pay tied to productivity and quality
standards. The Company believes that this compensation program enables
the plant's manufacturing lines to attain high output and motivates
manufacturing employees to continually maintain product quality. The
Company also believes that its stock option plan enhances the
motivation of its salaried manufacturing supervisors. The Company has
coupled these incentives with a comprehensive safety program that
emphasizes employee participation.
1
PRODUCTS
Encore offers a residential wire product line that consists primarily
of NM cable and UF cable. Encore's commercial product line consists primarily of
THHN, the most widely used type of commercial wire. Additionally, the Company
manufactures other types of commercial wire products. The Company's NM, UF and
THHN cable are all manufactured with copper as the conductor. The Company also
purchases small quantities of other types of wire to re-sell to the customers
that buy the products it manufactures. The Company maintains between 400 and 500
stock-keeping units ("SKUs") of residential wire and between 4,500 and 5,000
SKUs of commercial wire. The principal bases for differentiation among SKUs are
product diameter, insulation, color and packaging.
Residential Wire
NM Cable. Non-metallic sheathed cable is used primarily as
interior wiring in homes, apartments and manufactured housing.
NM cable is composed of either two or three insulated copper
wire conductors, with or without an uninsulated ground wire,
all sheathed in a polyvinyl chloride ("PVC") jacket.
UF Cable. Underground feeder cable is used to conduct power
underground to outside lighting and other applications remote
from residential buildings. UF cable is composed of two or
three PVC insulated copper wire conductors, with or without an
uninsulated ground wire, all jacketed in PVC.
Commercial Wire
THHN Cable. THHN cable is used primarily as feeder, circuit
and branch wiring in commercial and industrial buildings. It
is composed of a single conductor, either stranded or solid,
and insulated with PVC, which is further coated with nylon.
Users typically enclose THHN cable in protective pipe or
conduit.
MANUFACTURING
The efficiency of Encore's highly automated manufacturing facility is a
key element of its low-cost production capability. Encore's residential wire
manufacturing lines have been integrated so that handling of product is
substantially reduced. At the few points remaining where handling between
manufacturing steps is necessary the Company has, for the most part, replaced
reels with large baskets, each capable of handling approximately four times the
capacity of a reel. Encore's commercial wire plant is designed to reduce product
handling by integrating steps within production stages and, again, by using
baskets instead of reels where feasible.
The manufacturing process for the Company's products involves up to six
steps: casting, drawing, stranding, blending, insulating and jacketing.
Rod Casting. Rod Casting is the process of melting sheets of copper
cathode and copper scrap and casting the hot copper into a 5/16 inch
copper rod to be drawn into copper wire.
Drawing. Drawing is the process of reducing 5/16 inch copper rod
through converging dies until the specified wire diameter is attained.
The wire is then heated with electrical current to soften or "anneal"
the wire to make it easier to handle.
Stranding. Stranding is the process of twisting together from seven to
61 individual wire strands to form a single cable. The purpose of
stranding is to improve the flexibility of wire while maintaining its
electrical current carrying capacity.
PVC Blending. PVC blending is the process of mixing the various raw
materials that are required to produce the PVC necessary to meet UL
specifications for the insulation and jacket requirements for the wire
that is manufactured.
Insulating. Insulating is the process of extruding first PVC and then
nylon (where applicable) over the solid or stranded wire.
Jacketing. Jacketing is the process of extruding PVC over two or more
insulated conductor wires, with or without an uninsulated ground wire,
to form a finished product. The Company's jacketing lines are
integrated with packaging lines that cut the wire and coil it onto
reels or package it in boxes or shrink-wrap.
2
Encore manufactures and tests all of its products in accordance with
the standards of Underwriters Laboratories, Inc. ("U/L"), a nationally
recognized testing and standards agency. Encore's machine operators and quality
control inspectors conduct frequent product tests. At three separate
manufacturing stages, the Company spark tests insulated wire for defects. The
Company tests finished products for electrical continuity to insure compliance
with its own quality standards and those of U/L. Encore's manufacturing lines
are equipped with laser micrometers to measure wire diameter and insulation
thickness while the lines are in operation. During each shift, operators take
physical measurements of products, which Company inspectors randomly verify on a
daily basis. Although suppliers pretest PVC and nylon compounds, the Company
tests products for aging and for cracking and brittleness of insulation and
jacketing. Encore sells all of its products with a one-year replacement
warranty.
CUSTOMERS
Encore sells its wire principally to wholesale electrical distributors
throughout the United States and, to a lesser extent, to retail home improvement
centers. Most distributors supply products to electrical contractors. The
Company sells its products to at least 65% of the top 250 wholesale electrical
distributors (by volume) in the United States according to information reported
in the September 2002 issue of Electrical Wholesaling magazine. No customer
accounted for more than ten percent of net sales in 2002.
Encore believes that the speed and completeness with which it fills
customers' orders are crucial to its ability to expand the market share for its
products. The Company also believes that, in order to reduce costs, many
customers no longer maintain their own substantial warehouse inventories.
Because of this trend, the Company seeks to maintain sufficient inventories to
satisfy customers' prompt delivery requirements.
MARKETING AND DISTRIBUTION
Encore markets its products throughout the United States primarily
through manufacturers' representatives and, to a lesser extent, through its own
direct marketing efforts.
Encore maintains the majority of its finished product inventory at its
plant in McKinney, Texas. In order to provide flexibility in handling customer
requests for immediate delivery of the Company's products, additional product
inventories are maintained at warehouses owned and operated by independent
manufacturers' representatives located throughout the United States. At December
31, 2002, additional product inventories are maintained at the warehouses of
independent manufacturers' representatives located in Chattanooga, Tennessee;
Cincinnati, Ohio; Detroit, Michigan; Edison, New Jersey; Louisville, Kentucky;
Greensboro, North Carolina; Pittsburgh, Pennsylvania; Santa Fe Springs,
California; and Hayward, California. Some of these manufacturers'
representatives, as well as the Company's other manufacturers' representatives,
maintain offices without warehouses in numerous locations throughout the United
States.
Finished goods are typically delivered to warehouses and customers by
trucks operated by common carriers. The decision regarding the carrier to be
used is based primarily on cost and availability.
The Company invoices its customers directly for products purchased and,
if an order has been obtained through a manufacturer's representative, pays the
representative a commission based on pre-established rates. The Company
determines customers' credit limits. The Company's bad debt experience was
0.06%, 0.06%, and 0.05% of net sales in 2002, 2001 and 2000, respectively. The
manufacturers' representatives have no discretion to increase customers' credit
limits or to determine prices charged for the Company's products, and all sales
are subject to approval by the Company.
EMPLOYEES
Encore believes that its hourly employees are highly motivated and that
their motivation contributes significantly to the plant's operating efficiency.
The Company attributes the motivation of these employees largely to the fact
that a significant portion of their compensation comes from incentive pay that
is tied to productivity and quality standards. The Company believes that its
incentive program focuses its employees on maintaining product quality.
Encore emphasizes safety to its manufacturing employees through its
safety program. On a weekly basis, each team of employees meets to review safety
standards and, on a monthly basis, a group of participants from each team
discusses safety issues and inspects each area of the plant for compliance. The
Company's safety program is an integral part of its focus on cost control.
As of December 31, 2002, Encore had 617 employees, 539 of whom were
paid hourly wages and were primarily engaged in the operation and maintenance of
the Company's manufacturing and warehouse facility. The remainder of the
Company's employees were executive, supervisory, administrative, sales and
clerical personnel. The Company considers
3
its relations with its employees to be good. The Company has no collective
bargaining agreements with any of its employees.
RAW MATERIALS
The principal raw materials used by Encore in manufacturing its
products are copper cathode, copper scrap, PVC thermoplastic compounds, paper
and nylon, all of which are readily available from a number of suppliers. Copper
requirements are purchased primarily from producers and merchants at prices
determined each month primarily based on the average daily closing prices for
copper for that month, plus a negotiated premium. The Company also purchases raw
materials necessary to manufacture various PVC thermoplastic compounds. These
raw materials include PVC resin, clay and plasticiser.
