-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NFmEkkQ1gLfxqsLFE1XV3BDhBuyBLKpbjADttbv0AeWgrGAAg4ZN9MgyRg9of1Cy sx4dNFiCx2/LQ4EgFO/cTQ== 0000950134-98-002484.txt : 19980330 0000950134-98-002484.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950134-98-002484 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENCORE WIRE CORP /DE/ CENTRAL INDEX KEY: 0000850460 STANDARD INDUSTRIAL CLASSIFICATION: ROLLING DRAWING & EXTRUDING OF NONFERROUS METALS [3350] IRS NUMBER: 752274963 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20278 FILM NUMBER: 98575249 BUSINESS ADDRESS: STREET 1: 1410 MILLWOOD RD STREET 2: P O BOX 1149 CITY: MCKINNEY STATE: TX ZIP: 75069 BUSINESS PHONE: 2145629473 MAIL ADDRESS: STREET 1: 1410 MILLWOOD RD STREET 2: P O BOX 1149 CITY: MCKINNEY STATE: TX ZIP: 75069 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 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, 1997 [ ] 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) DELAWARE 75-2274963 (State of incorporation) (I.R.S. Employer Identification No.) 1410 MILLWOOD ROAD MCKINNEY, TEXAS 75069 (Address of principal executive offices) (Zip Code) 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 [ ] Aggregate market value of Common Stock held by nonaffiliates as of March 10, 1998: $ 230,099,791 Number of shares of Common Stock outstanding as of March 10, 1998: 10,808,385 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 1998 annual meeting of stockholders -- Part III 2 TABLE OF CONTENTS
PAGE NUMBER PART I.......................................................................................................... 1 ITEM 1. BUSINESS........................................................................................ 1 General........................................................................................ 1 Recent Event................................................................................... 1 Strategy....................................................................................... 1 Products....................................................................................... 2 Manufacturing.................................................................................. 3 Customers...................................................................................... 3 Marketing and Distribution..................................................................... 3 Employees...................................................................................... 4 Raw Materials.................................................................................. 4 Competition.................................................................................... 4 Patent Matters................................................................................. 5 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............................................................ 6 PART II......................................................................................................... 7 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 7 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................................ 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 9 General........................................................................................ 9 Results of Operations.......................................................................... 9 Liquidity and Capital Resources................................................................ 11 Information Regarding Forward Looking Statements............................................... 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................... 14 ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 26 PART III........................................................................................................ 26 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................................................. 26 ITEM 11. EXECUTIVE COMPENSATION.......................................................................... 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS............................................ 26 PART IV......................................................................................................... 26 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..................................................................................... 26
ii 3 PART I ITEM 1. BUSINESS GENERAL Encore is a low-cost manufacturer of copper electrical building wire and cable. The Company is a significant supplier of residential wire for interior wiring in homes, apartments and manufactured housing. In 1994, the Company completed a major plant expansion and began manufacturing commercial wire for commercial and industrial buildings, allowing Encore to offer a broad line of copper electrical building wire and cable to its customers. The Company began operations in 1990. The Company has undergone four plant expansions (including the commercial wire plant expansion described above). The Company's net sales have grown from $10.7 million in 1990 to $254.6 million in 1997. As a result, based upon the latest available U.S. Department of Commerce data, the Company increased its share of the market for residential wire from less than 2% in 1990 to approximately 16% in 1996. Based on the same information, the Company's share of the market for the commercial wire that it manufactures was approximately 8% in 1996. According to this same Department of Commerce data, the total dollar value of all 1996 U.S. shipments of the types of residential and commercial wire that the Company manufactures amounted to approximately $825.3 million and $1.7 billion, respectively. 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 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 compliment 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. The Company is a Delaware corporation with its principal executive offices 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 subsidiary. RECENT EVENTS In 1996, the Company's Board of Directors authorized a new project whereby the Company would construct and equip a copper rod fabrication facility, as well as a new distribution facility. The new distribution center was completed in the fourth quarter of 1997 and the copper rod facility is estimated to be completed in the third quarter of 1998. Both facilities will be located adjacent to the Company's existing plant on property that was acquired in 1997. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company presently uses copper rod purchased from others to manufacture its wire and cable products. When the new copper rod fabrication facility is completed, the Company will produce its own copper rod from copper cathodes. The Company will also be able to reprocess copper scrap generated by its operations and copper scrap purchased from others. STRATEGY Encore's strategy for expanding its share of the residential wire and commercial wire markets emphasizes customer service coupled with low-cost production. 1 4 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, including 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. PRODUCTS Encore offers a residential wire product line that consists primarily of NM cable and UF cable and, in 1994, began offering a line of THHN cable, the most widely used type of commercial wire. Additionally, the Company manufactures other types of commercial wire products. 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 100 and 150 stock keeping units (SKUs) of residential wire and between 450 and 500 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. 