The Company began production from its copper rod fabrication facility
in June 1998. Prior to completion of the new copper rod fabrication facility,
the Company used copper rod purchased from others to manufacture its wire and
cable products. In 2002, the copper rod fabrication facility manufactured all of
the Company's copper rod requirements. The Company produces copper rod from
purchased copper cathodes. The Company also reprocesses copper scrap generated
by its operations and copper scrap purchased from others.
In 1999, the Company completed a new facility to manufacture PVC. The
process involves the mixture of PVC raw material components to produce the PVC
used to insulate the Company's wire and cable products. The raw materials
include PVC resin, clay and plasticiser. During 2002, this facility produced all
of the Company's PVC requirements.
COMPETITION
The electrical wire and cable industry is highly competitive. The
Company competes with several manufacturers of wire and cable products, some of
whom are substantially larger companies than the Company and offer lines of
electrical wire and cable products beyond the building wire segment in which the
Company competes. The Company's competitors include Southwire Corporation, Essex
Electric (a subsidiary of Alpine Group, Inc.) and Cerro Wire and Cable Co. Inc.
The principal elements of competition in the electrical wire and cable
industry are, in the opinion of the Company, pricing, order fill rate and, in
some instances, breadth of product line. The Company believes that it is
competitive with respect to all of these factors.
Competition in the electrical wire and cable industry, although
intense, has been primarily from U.S. manufacturers, including foreign owned
facilities located in the United States. The Company has encountered no
significant competition from imports of residential or commercial wire. The
Company believes this is because direct labor costs generally account for a
relatively small percentage of the cost of goods sold for these products.
INTELLECTUAL PROPERTY MATTERS
The Company owns the following registered trademarks: U.S. Registration
Number 2,687,746 for the "ENCORE WIRE" mark; U.S. Registration Number 2,582,340
for the mark "NONLEDEX" for use in connection with the conductor insulation
material; U.S. Registration Number 1,900,498 for the ENCORE WIRE LOGO design
mark; and U.S. Registration Number 2,263,692 for the mark "HANDY MAN'S CHOICE."
INTERNET ADDRESS
Our internet address is http://www.encorewire.com. You can review the
filings Encore Wire has made with the U.S. Securities and Exchange Commission
("SEC"), free of charge by linking directly from our website to NASDAQ's, a
database that allows you to access our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after the reports have
been electronically filed with or furnished to the SEC.
4
ITEM 2. PROPERTIES
Encore maintains its corporate office and manufacturing plant in
McKinney, Texas, approximately 35 miles north of Dallas. The Company's
facilities are located on a combined site of approximately 105 acres and consist
of buildings containing approximately 926,000 square feet of floor space, of
which approximately 24,000 square feet are used for office space and 902,000
square feet are used for manufacturing and warehouse operations. The plant and
equipment are owned by the Company and are not mortgaged to secure any of the
Company's existing indebtedness. Encore believes that its plant and equipment
are suited to its present needs, comply with applicable federal, state and local
laws and regulations and are properly maintained and adequately insured.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation and claims that arise out of the
ordinary business of the Company. While the results of these matters cannot be
predicted with certainty, the Company does not believe the final outcome of such
litigation and claims will have a material adverse effect on the financial
condition, the results of operations or cash flows of the Company because the
Company believes that it has adequate insurance and reserves to cover any
damages that may ultimately be awarded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Information regarding Encore's executive officers including their
respective ages at March 19, 2003 is set forth below.
<Table>
<Caption>
Name Age Position with Company
- ---- --- ---------------------
Vincent A. Rego 79 Chairman of the Board of Directors, and
Chief Executive Officer
Daniel L. Jones 39 President, Chief Operating Officer, and
Member of the Board of Directors
David K. Smith 43 Vice President -- Operations
Frank J. Bilban 46 Vice President -- Finance, Treasurer and
Secretary
</Table>
Mr. Rego has been Chairman of the Board of Directors of Encore since
1989. In October 1997, Mr. Rego was named President and Chief Executive Officer
of the Company. He served as President until May 1998. From 1978 until 1988, Mr.
Rego served as President, Chief Executive Officer and Chairman of the Board of
Directors of Capital Wire and Cable Corporation ("Capital Wire"), which was
purchased by General Cable Corporation in 1988. Prior thereto, Mr. Rego was
associated with predecessors of Capital Wire in various executive capacities.
Mr. Jones has been President of the Company since May 1998. In May
1997, Mr. Jones was named Executive Vice President of the Company, and in
October 1997, he was named Chief Operating Officer. He previously held the
position of Vice President-Sales and Marketing of Encore from 1992 to May 1997.
He also serves as a member of the Board of Directors.
Mr. Smith has been Vice President -- Operations of Encore since 1992.
From 1984 until joining the Company in 1990, Mr. Smith was employed by General
Cable Corporation.
Mr. Bilban has been Vice President -- Finance, Treasurer and Secretary
of Encore since June 2000. From 1998 until joining the Company in June 2000, Mr.
Bilban was Executive Vice President and Chief Financial Officer of Alpha
Holdings Inc., a plastics manufacturing concern. From 1996 until 1998, Mr.
Bilban was Vice President and Chief Financial Officer of Wedge Dia-Log Inc., an
oil field services company based in. From 1991 until 1996, Mr. Bilban held
financial positions, including Division Controller, with the CT Film Division of
Rexene Corporation. From 1978 until 1991 he was employed in various financial
capacities with several divisions of Outboard Marine Corporation.
5
All executive officers are elected annually by the Board of Directors
to serve until the next annual meeting of the Board or until their respective
successors are chosen and qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted in the NASDAQ Stock Market's
National Market under the symbol "WIRE." The following table sets forth the high
and low closing sales prices per share for the Common Stock as reported in the
NASDAQ Stock Market's National Market for the periods indicated.
<Table>
<Caption>
HIGH LOW
----------- -----------
2002
First Quarter ........................ $ 16.75 $ 11.65
Second Quarter ....................... 16.42 12.30
Third Quarter ........................ 14.30 8.59
Fourth Quarter ....................... 10.40 7.49
2001
First Quarter ........................ $ 9.00 $ 6.13
Second Quarter ....................... 12.06 7.50
Third Quarter ........................ 14.88 8.00
Fourth Quarter ....................... 13.40 10.13
</Table>
On March 7, 2003, the last reported sale price of the Common Stock was
$8.60 per share. As of March 7, 2003, there were 120 record holders of the
Common Stock. The Company estimates that there were approximately 2,100
beneficial holders of the Common Stock.
The Company has never paid cash dividends. Management intends to retain
any future earnings for the operation and expansion of the Company's business
and does not anticipate paying any cash dividends in the foreseeable future. The
Company's present credit arrangements restrict the Company's ability to pay cash
dividends. See Note 4 of Notes to Consolidated Financial Statements.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about our equity compensation
plans as of March 31, 2003.
<Table>
<Caption>
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
---------------------------- ---------------------------- ----------------------------
PLAN CATEGORY (a) (b) (c)
Equity compensation plans
approved by security holders 753,710 $ 9.79 39,500
Equity compensation plans not
approved by security holders -0- -0- -0-
---------------------------- ---------------------------- ----------------------------
TOTAL 753,710 $ 9.79 39,500
</Table>
6
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net Sales ....................................... $ 285,207 $ 281,010 $ 283,689 $ 229,670 $ 244,044
Cost of goods sold .............................. 250,267 240,553 243,132 197,636 195,060
--------- --------- --------- --------- ---------
Gross profit .................................. 34,940 40,457 40,557 32,034 48,984
Selling, general and administrative expenses...... 23,891 24,475 24,027 18,742 18,083
--------- --------- --------- --------- ---------
Operating income ................................. 11,049 15,982 16,530 13,292 30,901
Other income (expense):
Interest and other income ....................... (64) 116 128 104 145
Interest expense ................................ 1,666 1,833 4,080 2,922 1,876
--------- --------- --------- --------- ---------
Income before income taxes ....................... 9,319 14,265 12,578 10,474 29,170
Income tax expense ............................... 3,355 5,135 4,528 3,880 11,602
--------- --------- --------- --------- ---------
Net income ....................................... $ 5,964 $ 9,130 $ 8,050 $ 6,594 $ 17,568
========= ========= ========= ========= =========
Net income per common and common
equivalent share - basic ........................ $ .39 $ 0.61 $ 0.53 $ 0.43 $ 1.11
========= ========= ========= ========= =========
Net income per common and common
equivalent share - diluted ...................... $ .39 $ 0.60 $ 0.52 $ 0.42 $ 1.07
========= ========= ========= ========= =========
Weighted average common and common
equivalent shares - basic ...................... 15,203 15,068 15,217 15,468 15,844
Weighted average common and common
equivalent shares - diluted ..................... 15,339 15,157 15,383 15,713 16,388
</Table>
<Table>
<Caption>
DECEMBER 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
-------- --------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ................................ $ 75,679 $ 62,363 $ 68,547 $ 74,228 $ 52,825
Total assets ................................... 183,129 171,696 171,839 182,389 156,948
Long-term debt, net of current portion ......... 47,500 30,000 42,600 60,600 44,000
Stockholders' equity ........................... 106,519 102,928 93,546 87,423 83,655
</Table>
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following management's discussion and analysis is intended to provide a
better understanding of key factors, drivers and risks regarding the Company and
the building wire industry.