2 5 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, reels for the most part have been replaced 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 four steps: drawing, stranding, insulating and jacketing. 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. Insulating. Insulating is the process of extruding first PVC and then nylon 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. 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 now sells its products to more than 50% of the top 250 wholesale electrical distributors (by volume) in the United States according to information reported in the June 1997 issue of Electrical Wholesaling magazine. No customer accounted for more than eight percent of net sales in 1997. 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 most of its product inventory at its plant in McKinney, Texas. At December 31, 1997, it held approximately 82% of its finished goods inventory at that location. In order to provide flexibility in handling 3 6 customer requests for immediate delivery of the Company's products, additional product inventories are maintained at the warehouses owned and operated by independent manufacturers' representatives located throughout the United States. At December 31, 1997, additional product inventories are maintained at the warehouses of independent manufacturers' representatives located in Chattanooga, Tennessee; Detroit, Michigan; Edison, New Jersey; Louisville, Kentucky; Norcross, Georgia; Orlando, Florida; Pittsburgh, Pennsylvania; Salt Lake City, Utah; and San Francisco, 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, including a related third party. See "Item 13. Certain Relationships and Related Party Transactions." 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 .05%, .09% and .09% of net sales in 1997, 1996 and 1995, 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 can be incentive pay tied to productivity and quality standards. The Company believes that its incentive program focuses the 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. In addition, the Company awards incentive bonuses to employees who achieve certain safety goals. The Company's safety program is an integral part of its general attention to cost control. As of December 31, 1997, Encore had 381 employees, of whom 330 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 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 rod, PVC thermoplastic compounds, paper and nylon, all of which are readily available from a number of suppliers. The Company purchases copper rod from three major producers at prices determined each month primarily based on the average daily closing prices for copper for that month, plus a negotiated premium. COMPETITION The electrical wire and cable industry is highly competitive. The Company competes with several manufacturers of wire and cable products, which have substantially greater resources than the Company and offer more complete lines of electrical wire and cable products. The Company's competitors include Southwire Corporation, Essex International Inc. and General Cable Corporation. These competitors are also vertically integrated insofar as they possess rod fabrication facilities and plastic compounding operations. 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 these factors. 4 7 Competition in the electrical wire and cable industry, although intense, has been primarily from U.S. manufacturers. The Company has encountered no significant foreign competition in the production 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. PATENT MATTERS Encore neither has nor is seeking any patents, believing instead that the success of its manufacturing operations is dependent on its marketing abilities, technical competence and customer service. 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 fifty acres and consist of buildings containing approximately 745,000 square feet of floor space (including the Company's copper rod fabrication facility currently being completed), of which approximately 24,000 square feet are used for office space and 721,000 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 There are no material legal proceedings pending or threatened to which the Company is a party or of which any of the Company's property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 5 8 EXECUTIVE OFFICERS OF THE COMPANY Information regarding Encore's executive officers including their respective ages at March 19, 1998 is set forth below.
Name Age Position with Company - ---- --- --------------------- Vincent A. Rego 74 Chairman of the Board of Directors, President, Chief Executive Officer Donald M. Spurgin 60 Vice Chairman of the Board of Directors Daniel L. Jones 34 Executive Vice President, Chief Operating Officer, Member of the Board of Directors David K. Smith 38 Vice President-- Operations Scott D. Weaver 39 Vice President-- Finance, Treasurer and Secretary Shirley A. Wright 56 Vice President-- Credit and Assistant Secretary
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. 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. Spurgin was President, Chief Executive Officer and a director of Encore from 1989 until October 1996, and was Secretary of the Company from 1989 until 1992. In October 1996, Mr. Spurgin, for health reasons, resigned as President and Chief Executive Officers of the Company and was named Vice Chairman of the Board of Directors. From 1979 to 1988, Mr. Spurgin was Executive Vice President, Chief Operating Officer and a director of Capital Wire. Prior thereto, Mr. Spurgin was associated with predecessors of Capital Wire in various executive capacities. Mr. Jones was Vice President -- Sales and Marketing of Encore from 1992 to May 1997. In May 1997, Mr. Jones was named Executive Vice President of the Company and in October 1997, he was named Chief Operating Officer. He also serves as a member of the Board of Directors. From 1985 to 1988, Mr. Jones attended college while working on a part time basis for Capital Wire. From 1988 until joining the Company in 1989, Lone Star Transportation Inc., a freight brokerage firm, employed him as a sales representative. Mr. Jones is the son-in-law of Mr. Spurgin. 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. Weaver has been Vice President -- Finance, Treasurer and Secretary of Encore since 1993. From 1990 until joining the Company in 1993, Mr. Weaver was employed by the Federal Depository Insurance Corporation and was responsible for the financial oversight of assisted acquisitions of certain failed savings and loan institutions. From 1984 until 1989, Mr. Weaver was Vice President -- Finance of 2M Companies, a Dallas area investment company. From 1980 until 1984, Mr. Weaver was with the public accounting firm of Ernst & Whinney (now known as Ernst & Young LLP). Ms. Wright has been employed by Encore since its inception and has been its Vice President -- Credit and Assistant Secretary since 1992. From 1970 until 1989, Ms. Wright was employed in various capacities by Capital Wire, most recently as Vice President -- Credit/Administration. 6 9 All executive officers are elected annually by the Board of Directors to serve until the next annual meeting of the Board and 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." Public trading of the Common Stock commenced on July 16, 1992, the date of the Company's initial public offering. Prior to that date, there was no public market for the Common Stock. 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. The reported prices have been adjusted to reflect a 3-for-2 split of the Common Stock effective August 19, 1997.
HIGH LOW ---- --- 1997 First Quarter ..................................................... 15 7/8 11 3/8 Second Quarter..................................................... 20 5/8 12 1/8 Third Quarter...................................................... 35 19 5/8 Fourth Quarter..................................................... 38 1/2 22 1/2 1996 First Quarter...................................................... 7 5 7/8 Second Quarter..................................................... 7 3/8 6 Third Quarter...................................................... 10 6 1/2 Fourth Quarter..................................................... 12 3/4 9 1/8
On March 10, 1998, the last reported sale price of the Common Stock was $29 1/8 per share. As of March 10, 1998, there were 162 record holders of the Common Stock. The Company estimates that there were approximately 1500 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. 7 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales....................................... $ 254,640 $ 179,132 $ 151,308 $ 122,698 $ 73,954 Cost of goods sold.............................. 201,323 153,448 140,323 102,220 62,913 ---------- ---------- ---------- ---------- ---------- Gross profit.................................. 53,317 25,684 10,985 20,478 11,041 Selling, general and administrative expenses...................................... 16,236 12,413 10,255 9,089 6,632 ---------- ---------- ---------- ---------- ---------- Operating income................................ 37,081 13,271 730 11,389 4,409 Other income (expense): Interest and other income..................... 142 92 108 55 20 Interest expense.............................. (1,367) (1,722) (1,724) (598) (123) ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes............... 35,856 11,641 (886) 10,846 4,306 Income tax (benefit) expense.................... 14,163 4,482 (341) 4,176 1,659 ---------- ---------- ---------- ---------- ---------- Net income (loss)............................... $ 21,693 $ 7,159 $ (545) $ 6,670 $ 2,647 ========== ========== ========== ========== ========== Net income (loss) per common and common equivalent share.............................. $ 1.97 $ 1.00 $ (0.08) $ 0.98 $ 0.45 ========== ========== ========== ========== ========== Weighted average common and common equivalent shares - diluted................... 10,988 10,578 10,600 10,251 8,841
DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital................................. $ 43,710 $ 39,137 $ 35,560 $ 32,159 $ 9,809 Total assets.................................... 128,755 91,068 84,655 75,094 43,331 Long-term debt, net of current portion............................... 22,200 18,500 23,000 16,900 10,847 Stockholders' equity............................ 70,010 46,899 40,377 41,562 20,149
8 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Price competition for electrical wire and cable is intense, and the Company sells its products in accordance with prevailing market prices. Copper rod, a commodity product, is the principal raw material used by the Company in manufacturing its products. Copper accounted for approximately 73.8%, 77.4%, 76.8%, 67.9%, and 70.0% of the Company's cost of goods sold during fiscal 1997, 1996, 1995, 1994 and 1993, 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.
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold: Copper.................................... 58.4 66.3 71.3 Other raw materials....................... 12.3 13.6 12.8 Depreciation.............................. Labor and overhead........................ LIFO adjustment........................... (1.1) (3.3) 0.7 Lower of cost or market adjustment........ 0.5 0.0 (0.0) ----- ----- ----- 79.1 85.7 92.8 ----- ----- ----- Gross profit.................................. 20.9 14.3 7.2 Selling, general and administrative expenses.. 6.3 6.9 6.8 ----- ----- ----- Operating income.............................. 14.6 7.4 0.4 Interest expense, net......................... 6.4 0.9 1.0 ----- ----- ----- Income (loss) before income taxes 14.1 6.5 (0.6) Income tax (benefit) expense 5.6 2.5 (0.2) ----- ----- ----- Net income (loss) 8.5% 4.0% (0.4)% ===== ===== =====
The following discussion and analysis relates to factors that have affected the operating results of the Company for the years ended December 31, 1997, 1996 and 1995. Reference should also be made to the consolidated financial statements and the related notes included elsewhere in this Annual Report. Net sales were $254.6 million in 1997, compared to $179.1 million in 1996 and $151.3 million in 1995. The increase from 1996 to 1997 was due primarily to a 31% increase in sales volume combined with an increase in the average cost of copper, which resulted in an increase in the average sales price per copper pound of the Company's products. The increase from 1995 to 1996 was due to a 33% increase in sales volume offset by a lower average cost of copper, which resulted in a decrease in the average sales price per copper pound of the Company's products. Sales volume increased due to several factors, including increases in customer acceptance and product availability. In 1997, the Company continued to expand sales to some existing customers and increased the number of customers to which it sold its products. The Company currently sells its products to more than 50% of the top 250 wholesale electrical distributors (by volume) in the United States, as reported in the June 1997 issue of Electrical Wholesaling magazine. The average sales price per copper pound of product sold was $1.93 in 1997, compared to $1.79 in 1996 and $2.01 in 1995. The changes each year are primarily a result of changing price competition and changing copper raw material 9 12 prices. The average price per copper pound the Company paid in 1997, 1996 and 1995 was $1.09, $1.12 and $1.42, respectively. Cost of goods sold was $201.3 million in 1997, compared to $153.4 million in 1996 and $140.3 million in 1995. Copper costs increased to $148.6 million in 1997 from $118.7 million in 1996 and $107.8 million in 1995. The average cost per copper pound purchased was $1.09 in 1997, $1.12 in 1996 and $1.42 in 1995. Copper costs as a percentage of net sales decreased to 58.4% in 