GENERAL
Price competition for electrical wire and cable is intense and the Company
sells its products in accordance with prevailing market prices. Copper, a
commodity product, is the principal raw material used by the Company in
manufacturing its products. Copper accounted for approximately 63.9%, 66.6%,
63.9%, 60.6% and 66.2% of the Company's cost of goods sold during fiscal 2002,
2001, 2000, 1999 and 1998, respectively. The price of copper fluctuates,
depending on general economic conditions and in relation to supply and demand
and other factors, and 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.
RESULTS OF OPERATIONS
The following table presents certain items of income and expense as a
percentage of net sales for the periods indicated.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
2002 2001 2000
------ ------ ------
Net sales ............................................ 100.0% 100.0% 100.0%
Cost of goods sold:
Copper .......................................... 56.1 57.0 54.8
Other raw materials ............................. 12.7 13.6 14.0
Depreciation .................................... 3.5 3.2 3.0
Labor and overhead .............................. 14.2 13.6 13.3
LIFO adjustment ................................. 0.7 (2.7) 0.7
Lower of cost or market adjustment .............. 0.5 0.9 (0.1)
----- ----- -----
87.7 85.6 85.7
----- ----- -----
Gross profit ......................................... 12.3 14.4 14.3
Selling, general and administrative expenses.......... 8.4 8.7 8.5
----- ----- -----
Operating income ..................................... 3.9 5.7 5.8
Interest expense, net ................................ 0.6 0.7 1.4
----- ----- -----
Income before income taxes ........................... 3.3 5.0 4.4
Income tax expense ................................... 1.2 1.8 1.6
----- ----- -----
Net income ........................................... 2.1% 3.2% 2.8%
===== ===== =====
</Table>
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the years ended December 31,
2002, 2001, and 2000. Reference should also be made to the Consolidated
Financial Statements and the related notes included elsewhere in this Annual
Report.
Net sales were $285.2 million in 2002, compared to $281.0 million in
2001 and $283.7 million in 2000. The increase in net sales in 2002 over 2001 was
the net result of a 6.1% increase in the volume of copper pounds of product
sold, offset by a 9.6% decrease in average price of product sold and a slight
change in the mix of product sold. The decrease from 2000 to 2001 resulted from
an 11.5% increase in sales volume, offset by an 11.1% decrease in the average
price of product sold and a slight change in the mix. Sales volume increases
were due to several factors, including increased customer acceptance and product
availability. In 2002, the Company continued to expand sales to the existing
customer base and increased the number of customers to which it sold its
products. The 9.6% decrease in the average price of product sold in 2002 was due
primarily to intense price competition in the building wire industry resulting
in a compression of the Company's margins. The Company currently sells its
products to at least 65% of the top 250 wholesale electrical distributors (by
volume) in the United States, as reported in the September 2002 issue of
Electrical Wholesaling magazine.
8
Cost of goods sold was $250.3 million in 2002, compared to $240.6
million in 2001 and $243.1 million in 2000. Copper costs decreased slightly to
$159.9 million in 2002 from $160.3 million in 2001 and $155.4 million in 2000.
Copper costs as a percentage of net sales decreased to 56.1% in 2002 from 57.0%
in 2001 and increased from 54.8% in 2000. The slight decrease as a percentage of
net sales was due primarily to changes in the mix of products sold. Other raw
material costs as a percentage of net sales were 12.7%, 13.6% and 14.0%, in
2002, 2001, and 2000, respectively. The decrease is due primarily to the
Company's cost of other raw materials per pound of copper sold declining more
than the price of copper wire sold. Depreciation, labor and overhead costs as a
percentage of net sales were 17.8% in 2002, compared to 16.8% in 2001 and 16.3%
in 2000. The percentage increase in 2002 was due to these costs containing
significant fixed components versus the elastic nature of the price of copper
wire sold as well as an increase of $955,000 in depreciation cost in 2002
stemming from the manufacturing expansion (Plant 3) that was completed during
2002.
Inventories consist of the following at December 31:
<Table>
<Caption>
2002 2001
--------------- ---------------
Raw materials $ 12,690,079 $ 3,761,870
Work-in-process 4,231,225 3,671,218
Finished goods 30,215,622 31,081,648
--------------- ---------------
47,136,926 38,514,736
Adjust to LIFO cost 7,017,373 8,933,919
Lower of cost or market adjustment (3,989,406) (2,612,075)
--------------- ---------------
$ 50,164,893 $ 44,836,580
=============== ===============
</Table>
Although copper prices were relatively stable in 2000, the price at the
end of 2000 was higher than at the end of 1999 and the copper pounds in
inventory were reduced during the year. As a result of the increase in the cost
of copper in 2000, the value of all inventories at December 31, 2000 using the
LIFO method was greater than the FIFO value by approximately $1,348,000,
resulting in a corresponding increase in the cost of goods sold of $1,928,000.
At December 31, 2000, LIFO value was less than the market value of the
inventory, thereby requiring a reversal of the previously established lower of
cost or market reserve of approximately $159,000 and a corresponding decrease in
the cost of goods sold. The net effect of these two adjustments increased cost
of goods sold by $1,769,000. As of December 31, 2001, the value of all
inventories using the LIFO method was greater than the FIFO value by $8,934,000.
This differential exceeded the December 31, 2000 differential of $1,348,000 by
$7,586,000, resulting in a corresponding decrease in cost of goods sold. As of
December 31, 2001, the LIFO cost basis of inventory exceeded its market value by
$2,612,000, resulting in the Company establishing a lower of cost or market
reserve for this amount, which increased cost of goods sold. The net effect of
these two adjustments decreased cost of goods sold by $4,974,000. As of December
31, 2002, the value of all inventories using the LIFO method was greater than
the FIFO value by $7,017,000. This differential was $1,917,000 less than the
December 31, 2001 differential of $8,934,000, resulting in a corresponding
increase in cost of goods sold. As of December 31, 2002, the LIFO cost basis of
inventory exceeded its market value by $3,989,000, resulting in the Company
establishing a lower of cost or market reserve for this amount, which increased
cost of goods sold by $1,377,000. The net effect of these two adjustments
increased cost of goods sold for the year by $3,294,000.
Gross profit decreased to $34.9 million, or 12.3% of nets sales, in
2002 from $40.5 million, or 14.4% of net sales, in 2001 and $40.6 million, or
14.3% of net sales, in 2000. The changes in gross profit were due to the factors
discussed above.
Selling expenses, which include freight and sales commissions, were
$17.9 million in 2002, $17.3 million in 2001 and $17.6 million in 2000. As a
percentage of net sales, selling expenses remained consistent at 6.3% in 2002,
6.2% in 2001 and 6.2% in 2000. General and administrative expenses were $5.9
million in 2002, $6.9 million in 2001 and $6.4 million in 2000. As a percentage
of net sales, general and administrative expenses were 2.1% in 2002, 2.5% in
2001 and 2.3% in 2000. In 2002, general and administrative costs decreased due
to cost controls.
Interest expense decreased to $1,666,000 in 2002 from $1,833,000 in
2001 and $4,080,000 in 2000. The decrease in 2002 is due to lower floating
interest rates and higher capitalization of interest expense offset somewhat by
higher debt levels, while the 2001 decrease was due to lower average debt levels
coupled with lower floating interest rates. The Company capitalized interest
expense relating to the construction of assets in the amounts of approximately
$349,000 in 2002, $112,000 in 2001 and $0 in 2000.