1997 from 66.3% in 1996 and 71.3% in 1995. The decrease as a percentage of net sales was due primarily to an increasing differential between what the Company pays per pound of copper purchased and the Company's net sales price per copper pound sold. This differential increased during 1997 and 1996 primarily because of improved pricing for the Company's products. Other raw material costs as a percentage of net sales were 12.3%, 13.6% and 12.8% in 1997, 1996 and 1995, respectively. The decrease from 1996 to 1997 was due primarily to the Company's sales price per copper pound sold increasing (as discussed above) while the cost of other raw materials per pound of copper sold decreased slightly. This decrease was primarily caused by increased sales of the Company's commercial wire product line in 1997 as a percentage of total sales compared to 1996, which product line, as compared to residential wire, requires fewer raw materials (other than copper). The increase from 1995 to 1996 was due primarily to the Company's sales price per copper pound sold decreasing (as discussed above) while the cost of other raw materials per pound of copper sold remained relatively constant. Depreciation labor and overhead costs as a percentage of net sales were 9.0% in 1997 compared to 9.1% in 1996 and 8.0% in 1995. This increase in 1996 and 1997 was due primarily to expenses relating to increasing the Company's production capacity. Inventories are stated at the lower of cost, using the last in, first out (LIFO) method, or market. The Company changed its method of accounting for inventories to the LIFO method on January 1, 1992. The Company believes that the LIFO method more fairly presents its results of operations by matching current costs with current revenues. As permitted by generally accepted accounting principles, the Company maintains its inventory costs and cost of goods sold on a first in, first out (FIFO) basis and makes a quarterly LIFO adjustment to adjust total inventory and cost of goods sold to LIFO. As a result of increases in the cost of copper during 1995, the value of all inventory at December 31, 1995 using the LIFO method was less than its FIFO value by approximately $6,147,000, resulting in a corresponding increase in the cost of goods sold of $1,050,000, which is net of a $5,097,000 difference at December 31, 1994. At December 31, 1995, LIFO value did not exceed the market value of the inventory, therefore, no lower of cost or market adjustment was necessary. As a result of decreases in the cost of copper during 1996, the value of all inventory at December 31, 1996 using the LIFO method was less than its FIFO value by approximately $122,000, resulting in a corresponding decrease in the cost of goods sold of $6,025,000, including the partial reversal of the $6,147,000 difference at December 31, 1995. At December 31, 1996, LIFO value did not exceed the market value of the inventory, therefore, no lower of cost or market adjustment was necessary. As a result of further decreases in the cost of copper during 1997 (specifically at the end of 1997), the value of all inventory at December 31, 1997 using the LIFO method was greater than its FIFO value by approximately $2,629,000, resulting in a corresponding decrease in the cost of goods sold of $2,751,000, including the reversal of the $122,000 difference at December 31, 1996. At December 31, 1997, LIFO value exceeded the market value of the inventory by $1,278,000, thereby necessitating a $1,278,000 lower of cost or market decrease in the value of inventory and a corresponding increase in the cost of goods sold. The net of these two adjustments decreased cost of goods sold by $1,473,000. Future reductions in the price of copper could require the Company to record additional lower of cost or market adjustments against the related inventory balance. Additionally, a reduction in the quantity of inventory 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 cost of goods sold for that period at the different price. Gross profit increased to $53.3 million, or 20.9% of net sales, in 1997 from $25.7 million, or 14.3% of net sales, in 1996 and $11.0 million, or 7.2% of net sales, in 1995. The changes in gross profit were due to the factors discussed above. General and administrative expenses were $3.8 million in 1997, $2.9 million in 1996 and $2.7 million in 1995. As a percentage of net sales, general and administrative expenses were 1.5% in 1997, 1.6% in 1996 and 1.8% in 1995. Selling expenses, which include freight and sales commissions, were $12.4 million in 1997, $9.5 million in 1996 and $7.6 million in 1995. As a percentage of net sales, selling expenses were 4.9% in 1997, 5.3% in 1996 and 5.0% in 1995. The changes in these items, as a percentage of sales, is due primarily to freight charges remaining relatively constant per copper pound of product shipped while the sales price per copper pound sold decreased from 1995 to 1996 and increased from 1996 to 1997. 10 13 Interest expense decreased to $1,367,000 in 1997 from $1,722,000 in 1996, which was relatively constant from $1,724,000 in 1995. Interest remained relatively constant from 1995 to 1996 due to the average balance of the Company's debt remaining relatively constant. The balance of the Company's debt at the end of 1996 decreased from the balance at the end of 1995 due to the Company's cash flow (see discussion in Liquidity and Capital Resources section below). The decrease in 1997 was due primarily to the capitalization of $374,000 of interest expense relating to the construction of the Company's copper rod fabrication facility and distribution center. Without this capitalization of interest, the interest expense incurred by the Company in 1997 would have been relatively constant with the interest expense incurred in 1996. The Company's effective tax rate increased in 1997 to 39.5% due to the Company's increased net income causing it to be placed in a higher statutory tax bracket. It remained constant in 1996 and 1995 at 38.5%. As a result of the foregoing factors, the Company had net income of $21.7 million in 1997 compared to $7.1 million in 1996 and a loss of $545,000 in 1995. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's cash flow activities.
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Net income (loss).................................. $ 21,693 $ 7,159 $ (545) Adjustments to reconcile net income (loss) to net Cash provided by (used in) operating Activities: Depreciation and amortization.................. 4,060 3,396 3,054 Other non-cash items........................... 469 1,192 451 Increase in accounts receivable, Inventory and other assets.................... (14,709) (6,928) (7,495) Increase in trade accounts payable, accrued liabilities and other liabilities..... 10,225 3,428 4,213 -------- -------- -------- Net cash provided by (used in) operating activities........................................ 21,738 8,247 (322) Investing activities: Purchases of property, plant and equipment (net)................................ (26,952) (2,840) (5,297) Financing activities: Increase (decrease) in indebtedness, net....... 3,700 (4,500) 6,100 Issuances of common stock...................... 1,517 34 85 Purchase of treasury stock..................... (99) (671) (838) -------- -------- -------- Net cash (used in) provided by financing activities........................................ 5,118 (5,137) 5,347 -------- -------- -------- Net increase (decrease) in cash.................... $ 96 $ 270 $ (272) -------- -------- --------
The Company maintains a substantial inventory of finished products to satisfy customers' prompt delivery requirements. As is customary in the industry, the Company provides to most of its customers 60-day payment terms, although the Company's suppliers typically require more immediate payment, generally within 30 days. Therefore, 11 14 the Company's liquidity needs have generally consisted of operating capital necessary to finance these receivables and inventory. Capital expenditures have historically been necessary to expand the production capacity of the Company's manufacturing operations. The Company has satisfied its liquidity and capital expenditure needs with cash generated from operations, borrowings under its revolving credit facilities and sales of its Common Stock. Effective June 9, 1997, the Company completed an unsecured loan facility with a group of banks (the "Financing Agreement"). The Financing Agreement provides for maximum borrowings of the lesser of $55.0 million (the Company has notified the banks of its intention to decrease this maximum borrowing to $40.0 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 bank. The calculated maximum borrowing amount available at December 31, 1997, as computed in the Financing Agreement, was $46.0 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, 1997. Pursuant to the Financing Agreement, the Company is prohibited from declaring, paying, or issuing cash dividends. At December 31, 1997, the balance outstanding under the Financing Agreement was $22.2 million. Amounts outstanding under the Financing Agreement are payable on June 9, 2000 with interest due quarterly based on the lead bank's prime rate or LIBOR Rate option, at the Company's election. In 1995, the Board of Directors authorized the Company to purchase up to 600,000 shares, or approximately 5.6%, of its outstanding Common Stock from time to time dependent upon market conditions. Purchases made pursuant to the repurchase program are made from time to time on the open market or through privately negotiated transactions at prices determined by the Chairman of the Board or the President of the Company. The Company uses cash provided by operations and borrowings under the Financing Agreement to fund any repurchase of shares. The repurchase program permits the Company to purchase shares of its Common Stock whenever management believes that the stock price is undervalued relative to the performance and future prospects of the Company. As of December 31, 1997, the Financing Agreement discussed above allows the Company to purchase up to 407,250 shares with the aggregate price of these shares not to exceed $3,991,410. In 1997, the Company repurchased 5,000 shares. As of December 31, 1997, the Company had repurchased 200,250 shares of its Common Stock in the open market at an $8.03 per share weighted average price. Cash provided by operations increased to $21.7 million 1997 from $8.2 million in 1996, compared to cash used by operations of $322,000 in 1995. This increase in cash provided by operations from 1995 to 1997 was due primarily to the Company's increased net income in 1997 and 1996 compared to a loss in 1995. Cash used in investing activities increased to $26.9 million in 1997 from $2.8 million in 1996 and $5.3 million in 1995. These funds were used primarily to increase the Company's production capacity, including the construction of the Company's new copper rod fabrication facility and distribution center in 1997. The cash used in/provided by financing activities was primarily due to an increases and decreases in the amount of indebtedness provided by additional borrowings and repayments on the Company's loan facility. Cash used in/provided by financing activities was reduced by $99,000 in 1997, $671,000 in 1996 and $838,000 in 1995, as a result of the purchase of treasury stock. Cash used in/provided by financing activities was increased by $1.5 million in 1997, $33,000 in 1996 and $85,000 in 1995, as the result of the issuance of common stock. During 1998, the Company expects its capital expenditures will consist of additional manufacturing equipment for its residential and commercial wire operations. In addition, the Company plans to complete its copper rod fabrication facility. See "Item 1. Business." The total capital expenditures associated with the fabrication facility completion and the additional manufacturing equipment are estimated to be approximately $21.0 million. The Company also expects its working capital requirements to increase during 1998 as a result of continued increases in sales. 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 that it expects to receive from its bank will satisfy working capital and capital expenditure requirements for the next twelve months. IMPACT OF YEAR 2000 The Company is currently working to determine the impact of the year 2000 issue on the processing of date sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the 12 15 Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. Based on information available at this time, costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. The Company is currently engaged in identifying and resolving all significant year 2000 issues in a timely manner. 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 Not applicable. 13 16 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. 14 17 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, 1997 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Encore Wire Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. January 23, 1998 Dallas, Texas 15 18 Encore Wire Corporation Consolidated Balance Sheets