The Company's effective tax rate was 36.0% in 2002, 2001 and 2000.
As a result of the foregoing factors, the Company's net income was $6.0
million in 2002, $9.1 million in 2001 and $8.0 million in 2000.
9
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not currently have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on the
Company's financial condition, revenues of expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's cash flow activities.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
2002 2001 2000
-------- -------- --------
(In thousands)
Net income .................................................................... $ 5,964 $ 9,130 $ 8,050
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................................ 10,686 9,633 9,187
Other non-cash items ..................................................... (746) 1,572 402
Increase (decrease) in accounts receivable,
inventory and other assets ............................................ (4,683) 4,187 4,179
Increase (decrease) in trade accounts payable,
accrued liabilities and other liabilities ............................. (9,694) 1,599 1,071
-------- -------- --------
Net cash provided by (used in) operating
activities ................................................................... 1,527 26,121 22,889
Investing activities:
Purchases of property, plant and equipment
(net) .................................................................. (18,801) (12,840) (4,163)
Financing activities:
Increase (decrease) in indebtedness, net ................................... 17,500 (12,600) (18,000)
Issuances of common stock .................................................. 97 1,881 1,510
Purchase of treasury stock ................................................. (1,415) (1,366) (3,436)
-------- -------- --------
Net cash provided (used in) by financing
activities ................................................................. 16,182 (12,085) (19,296)
Net increase (decrease) in cash ............................................... $ (1,092) $ 1,196 $ (1,200)
======== ======== ========
</Table>
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 historically 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, refinanced
its unsecured loan facility with a group of banks (the "Financing Agreement").
The Company is a guarantor of the indebtedness. Obligations under the Financing
Agreement are the only contractual obligations or commercial commitments of the
Company. The Financing Agreement has been amended twice since August 31, 1999,
to extend the term to May 31, 2003 and then again to May 31, 2005. 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 December 31, 2002, 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
December 31, 2002. Pursuant to the Financing Agreement, the Company is
prohibited from declaring, paying or issuing cash dividends. At December 31,
2002, the balance outstanding under the Financing Agreement was $47.5 million.
Amounts outstanding under the Financing Agreement are payable on May 31, 2005,
with interest due quarterly based on the bank's prime rate or LIBOR rate
options, at the Company's election.
10
In December 2001, the Company entered into an interest rate swap
agreement on $24.0 million of its variable rate debt in order to hedge against
an increase in variable interest rates. The terms of the agreement fix the
interest rate on $24.0 million of the Company's variable rate, long-term note
payable to 4.6% per annum plus a variable adder that is based on certain
financial ratios contained in the loan covenants. This three-year agreement
expires in December 2004. For the year ended December 31, 2002, the Company
recorded an unrealized loss of $1,055,893, resulting in a total unrealized loss
of $1,318,774 recorded in accumulated other comprehensive income (loss) in the
equity section of the balance sheet.
On November 6, 2001, the Board of Directors of the Company approved a
new stock repurchase program covering the purchase of up to 300,000 additional
shares of its common stock dependent upon market conditions. Common stock
purchases under this program were authorized through December 31, 2002 on the
open market or through privately negotiated transactions at prices determined by
the Chairman of the Board or the President of the Company. As of December 31,
2002, 150,200 shares had been purchased under this authorization. Early in 2003,
the Board of Directors extended this program through December 2003 for the
remaining 149,800 shares.
Cash provided by operations was $1.5 million in 2002 compared to $26.1
million in 2001 and $22.9 million provided in 2000. The decrease of $24.6
million from 2001 to 2002 was primarily the result of a $10.8 million decrease
in accounts payable in 2002, a $5.3 million increase in inventories and a $3.1
million decrease in earnings. The increase of $3.2 million from 2000 to 2001 was
the result of increased earnings, depreciation and deferred taxes. Cash used in
investing activities increased to $18.8 million in 2002 from $12.8 million in
2001 due to the new building construction and related equipment purchases. Cash
used in investing activities increased to $12.8 million in 2001 from $4.2
million due to new building construction and related equipment purchases. During
2001 and 2002, capital expenditures rose to build Plant 3 and buy new
manufacturing equipment. This project was completed as of December 31, 2002. The
cash provided by financing activities in 2002 was used primarily to fund these
capital expenditures. The cash consumed by financing activities in 2001 and 2000
was primarily used to decrease borrowings on the Company's loan facility by
$12.6 million and $18.0 million, respectively. Cash provided by financing
activities was reduced by $1.4 million in 2002, $1.4 million in 2001 and $3.4
million in 2000, as a result of the purchase of treasury stock. Cash provided by
financing activities was increased by $0.1 million in 2002, $1.9 million in 2001
and $1.5 million in 2000, as the result of the issuance of common stock,
primarily to satisfy employee option exercises.
During 2003, the Company expects its capital expenditures will consist
of maintaining and adding manufacturing equipment for its residential and
commercial wire operations. The total capital expenditures associated with these
capital expenditures are estimated to be less than $5.0 million in 2003. The
Company also expects its working capital requirements to increase during 2003 as
a result of continued increases in sales and potential increases in the cost of
copper. Moreover, the Company expects that the inventory levels necessary to
support sales of commercial wire will continue to be greater than the levels
necessary to support comparable sales of residential wire. The Company believes
that the cash flow from operations and the financing available from its
revolving credit facility will satisfy working capital and capital expenditure
requirements for the next twelve months.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements 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. See Note 1 to the Consolidated
Financial Statements. Management believes the following critical accounting
policies affect its more significant estimates and assumptions used in the
preparation of its consolidated financial statements.
Inventories are stated at the lower of cost, using the last-in,
first-out (LIFO) method, or market. The Company maintains only one inventory
pool for LIFO purposes as all inventories held by the Company generally relate
to the Company's only business segment, the manufacture and sale of copper
building wire products. As permitted by accounting principles generally accepted
in the United States, the Company maintains its inventory costs and cost of
goods sold on a first-in, first-out (FIFO) basis and makes a quarterly
adjustment to adjust total inventory and cost of goods sold from FIFO to LIFO.
The Company applies the lower of cost or market test by comparing the LIFO cost
of its raw materials, work-in-process and finished goods inventories to
estimated market values, which are based primarily upon the most recent quoted
market price of copper and finished wire prices as of the end of each reporting
period. As of December 31, 2002, a $0.05 reduction in the fair market value of
copper would have required the Company to increase its lower of cost or market
reserve and cost of goods sold by approximately $2,228,000 for the year ended
December 31, 2002. Additionally, future reductions in the quantity of inventory
on hand could cause copper that is carried in inventory at costs different from
the cost of copper in the period in which the reduction occurs to be included in
costs of goods sold for that period at the different price.
11
The Company has provided an allowance for losses on customer
receivables based upon estimates of those customers' inability to make required
payments. Such estimate is established and adjusted based upon the makeup of the
current receivable portfolio, past bad debt experience and current market
conditions. If the financial condition of our customers were to deteriorate and
impair their ability to make payments to the Company, additional allowances for
losses might be required in future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires that the fair value of asset retirement obligations be capitalized as
part of the carrying amount of related long-lived assets. SFAS No. 143 is
effective for fiscal years ending after June 15, 2002, with early adoption
permitted. The Company adopted SFAS No. 143 as of January 1, 2003 and does not
believe the adoption had a material effect on its financial condition, results
of operations or cash flows.
In November 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, providing a single accounting model for long-lived assets to be
disposed of and measured for impairment. Although retaining many of the
fundamental recognition and measurement principles of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as held for sale. SFAS No. 144 also supersedes APB Opinion 30 with regard
to reporting the effects of discontinued operations. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. The Company has adopted SFAS No. 144 on January 1, 2002 and
the adoption of SFAS No. 144 did not have any impact on its financial condition,
results of operations or cash flows.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 supersedes EITF 94-3
and requires that liabilities for exit or disposal activities be recorded when
the liabilities are actually incurred. SFAS No. 146 is applicable for exit or
disposal activities occurring after December 31, 2002. The Company does not
believe the adoption of SFAS No. 146 will have a material impact on its
financial condition, results of operations, or cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, providing alternative transition methods to the fair value based method
of accounting for stock compensation. SFAS No. 148 also requires additional
annual and quarterly disclosures related to stock-based compensation
arrangements. The provisions of SFAS No. 148 related to transition methods and
annual disclosure requirements are applicable to fiscal years ending after
December 15, 2002 and the provisions related to interim disclosure requirements
are effective for financial reports for interim periods beginning after December
15, 2002.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This report contains various forward-looking statements 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in metal futures trading or hedging
activities and does not enter into derivative financial instrument transactions
for trading or other speculative purposes. However, the Company is generally
exposed to commodity price and interest rate risks. In order to take advantage
of the low prevailing interest rates at the end of 2001, the Company entered
into an interest rate swap agreement on $24 million of its long-term debt. This
arrangement was entered into to fix the interest rate on that portion of the
debt until December 20, 2004.