DECEMBER 31 1997 1996 -------------------------------- ASSETS Current assets: Cash $ 1,164,676 $ 1,261,103 Accounts receivable, net of allowance for losses of $675,000 and $473,000 in 1997 and 1996, respectively 44,302,107 33,231,871 Inventories (Note 2) 30,596,731 27,247,929 Prepaid expenses and other assets 158,903 209,724 Deferred income taxes (Note 5) 793,000 268,000 ------------- ------------- Total current assets 77,015,417 62,218,627 Property, plant, and equipment - on the basis of cost: Land 1,747,308 286,654 Construction In Progress 19,257,517 -- Buildings and improvements 8,793,423 8,749,460 Machinery and equipment 35,497,584 29,962,109 Furniture and fixtures 829,340 675,918 ------------- ------------- 66,125,172 39,674,141 Accumulated depreciation and amortization (14,796,683) (10,888,424) ------------- ------------- 51,328,489 28,785,717 Other assets 411,095 63,500 ------------- ------------- Total assets $ 128,755,001 $ 91,067,844 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 23,379,671 $ 15,473,269 Accrued liabilities (Note 3) 8,248,016 6,249,699 Current income taxes payable 1,677,402 1,358,863 ------------- ------------- Total current liabilities 33,305,089 23,081,831 Noncurrent deferred income taxes (Note 5) 3,239,844 2,587,000 Long-term note payable (Note 4) 22,200,000 18,500,000 Stockholders' equity (Note 6): 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 - 10,798,385 in 1997 and 7,112,917 in 1996 107,983 71,129 Additional paid-in capital 30,010,051 28,528,910 Treasury Stock - 200,250 in 1997 and 192,750 in 1996 (1,608,390) (1,509,011) Retained earnings 41,500,424 19,807,985 ------------- ------------- Total stockholders' equity 70,010,068 46,899,013 ------------- ------------- Total liabilities and stockholders' equity $ 128,755,001 $ 91,067,844 ============= =============
See accompanying notes. 16 19 Encore Wire Corporation Consolidated Statements of Operations
YEAR ENDED DECEMBER 31 1997 1996 1995 --------------------------------------------------- Net sales $ 254,639,993 $ 179,131,812 $ 151,308,363 Cost of goods sold 201,323,137 153,448,265 140,323,624 ------------- ------------- ------------- Gross profit 53,316,856 25,683,547 10,984,739 Selling, general, and administrative expenses 16,235,787 12,412,537 10,254,718 ------------- ------------- ------------- Operating income 37,081,069 13,271,010 730,021 Other income (expense): Interest and other income 141,836 92,233 108,129 Interest expense (1,367,068) (1,722,445) (1,724,324) ------------- ------------- ------------- Income (loss) before income taxes 35,855,837 11,640,798 (886,174) Income tax (benefit) expense (Note 5) 14,163,062 4,481,707 (341,177) ============= ============= ============= Net income (loss) $ 21,692,775 $ 7,159,091 $ (544,997) ============= ============= ============= Weighted average common shares - basic (Note 8) 10,527,904 10,515,246 10,600,422 ============= ============= ============= Basic earnings per common share $ 2.06 $ .68 $ (.05) ============= ============= ============= Weighted average common shares - diluted (Note 8) 10,987,950 10,578,160 10,600,422 ============= ============= ============= Diluted earnings per common share $ 1.97 $ .68 $ (.05) ============= ============= =============
See accompanying notes. 17 20 Encore Wire Corporation Consolidated Statements of Stockholders' Equity
ADDITIONAL COMMON STOCK PAID-IN TREASURY RETAINED SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL ---------------------------------------------------------------------------------------- Balance at December 31, 1994 7,080,317 $ 70,803 $ 28,297,004 $ -- $ 13,193,891 $ 41,561,698 Proceeds from exercise of stock options 24,100 241 51,792 -- -- 52,033 Purchase of treasury stock -- -- -- (838,083) -- (838,083) Tax benefit on exercise of stock options -- -- 112,972 -- -- 112,972 Other -- -- 33,347 -- -- 33,347 Net loss -- -- -- -- (544,997) (544,997) ---------------------------------------------------------------------------------------- Balance at December 31, 1995 7,104,417 71,044 28,495,115 (838,083) 12,648,894 40,376,970 Proceeds from exercise of stock options 8,500 85 33,795 -- -- 33,880 Purchase of treasury stock -- -- -- (670,928) -- (670,928) Net income -- -- -- -- 7,159,091 7,159,091 ---------------------------------------------------------------------------------------- Balance at December 31, 1996 7,112,917 71,129 28,528,910 (1,509,011) 19,807,985 46,899,013 Proceeds from exercise of stock options 98,520 985 810,547 -- -- 811,532 Purchase of treasury stock -- -- -- (99,379) -- (99,379) Tax benefit on exercise of stock options -- -- 706,463 -- -- 706,463 Stock split 3,586,948 35,869 (35,869) -- (336) (336) Net income -- -- -- -- 21,692,775 21,692,775 ---------------------------------------------------------------------------------------- Balance at December 31, 1997 10,798,385 $ 107,983 $ 30,010,051 $ (1,608,390) $ 41,500,424 $ 70,010,068 ========================================================================================
See accompanying notes. 18 21 Encore Wire Corporation Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1997 1996 1995 -------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 21,692,775 $ 7,159,091 $ (544,997) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,060,125 3,396,015 3,054,319 Provision for bad debts 340,869 227,000 139,218 Deferred income taxes 127,844 929,000 199,000 Tax benefit on exercise of stock options -- -- 112,972 Changes in operating assets and liabilities: Accounts receivable (11,411,105) (5,271,078) (9,220) Inventories (3,348,802) (2,699,142) (6,683,537) Prepaid expenses 50,821 (331) 33,589 Current income taxes receivable -- 1,042,460 (1,042,460) Other assets -- -- 206,028 Trade accounts payable 7,906,402 (14,838) 4,349,224 Accrued liabilities 1,998,317 2,083,462 503,035 Current income taxes payable 318,539 1,358,863 (639,177) Loss on disposal of assets 2,154 36,110 -- ------------ ------------ ------------ Net cash provided (used in) by operating activities 21,737,939 8,246,612 (322,006) INVESTING ACTIVITIES Purchases of property, plant, and equipment (26,621,051) (2,946,177) (5,297,591) Increase in long term investments (4,180) (16,000) -- Increase in deposits (343,415) -- -- Proceeds from sale of equipment 16,000 122,200 -- ------------ ------------ ------------ Net cash used in investing activities (26,952,646) (2,839,977) (5,297,591) FINANCING ACTIVITIES Increase in long-term note payable 3,700,000 -- 6,100,000 Repayment of note payable -- (4,500,000) -- Proceeds from issuance of common stock 1,517,659 33,880 85,380 Purchase of treasury stock (99,379) (670,928) (838,083) ------------ ------------ ------------ Net cash provided (used in) by financing activities 5,118,280 (5,137,048) 5,347,297 ------------ ------------ ------------ Net increase (decrease) in cash (96,427) 269,587 (272,300) Cash at beginning of year 1,261,103 991,516 1,263,816 ------------ ------------- ------------ Cash at end of year $ 1,164,676 $ 1,261,103 $ 991,516 ============ ============ ============