The Company purchases copper cathode primarily from producers and
merchants at prices determined each month based on the average daily closing
prices for copper for that month, plus a negotiated premium. As a result,
fluctuations in copper prices caused by market forces can significantly affect
the Company's financial results.
Interest rate risk is attributable to the Company's long-term debt.
Effective August 31, 1999, the Company through its indirectly wholly owned
subsidiary, Encore Wire Limited, refinanced the "Financing Agreement". The
amounts outstanding under the Financing Agreement are payable on May 31, 2005,
with interest due quarterly based on the bank's prime rate or LIBOR rate
options, at the Company's election. At
12
December 31, 2002, the balance outstanding under the Financing Agreement was
$47.5 million, and the average interest rate was 4.56%. There is inherent
rollover risk for borrowings as they mature and are renewed at current market
rates. The extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and the Company's future financing
requirements. The Company hedged a portion of its' outstanding debt to protect
itself against rising interest rates. A 1% interest rate increase in 2003 would
increase interest expense by $235,000.
For further information, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors and the consolidated financial
statements of the Company and the notes thereto appear on the following pages.
13
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Encore Wire Corporation
We have audited the accompanying consolidated balance sheets of Encore Wire
Corporation (the Company) as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Encore Wire
Corporation at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
Dallas, Texas
January 24, 2003
14
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 160,088 $ 1,252,148
Accounts receivable, net of allowance for losses of $480,174 and
$541,476 in 2002 and 2001, respectively 46,599,640 45,616,298
Inventories (Note 2) 50,164,893 44,836,580
Prepaid expenses and other 672,082 2,390,353
-------------- --------------
Total current assets 97,596,703 94,095,379
Property, plant, and equipment - at cost:
Land and land improvements 5,858,077 3,456,979
Construction-in-progress 1,436,835 13,178,747
Buildings and improvements 30,855,408 24,645,848
Machinery and equipment 101,509,110 80,336,766
Furniture and fixtures 2,442,281 2,264,188
-------------- --------------
142,101,711 123,882,528
Accumulated depreciation and amortization (56,734,983) (46,498,736)
-------------- --------------
85,366,728 77,383,792
Other assets 165,912 217,151
-------------- --------------
Total assets $ 183,129,343 $ 171,696,322
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 10,735,329 $ 20,174,630
Accrued liabilities (Note 3) 7,717,889 7,864,530
Current income taxes payable 2,650,643 1,702,123
Current deferred income taxes (Note 5) 813,649 1,990,700
-------------- --------------
Total current liabilities 21,917,510 31,731,983
Noncurrent deferred income taxes (Note 5) 7,193,209 7,035,871
Long-term note payable (Note 4) 47,500,000 30,000,000
Contingencies (Note 10)
Stockholders' equity (Notes 6, 7 and 8):
Convertible preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - none
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 16,958,365 in 2002 and
16,944,785 in 2001 169,584 169,448
Additional paid-in capital 34,137,750 34,040,542
Treasury stock, at cost - 1,839,300 in 2002 and 1,689,100 in 2001 (15,274,643) (13,859,288)
Accumulated other comprehensive income (loss) (1,318,774) (262,881)
Retained earnings 88,804,707 82,840,647
-------------- --------------
Total stockholders' equity 106,518,624 102,928,468
-------------- --------------
Total liabilities and stockholders' equity $ 183,129,343 $ 171,696,322
============== ==============
</Table>
See accompanying notes.
15
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2002 2001 2000
------------- ------------- -------------
Net sales $ 285,207,344 $ 281,009,863 $ 283,689,096
Cost of goods sold 250,267,112 240,552,777 243,132,019
------------- ------------- -------------
Gross profit 34,940,232 40,457,086 40,557,077
Selling, general, and administrative expenses 23,891,276 24,475,040 24,027,034
------------- ------------- -------------
Operating income 11,048,956 15,982,046 16,530,043
Other income (expense):
Interest and other income (expense) (64,016) 116,440 127,831
Interest expense (1,666,180) (1,832,965) (4,079,928)
------------- ------------- -------------
Income before income taxes 9,318,760 14,265,521 12,577,946
Income tax expense (Note 5) 3,354,700 5,135,723 4,528,100
------------- ------------- -------------
Net income $ 5,964,060 $ 9,129,798 $ 8,049,846
============= ============= =============
Weighted average common shares - basic (Note 7) $ 15,202,955 15,068,086 15,216,650
============= ============= =============
Basic earnings per common share $ 0.39 $ 0.61 $ 0.53
============= ============= =============
Weighted average common shares - diluted (Note 7) 15,339,382 15,156,690 15,382,870
============= ============= =============
Diluted earnings per common share $ 0.39 $ 0.60 $ 0.52
============= ============= =============
</Table>
See accompanying notes.
16
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ADDITIONAL ACCUMULATED OTHER
COMMON STOCK PAID-IN TREASURY COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL STOCK (LOSS) EARNINGS TOTAL
---------- -------- ----------- ------------ ------------ ------------ ------------
Balance at December 31, 1999 16,337,922 $ 163,379 $ 30,655,663 $ (9,057,353) $ -- $ 65,661,003 $ 87,422,692
Net income -- -- -- -- -- 8,049,846 8,049,846
Proceeds from exercise of
stock options 299,587 2,996 1,506,604 -- -- -- 1,509,600
Purchase of treasury stock -- -- -- (3,435,985) -- -- (3,435,985)
---------- ----------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 2000 16,637,509 166,375 32,162,267 (12,493,338) -- 73,710,849 93,546,153
Net income -- -- -- -- -- 9,129,798 9,129,798
Unrealized loss on hedging
activities -- -- -- -- (262,881) -- (262,881)
-------------
Total comprehensive income -- -- -- -- -- -- 8,866,917
Proceeds from exercise of
stock options 307,276 3,073 1,524,675 -- -- -- 1,527,748
Purchase of treasury stock -- -- -- (1,365,950) -- -- (1,365,950)
Tax benefit on exercise of
stock options -- -- 353,600 -- -- -- 353,600
---------- ----------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001 16,944,785 169,448 34,040,542 (13,859,288) (262,881) 82,840,647 102,928,468
Net income -- -- -- -- -- 5,964,060 5,964,060
Unrealized loss on hedging
activities -- -- -- -- (1,055,893) (1,055,893)
-------------
Total comprehensive income -- -- -- -- -- -- 4,908,167
Proceeds from exercise of
stock options 13,580 136 97,208 -- -- -- 97,344
Purchase of treasury stock -- -- -- (1,415,355) -- -- (1,415,355)
---------- ----------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 2002 16,958,365 $ 169,584 $ 34,137,750 $ (15,274,643) $ (1,318,774) $ 88,804,707 $ 106,518,624
========== =========== ============= ============= ============= ============= =============
</Table>
See accompanying notes.
17
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 5,964,060 $ 9,129,798 $ 8,049,846
Adjustments to reconcile net income to net cash provided by
activities:
Depreciation 10,686,444 9,633,040 9,187,014
Provision for bad debts 90,000 300,000 87,500
Deferred income taxes (1,019,713) 1,213,258 255,706
Loss on disposal of assets 183,365 58,355 58,587
Changes in operating assets and liabilities:
Accounts receivable (1,073,342) 8,086,310 (7,497,695)
Inventories (5,328,313) (1,969,064) 11,770,841
Prepaid expenses and other 1,718,271 (1,929,810) (92,853)
Trade accounts payable (9,439,301) 1,950,467 405,499
Accrued liabilities (1,202,534) (1,315,978) 441,984
Current income taxes payable 948,520 964,449 223,308
------------ ------------ ------------
Net cash provided by operating activities 1,527,457 26,120,825 22,889,737
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (19,452,755) (14,530,556) (4,169,203)
Increase in long term investments -- 7,500 --
(Increase) decrease in deposits 51,239 (33,530) (46,085)
Proceeds from sale of assets 600,010 1,716,532 52,000
------------ ------------ ------------
Net cash used in investing activities (18,801,506) (12,840,054) (4,163,288)
FINANCING ACTIVITIES
Proceeds from (repayments of) long-term note payable, net 17,500,000 (12,600,000) (18,000,000)
Proceeds from issuance of common stock, net 97,344 1,881,348 1,509,600
Purchase of treasury stock (1,415,355) (1,365,950) (3,435,985)
------------ ------------ ------------
Net cash provided by (used in) financing activities 16,181,989 (12,084,602) (19,926,385)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,092,060) 1,196,169 (1,199,936)
Cash and cash equivalents at beginning of year 1,252,148 55,979 1,255,915
------------ ------------ ------------
Cash and cash equivalents at end of year $ 160,088 1,252,148 55,979
============ ============ ============
NON-CASH ACTIVITIES
Unrealized loss on hedging activities $ 1,055,893 $ 262,881 $ --
============ ============ ============
</Table>
See accompanying notes.
18
Encore Wire Corporation
Notes to Consolidated Financial Statements
December 31, 2002
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Encore Wire Corporation (the Company) conducts its business in one segment - the
manufacture of copper electrical wire, principally NM cable, for use primarily
as interior wiring in homes, apartments, and manufactured housing, and THHN
cable, for use primarily as wiring in commercial and industrial buildings. The
Company sells its products primarily through approximately 30 manufacturers'
representatives located throughout the United States and, to a lesser extent,
through its own direct marketing efforts. The principal customers for Encore's
commercial and residential wire are wholesale electrical distributors.
Copper, a commodity product, is the principal raw material used in the Company's
manufacturing operations. Copper accounted for approximately 63.9%, 66.6%, and
63.9% of its cost of goods sold during 2002, 2001, and 2000, respectively. The
price of copper fluctuates, depending on general economic conditions and in
relation to supply and demand and other factors, and 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 on the cost of
copper on the Company's future operating results. Future reductions in the price
of copper could require the Company to record an additional lower of cost or
market adjustment against the related inventory balance.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated upon consolidation.
Certain prior year balances have been reclassed to conform to current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
that the fair value of asset retirement obligations be capitalized as part of
the carrying amount of related long-lived assets. SFAS No. 143 is effective for
fiscal years ending after June 15, 2002, with early adoption permitted. The
Company adopted SFAS No. 143 as of January 1, 2003 and does not believe the
adoption will have a material effect on its financial condition, results of
operations or cash flows.
In November 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, providing a single accounting model for long-lived assets to be disposed of
and measured for impairment. Although retaining many of the fundamental
recognition and measurement principles of SFAS No. 121, the new rules
significantly change the criteria that would have to be met to classify an asset
as held for sale. SFAS No. 144 also supersedes APB Opinion 30 with regard to
reporting the effects of discontinued operations. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. The Company has adopted SFAS No. 144 on January 1, 2002 and the
adoption of SFAS No. 144 did not have any impact on its financial condition,
results of operations or cash flows.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 supersedes EITF 94-3
and requires that liabilities for exit or disposal activities be recorded when
the liabilities are actually incurred. SFAS No. 146 is applicable for exit or
disposal activities occurring after December 31, 2002. The Company does not
believe the adoption of SFAS No. 146 will have a material impact on its
financial condition, results of operations, or cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and
19
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Disclosure." SFAS No. 148 amends SFAS No. 123, providing alternative transition
methods to the fair value based method of accounting for stock compensation.
SFAS No. 148 also requires additional annual and quarterly disclosures related
to stock-based compensation arrangements. The provisions of SFAS No. 148 related
to transition methods and annual disclosure requirements are applicable to
fiscal years ending after December 15, 2002 and the provisions related to
interim disclosure requirements are effective for financial reports for interim
periods beginning after December 15, 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment to
the customer, which is when title and risk of loss pass to the customer. The
Company provides for estimated returns and allowances at the time of sale.
FREIGHT EXPENSES
The Company classifies shipping and handling costs as a component of selling,
general and administrative expenses. Shipping and handling costs were
approximately $9.8 million, $9.1 million and $8.6 million for the fiscal years
ended December 31, 2002, 2001 and 2000, respectively.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Cash, accounts receivable, trade accounts payable, accrued liabilities, and
notes payable are stated at expected settlement amounts which approximate fair
value.
Accounts receivable represent amounts due from customers (primarily wholesale
electrical distributors, manufactured housing suppliers, and retail home
improvement centers) related to the sale of the Company's products. Such
receivables are uncollateralized and are generally due from a diverse group of
customers located throughout the United States. The Company establishes an
allowance for losses based upon the makeup of the current portfolio, past bad
debt experience and current market conditions. The Company charged off accounts
receivable of $176,054, $172,333 and $169,591 in 2002, 2001 and 2000,
respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost, using the last-in, first-out (LIFO)
method, or market. The Company evaluates the market value of its raw materials,
work-in-process and finished goods inventory primarily based upon reference to
current raw and finished copper and other materials prices at the end of each
period.
20
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Depreciation of property, plant, and equipment for financial reporting is
provided on the straight-line method over the estimated useful lives of the
respective assets as follows: buildings and improvements, 15 to 30 years;
machinery and equipment, 3 to 10 years; and furniture and fixtures, 3 to 5
years. Accelerated cost recovery methods are used for tax purposes. Repairs and
maintenance costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees and Financial Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. Under APB 25, the Company recognizes no
compensation expense related to employee or director stock options when options
are granted with exercise prices at the estimated fair value of the stock on the
date of grant, as determined by the Board of Directors.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation
and Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting
for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123. Under the provisions of SFAS 123, compensation expense is
recognized based on the fair value of options on the grant date.
The following table (in thousands) illustrates the effect on net income if the
Company had applied the fair value recognition provision of SFAS 123 to stock
based compensation:
<Table>
<Caption>
2002 2001 2000
------- ------- -------
Net income, as reported $ 5,964 $ 9,130 $ 8,050
Less: Stock-based compensation expense determined under fair
value-based method (429) (267) (187)
------- ------- -------
Net income, pro forma $ 5,535 $ 8,863 $ 7,863
======= ======= =======
</Table>
The Company's pro forma information for SFAS 123 is as follows (in thousands,
except for earnings per common share information):
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Basic earnings per common share As reported 0.39 0.61 0.53
Pro forma 0.36 0.59 0.52
Diluted earnings per common share As reported 0.39 0.60 0.52
Pro forma 0.36 0.58 0.51
</Table>
Because options vest over a period of several years and additional awards are
generally made each year, the pro forma information presented above is not
necessarily indicative of the effects on reported or pro forma net earnings or
losses for future years.
21
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Income 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. The dilutive effects of stock options and common
stock warrants, which are common stock equivalents, are calculated using the
treasury stock method.
INCOME TAXES
Income taxes are provided based on the liability method, resulting in income tax
assets and liabilities arising due to temporary differences. Temporary
differences are differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements that will result in taxable
or deductible amounts in future years.
2. INVENTORIES
Inventories consist of the following at December 31:
<Table>
<Caption>
2002 2001
--------------- ---------------
Raw materials $ 12,690,079 $ 3,761,870
Work-in-process 4,231,225 3,671,218
Finished goods 30,215,622 31,081,648
--------------- ---------------
47,136,926 38,514,736
Adjust to LIFO cost 7,017,373 8,933,919
Lower of cost or market adjustment (3,989,406) (2,612,075)
--------------- ---------------
$ 50,164,893 $ 44,836,580
=============== ===============
</Table>
During the fiscal year ended December 31, 2000, the Company liquidated inventory
quantities resulting in a decrease in cost of goods sold under the LIFO method
of approximately $629,000. During the fiscal years ended December 31, 2002 and
2001, there were no liquidations of inventory quantities.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<Table>
<Caption>
2002 2001
--------------- ---------------
Sales volume discounts payable $ 3,363,646 $ 3,997,739
Property taxes payable 1,791,225 1,678,271
Commissions payable 621,604 495,312
Unrealized loss on hedging activities 1,318,774 262,881
Accrued salaries 490,426 1,320,000
Other accrued liabilities 132,214 110,327
--------------- ---------------
$ 7,717,889 $ 7,864,530
=============== ===============
</Table>
22
4. LONG-TERM NOTE PAYABLE
On August 31, 1999, the Company signed a new Financing Agreement with a group of
banks to provide 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 inventories as defined in the Financing Agreement
(approximately $65.0 million at December 31, 2002). The Facility is unsecured
and contains customary covenants and conditions providing for events of default.