See accompanying notes. 19 22 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 the Company's commercial and residential wire are wholesale electrical distributors. Copper rod, a commodity product, is the principal raw material used in the Company's manufacturing operations. Copper rod accounted for approximately 73.8%, 77.4%, and 76.8% of its cost of goods sold during 1997, 1996, and 1995, respectively. The price of copper fluctuates, depending on general economic conditions and in relation to supply and demand and other factors, 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 a 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 subsidiary. Significant intercompany accounts and transactions have been eliminated upon consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 charged off accounts receivable of $140,022, $117,183, and $151,164 in 1997, 1996, and 1995, respectively. INVENTORIES Inventories are stated at the lower of cost using the last-in, first-out (LIFO) method or market. 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. 20 23 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. Effective December 15, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This Statement simplifies the standards for computing EPS by replacing the historical presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS. The Company's historical presentations of net income per common and common equivalent share compare with the presentation of diluted earnings per share as required by Statement No. 128. INCOME TAXES Income taxes are provided based on the deferred method, resulting in income tax assets and liabilities 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:
1997 1996 ------------------------------ Raw materials $ 2,299,301 $ 1,364,299 Work-in-process 6,127,977 4,184,517 Finished goods 20,818,224 21,820,867 ------------ ------------ 29,245,502 27,369,683 Adjust to LIFO cost 2,628,860 (121,754) Lower of Cost or Market Adjustment (1,277,631) -- ------------ ------------ $ 30,596,731 $ 27,247,929 ============ ============
3. ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31:
1997 1996 ------------------------- Sales volume discounts payable $6,303,949 $4,758,070 Property taxes payable 17,000 134,087 Commissions payable 501,385 387,629 Other accrued liabilities 1,425,683 969,913 ---------- ---------- $8,248,017 $6,249,699 ========== ==========
21 24 4. LONG-TERM NOTE PAYABLE The Company amended its unsecured loan facility (Facility) with a group of banks as of June 9, 1997 to provide for a maximum borrowings of the lesser of $55.0 million or the amount of eligible accounts receivable plus the amount of eligible finished goods and raw materials as defined in the Financing Agreement (approximately $46.0 million at December 31, 1997). The Facility is unsecured and contains customary covenants and conditions providing for events of default. The Company is prohibited from declaring, paying, or issuing dividends in excess of an amount greater than 50% of the Company's net income for the preceding year. At December 31, 1997, the balance outstanding under the revolving credit facility was $22.2 million. Amounts outstanding under the facility are payable on June 9, 2000, with interest due quarterly based on the lead bank's prime rate or LIBOR Rate option, at the Company's election (average interest rate at December 31, 1997 was 6.81%). Each of the interest rate options includes a premium dependent upon the Company's financial performance. The Company paid interest totaling $1,761,660, $1,730,525, and $1,688,266 in 1997, 1996, and 1995, respectively. The Company capitalized $373,823 of interest in 1997 relating to the construction of the distribution center. 5. INCOME TAXES The provisions for income tax (benefit) expense are summarized as follows:
1997 1996 1995 -------------------------------------------- Current: Federal $12,108,230 $ 3,252,757 $ (540,177) State 1,926,988 404,950 -- Deferred 127,844 824,000 199,000 -------------------------------------------- $14,163,062 $ 4,481,707 $ (341,177) ============================================
The differences between the provision for income taxes and income taxes computed using the federal income tax rate are as follows:
1997 1996 1995 -------------------------------------------- Amount computed using the statutory rate $12,617,543 $ 3,957,871 $ (301,299) State income taxes 1,497,702 459,950 (55,000) Other items 47,817 63,886 15,122 -------------------------------------------- $14,163,062 $ 4,481,707 $ (341,177) ============================================
22 25 5. INCOME TAXES (CONTINUED) The tax effect of each type of temporary difference and carryforward giving rise to the deferred tax asset and liability at December 31, 1997 and 1996, is as follows:
DEFERRED TAX ASSET (LIABILITY) 1997 1996 -------------------------------------------------------------- CURRENT NONCURRENT CURRENT NONCURRENT -------------------------------------------------------------- Depreciation and amortization $ -- $(3,239,844) $ -- $(2,587,000) Inventory 125,000 -- (26,000) -- Allowance for doubtful accounts 260,000 -- 161,000 -- Accrued expenses 200,000 -- -- -- Uniform capitalization rules 219,000 -- 112,000 -- Other (11,000) -- 21,000 -- -------------------------------------------------------------- $ 793,000 $(3,239,844) $ 268,000 $(2,587,000) ==============================================================
The Company made income tax payments of $13,010,000 in 1997, $1,151,000 in 1996, and $1,028,000 in 1995. 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 1,161,000 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, 1997, 1996, and 1995:
SHARES UNDER PRICE PER AGGREGATE OPTIONS SHARE OPTION PRICE -------------------------------------------------- Options outstanding at December 31, 1994 672,750 $ .49-9.33 $4,400,952 Options granted - - - Options exercised (36,150) .49-4.59 (52,033) Options canceled (6,000) 9.33 (56,000) -------------------------------------------------- Options outstanding at December 31, 1995 630,600 .49-9.33 4,292,919 Options granted 95,550 6.25-6.83 613,575 Options exercised (12,750) .49-4.59 (33,880) Options canceled (18,600) 6.25-9.33 (144,000) -------------------------------------------------- Options outstanding at December 31, 1996 694,800 .49-9.33 4,728,614 Options granted 119,000 12.50-25.50 1,945,500 Options exercised (129,030) .49-9.33 (811,517) Options canceled (59,880) 4.59-12.67 (537,850) -------------------------------------------------- Options outstanding at December 31, 1997 624,890 $ .49-25.50 $5,324,747 ==================================================