The Company is prohibited from declaring, paying, or issuing cash dividends. At
December 31, 2002, the balance outstanding under the revolving credit facility
was $47.5 million. Amounts outstanding under the facility are payable on May 31,
2005, with interest due quarterly based on the bank's prime rate or LIBOR, at
the Company's election (average interest rate at December 31, 2002 was 4.6%).
Each interest rate option includes a variable adder based upon certain financial
ratios contained in its loan covenants.
The Company paid interest totaling $1,936,982, $1,889,956, and $4,021,313 in
2002, 2001 and 2000, respectively. The Company capitalized $349,379, $112,307
and $0 of interest in 2002, 2001 and 2000, respectively, relating to the
construction of a new manufacturing facility and related equipment.
In December 2001, the Company entered into an interest rate swap agreement on
$24.0 million of its variable rate debt in order to hedge against an increase in
variable interest rates. The terms of the agreement effectively fix the interest
rate on $24.0 million of the Company's variable rate, long-term note payable to
4.6% per annum plus a variable adder based upon certain financial ratios
contained in its loan covenants. Based upon its terms and conditions, the hedge
qualifies for the short-cut method under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, and all unrealized
gains or losses related to the hedge instrument will be recorded through
accumulated other comprehensive income. For the fiscal years ended December 31,
2002 and 2001, the Company recorded unrealized losses of $1,055,893 and $262,881
related to its interest rate swap agreement. As of December 31, 2002, the
Company has no other derivative financial instruments and is engaged in no other
hedging activities.
5. INCOME TAXES
The provisions for income tax expense are summarized as follows:
<Table>
<Caption>
2002 2001 2000
-------------- -------------- --------------
Current:
Federal $ 4,048,083 $ 3,616,572 $ 3,986,658
State 326,330 305,893 285,736
Deferred (1,019,713) 1,213,258 255,706
-------------- -------------- --------------
$ 3,354,700 $ 5,135,723 $ 4,528,100
============== ============== ==============
</Table>
23
5. INCOME TAXES (CONTINUED)
The differences between the provision for income taxes and income taxes computed
using the federal income tax rate are as follows:
<Table>
<Caption>
2002 2001 2000
----------- ----------- -----------
Amount computed using the
statutory rate $ 3,261,566 $ 4,992,932 $ 4,402,281
State income taxes, net of federal
tax benefit 144,069 234,212 221,556
Change in tax rate -- -- (153,324)
Other items (50,935) (91,421) 57,587
----------- ----------- -----------
$ 3,354,700 $ 5,135,723 $ 4,528,100
=========== =========== ===========
</Table>
The tax effect of each type of temporary difference giving rise to the deferred
tax liability at December 31, 2002 and 2001, is as follows:
<Table>
<Caption>
DEFERRED TAX ASSET (LIABILITY)
2002 2001
-------------------------------- ---------------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
-------------- -------------- -------------- --------------
Depreciation and amortization $ -- $ (7,201,350) $ -- $ (7,035,871)
Inventory (1,135,563) -- (2,354,370) --
Allowance for doubtful accounts 180,077 -- 162,198 --
Accrued expenses -- -- 42,178 --
Uniform capitalization rules 329,264 -- 324,524 --
AMT Credit -- -- -- --
Other (187,427) 8,141 (165,230) --
-------------- -------------- -------------- --------------
$ (813,649) $ (7,193,209) $ (1,990,700) $ (7,035,871)
============== ============== ============== ==============
</Table>
The Company made income tax payments of $3.4 million in 2002, $2.6 million in
2001, and $3.6 million in 2000.
6. STOCK OPTIONS
The Company has a stock option plan for employees that provides for the granting
of stock options and authorizes the issuance of common stock upon the exercise
of such options for up to 2,341,500 shares of common stock. The stock options
vest over five years and expire ten years from grant date. The following
summarizes activity in the stock option plan for the years ended December 31,
2002, 2001, and 2000:
24
6. STOCK OPTIONS (CONTINUED)
<Table>
<Caption>
SHARES UNDER PRICE PER AGGREGATE OPTION
OPTIONS SHARE PRICE
------------ ------------- ----------------
Options outstanding at December 31, 1999 974,952 $ 0.33 - 17.33 $ 6,422,197
Options granted 87,000 5.63 - 7.00 562,760
Options exercised (299,587) 0.33 - 5.84 (1,509,665)
Options canceled (28,850) 6.22 - 10.00 (240,191)
-------- -------------- -----------
Options outstanding at December 31, 2000 733,515 4.55 - 17.33 5,235,101
Options granted 331,000 6.63 - 11.55 3,643,880
Options exercised (307,275) 0.33 - 10.00 (1,527,929)
Options canceled (17,050) 5.88 - 10.00 (155,970)
-------- -------------- -----------
Options outstanding at December 31, 2001 740,190 4.55 - 17.33 7,195,082
Options granted 28,500 12.60 359,100
Options exercised (13,580) 4.55 - 10.00 (95,308)
Options canceled (1,400) 10.00 (14,000)
-------- -------------- -----------
Options outstanding at December 31, 2002 753,710 $ 4.55 - 17.33 $ 7,444,874
======== ============== ===========
</Table>
The following summarizes information about stock options outstanding at December
31, 2002:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$ 4.55 - $7.00 262,910 6.70 years $ 6.44 148,310 $ 6.38
$ 8.03 - $12.60 438,300 8.27 years $ 10.93 151,460 $ 10.01
$ 17.00 - 17.33 52,500 5.14 years $ 17.05 51,000 $ 17.04
-------- ----------- -------- --------- --------
$ 4.55 - $17.33 753,710 7.51 years $ 9.79 350,770 $ 9.50
======== =========== ======== ========= ========
</Table>
Pro forma information regarding net income and income per share has been
determined as if the Company had accounted for employee stock options granted
subsequent to December 31, 1994, under the fair value method provided for under
SFAS 123. The fair value for the stock options granted to directors, officers,
and key employees of the Company on or after January 1, 1995, was estimated at
the date of the grant using the Black-Scholes options pricing model with the
following weighted-average assumptions:
<Table>
<Caption>
2002 2001 2000
--------- --------- ---------
Risk-free interest rate 4.17% 3.89% 5.54%
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 57% 56% 55%
Expected lives 5.0 YEARS 5.0 years 5.0 years
</Table>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
25
6. STOCK OPTIONS (CONTINUED)
The weighted-average fair value of stock options granted during the years ended
December 31, 2002, 2001, and 2000, was $6.67, $5.72, and $4.59, respectively.
For purposes of the pro forma disclosures, the estimated fair value of stock
options granted has been amortized to expense over the vesting period.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
2002 2001 2000
----------- ----------- ------------
Numerator:
Net income $ 5,964,060 $ 9,129,798 $ 8,049,846
=========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
shares 15,202,955 15,068,086 15,216,650
Effect of dilutive securities:
Employee stock options 136,427 88,604 166,220
----------- ----------- -----------
Denominator for diluted earnings
per share -weighted average
shares 15,339,382 15,156,690 15,382,870
=========== =========== ===========
</Table>
8. STOCKHOLDERS' EQUITY
Pursuant to a 1995 stock repurchase program and extensions thereof; the Company
purchased an aggregate of 1,653,100 shares of its common stock during the period
from March 24, 1995 through June 30, 2001. All stock repurchases under the
program were authorized or ratified by the Board of Directors of the Company.
Following the attacks of September 11, 2001, the Company purchased an aggregate
of 36,000 shares of its common stock during the period from September 19, 2001
through September 24, 2001. In November 2001, the Company's Board of Directors
approved a new stock repurchase program covering the purchase of up to 300,000
additional shares of its common stock dependent upon market conditions. During
the year ended December 31, 2002, the company purchased 150,200 shares of its
common stock, for a total number of shares purchased to date of 1,839,300.
26
9. EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan (the "401(k) Plan") that is
intended to provide participating employees with retirement savings. Employees
may contribute between 1% and 15% of eligible compensation to the 401(k)Plan.
The Company matches 50% of the first 6% deferred by employees. Employees are
eligible to participate after one year of service and employer contributions are
vested on a five- year vesting schedule. Contribution expense for the fiscal
years ended December 31, 2002, 2001 and 2000 was $244,502, $230,291 and
$201,220, respectively.
10. CONTINGENCIES
The Company is a party to litigation and claims that arise out of the ordinary
business of the Company. While the results of these matters cannot be predicted
with certainty, the Company does not believe the final outcome of such
litigation and claims will have a material adverse effect on the financial
condition, the results of operation or the cash flows of the Company because the
Company believes that it has adequate insurance and reserves to cover any
damages that may ultimately be awarded.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information for
the two years ended December 31, 2002 and 2001 (in thousands, except per share
amounts):
<Table>
<Caption>
THREE MONTHS ENDED
2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ---------------- -----------
Net sales $64,182 $72,154 $80,150 $68,720
Gross profit 9,779 10,052 7,984 7,125
Net income 2,357 2,265 920 423
Net income per common share - basic 0.15 0.15 0.06 0.03
Net income per common share - diluted 0.15 0.15 0.06 0.03
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ----------------- -----------
Net sales $69,757 $75,007 $73,020 $63,226
Gross profit 9,830 10,242 9,910 10,475
Net income 2,032 2,228 2,135 2,735
Net income per common share - basic 0.13 0.15 0.14 0.18
Net income per common share - diluted 0.13 0.15 0.14 0.18
</Table>
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The section entitled "Election of Directors" and "Section 16 (a)
Beneficial Ownership Reporting Compliance" appearing in the Company's proxy
statement for the annual meeting of stockholders to be held on May 6, 2003 sets
forth certain information with respect to the directors of the Company and with
respect to Section 16 (a) reporting obligations of directors and officers are
incorporated herein by reference. Certain information with respect to persons
who are or may be deemed to be executive officers of the Company is set forth
under the caption "Executive Officers of the Company" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the
Company's proxy statement for the annual meeting of stockholders to be held on
May 6, 2003 sets forth certain information with respect to the compensation of
management of the Company and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners,
Directors and Executive Officers" appearing in the Company's proxy statement for
the annual meeting of stockholders to be held on May 6, 2003 sets forth certain
information with respect to the ownership of the Company's common stock, and is
incorporated herein by reference. Certain information with respect to the
Company's equity compensation plans that is required to be set forth in this
Item is incorporated by reference from "Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The section entitled "Executive Compensation - Certain Relationships
and Related Transactions" appearing in the Company's proxy statement for the
annual meeting of stockholders to be held on May 6, 2003 sets forth certain
information with respect to certain relationships and related transactions, and
is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the ninety (90) days prior to the date of this report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer (the "CEO") and the
Chief Financial Officer (the "CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures were effective as of December
31, 2002. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to December 31, 2002.
28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements included in Item 8 herein:
Report of Independent Auditors Consolidated Balance Sheets as of
December 31, 2002 and 2001 Consolidated Statements of Income for
the years ended December 31, 2002, 2001, and 2000 Consolidated
Statements of Stockholders' Equity for the years ended December
31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for
years ended December 31, 2002, 2001 and 2000 Notes to
Consolidated Financial Statements
(2) Financial Statement Schedules included in Item 8 herein:
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(3) Exhibits:
The information required by this Item 14(a)(3) is set forth in
the Index to Exhibits accompanying this Annual Report on Form
10-K.
(b) No Current Reports on Form 8-K were filed during the quarter ended
December 31, 2002.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Encore Wire Corporation has duly caused this Annual Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
ENCORE WIRE CORPORATION
Date: March 21, 2003
By: /s/ VINCENT A. REGO
------------------------------------
Vincent A. Rego
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed by the following persons in the capacities
and on the dates indicated.
SIGNATURE TITLE DATE
/s/ VINCENT A. REGO Chairman of the Board March 21, 2003
- ----------------------------- of Directors and Chief
Vincent A. Rego Executive Officer
/s/ DANIEL L. JONES President and Chief Operating March 21, 2003
- ----------------------------- Officer
Daniel L. Jones Director
/s/ FRANK J. BILBAN Vice President -- Finance, March 21, 2003
- ----------------------------- Secretary and Treasurer
Frank J. Bilban (Principal Financial
and Accounting Officer)
30
/s/ DONALD E. COURTNEY Vice-Chairman of the March 21, 2003
- ------------------------------------ Board of Directors
Donald E. Courtney
/s/ JOSEPH M. BRITO Director March 21, 2003
- ------------------------------------
Joseph M. Brito
/s/ JOHN H. WILSON Director March 21, 2003
- ------------------------------------
John H. Wilson
/s/ JOHN P. PRINGLE Director March 21, 2003
- ------------------------------------
John P. Pringle
/s/ WILLIAM R. THOMAS Director March 21, 2003
- ------------------------------------
William R. Thomas
/s/ SCOTT D. WEAVER Director March 21, 2003
- ------------------------------------
Scott D. Weaver
31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
ENCORE WIRE CORPORATION
I, Vincent A. Rego, certify that:
1. I have reviewed this annual report on Form 10-K of Encore Wire
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
32
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 21, 2003
/s/ VINCENT A. REGO
------------------------------------------
Vincent A. Rego
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
33
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
ENCORE WIRE CORPORATION
I, Frank J. Bilban, certify that:
1. I have reviewed this annual report on Form 10-K of Encore Wire
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
34
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 21, 2003
/s/ FRANK J. BILBAN
--------------------------------------------------------
Frank J. Bilban
VICE PRESIDENT - FINANCE, CHIEF FINANCIAL OFFICER,
TREASURER AND SECRETARY
35
INDEX TO EXHIBITS **
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of Encore Wire Corporation, as amended
(filed as Exhibit 3.1 to the Company's Registration Statement on Form
S-1, as amended (No. 33-47696), and incorporated herein by reference).
3.2 Amended and Restated Bylaws of Encore Wire Corporation, as amended
through February 7, 2002 (filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference).
10.1 Financing Agreement by and among Encore Wire Limited, as Borrower, Bank
of America, National Association, as Agent, and Bank of America,
National Association, and Comerica Bank-Texas, as Lenders, dated August
31, 1999 (filed as exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 and incorporated
herein by reference).
10.2 First amendment to Financing Agreement of August 31, 1999, dated June
27, 2000 by and among Encore Wire Limited, as Borrower, Bank of
America, National Association, as Agent, and Bank of America, National
Association, and Comerica Bank-Texas, as Lenders (filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, and incorporated herein by reference).
10.3 Second amendment to Financing Agreement of August 31, 1999, dated June
28, 2002 by and among Encore Wire Limited, as Borrower, Bank of
America, National Association, as Agent, and Bank of America, National
Association, and Comerica Bank-Texas, as Lenders (filed as Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, and incorporated herein by reference).
10.4* 1999 Stock Option Plan, as amended and restated, effective as of
October 24, 2001 (filed as Exhibit 99.1 to the Company's Registration
Statement on Form S-8 (No. 333-86620), and incorporated herein by
reference).
10.5* 1989 Stock Option Plan, as amended and restated (filed as Exhibit 4.1
to the Company's Registration Statement on Form S-8 (No. 333-38729),
and incorporated herein by reference), terminated except with respect
to outstanding options thereunder.
21.1 Subsidiaries (filed as Exhibit 21.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 and incorporated herein
by reference).
23.1 Consent of Ernst & Young LLP, Independent Auditors (included herein).
99.1 Certificate by Vince A. Rego, Chairman and Chief Executive Officer of
the Company, dated March 21, 2003 as required by 10 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (included herein).
99.2 Certificate by Frank J. Bilban, Vice President - Finance of the
Company, dated March 21, 2003 as required by 10 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(included herein).
* Management contract or compensatory plan
</Table>