23 26 6. STOCK OPTIONS (CONTINUED) At December 31, 1997, 424,350 options are currently exercisable and 624,890 common shares are reserved for future issuance. The Company has elected to continue to follow the expense recognition criteria in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". Therefore, the Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" will have no effect on the Company's financial statements. The pro forma disclosures mandated by SFAS 123 are not provided as the effect of adopting the expense recognition criteria of SFAS 123 for stock options granted subsequent to January 1, 1995 would not be material to the Company. 7. RELATED PARTY TRANSACTIONS The Company paid a related party common carrier $1,662,397 in 1997, $1,905,188 in 1996, and $1,370,104 in 1995. The Company believes that rates charged by this carrier compare favorably with rates charged by other carriers. 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 ---------------------------------------------- Numerator: Net Income $21,692,775 $7,159,091 $ (544,997) Denominator: Denominator for basic earnings per share- weighted average shares 10,527,904 10,515,246 10,600,422 Effect of dilutive securities: Employee stock options 460,406 62,914 -- ---------------------------------------------- Denominator for diluted earnings per share -weighted average shares 10,987,950 10,578,160 10,600,422 ==============================================
24 27 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the two years ended December 31, 1997 and 1996 (in thousands, except per share amounts):
THREE MONTHS ENDED 1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ----------------------------------------------------------------------------------------------------- Net sales $55,131 $66,889 $70,728 $61,893 Gross profit 10,471 13,269 15,347 14,230 Net income 4,057 5,259 6,321 6,055 Net income per common share - basic .39 .50 .60 .57 Net income per common share - diluted .38 .48 .57 .55
THREE MONTHS ENDED 1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ----------------------------------------------------------------------------------------------------- Net sales $40,015 $44,747 $46,099 $48,271 Gross profit 3,432 4,544 8,752 8,955 Net income 184 586 3,103 3,286 Net income per common share - basic .02 .03 .26 .31 Net income per common share - diluted .02 .03 .26 .31
25 28 ITEM 9. 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" appearing in the Company's proxy statement for the annual meeting of stockholders to be held on May 5, 1998 sets forth certain information with respect to the directors of the Company and is 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 5, 1998 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 and Management" appearing in the Company's proxy statement for the annual meeting of stockholders to be held on May 5, 1998 sets forth certain information with respect to the ownership of the Company's Common Stock and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The section entitled "Certain Transactions" appearing in the Company's proxy statement for the annual meeting of stockholders to be held on May 5, 1998 sets forth certain information with respect to certain business relationships and transactions between the Company and its directors and officers and is incorporated herein by reference. PART IV ITEM 14. 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, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995 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, 1997. 26 29 SIGNATURES Pursuant to the requirements of the 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 27, 1998 By: /s/ VINCENT A. REGO ------------------------------------- Vincent A. Rego President and 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 27, 1998 - --------------------------------------------- of Directors, President and Chief Vincent A. Rego Executive Officer /s/ DONALD M. SPURGIN Vice Chairman of the Board March 27, 1998 - --------------------------------------------- of Directors Donald M. Spurgin /s/ SCOTT D. WEAVER Vice President-- Finance, March 27, 1998 - --------------------------------------------- Secretary and Treasurer Scott D. Weaver (Principal Financial and Accounting Officer)
27 30
SIGNATURE TITLE DATE --------- ----- ---- /s/ DONALD E. COURTNEY Director March 27, 1998 - --------------------------------------------- Donald E. Courtney /s/ JOSEPH M. BRITO Director March 27, 1998 - --------------------------------------------- Joseph M. Brito /s/ JOHN H. WILSON Director March 27, 1998 - --------------------------------------------- John H. Wilson /s/ JOHN P. PRINGLE Director March 27, 1998 - --------------------------------------------- John P. Pringle /s/ WILLIAM R. THOMAS Director March 27, 1998 - --------------------------------------------- William R. Thomas /s/ DANIEL L. JONES Director March 27, 1998 - --------------------------------------------- Daniel L. Jones
28 31 INDEX TO EXHIBITS
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 10.1 Amended and Restated Financing Agreement dated as of June 15, 1994 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). 10.2 Revolving Note dated as of August 31, 1995 executed by Encore Wire Corporation payable to the order of NationsBank of Texas, N.A. (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.3 First Amendment to Amended and Restated Financing Agreement dated as of July 26, 1994 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). 10.4 Second Amendment to Amended and Restated Financing Agreement dated effective December 29, 1994 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.5 Third Amendment to Amended and Restated Financing Agreement dated effective April 7, 1995 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.6 Fourth Amendment to Amended and Restated Financing Agreement dated effective August 31, 1995 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.7 Fifth Amendment to Amended and Restated Financing Agreement dated effective March 19, 1996 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.8 Sixth Amendment to Amended and Restated Financing Agreement dated effective September 17, 1996 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). 10.9 Seventh Amendment to Amended and Restated Financing Agreement dated effective December 11, 1996 by and between NationsBank of Texas, N.A. and Encore Wire Corporation (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
29 32 10.10* Amended and Restated Agreement Not to Compete dated March 8, 1994, between Encore Wire Corporation and Vincent A. Rego (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1, as amended (No. 33-76216), and incorporated herein by reference). 10.11* Amended and Restated Agreement Not to Compete dated March 8, 1994, between Encore Wire Corporation and Donald M. Spurgin (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1, as amended (No. 33-76216), and incorporated herein by reference). 10.12* 1989 Stock Option Plan (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8, as amended (No. 33-54484), and incorporated herein by reference). 10.13* 1989 Stock Option Plan, as amended (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1, as amended (No. 33-76216), and incorporated herein by reference). 10.14 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. 10.15 Second Amended and Restated Financing Agreement dated as of June 9, 1997 by and among Encore Wire Corporation, NationsBank of Texas, N.A. and Bank of America, Texas N.A. (filed as exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). 10.16 $35,000,000 Revolving Note to NationsBank of Texas, N.A. (filed as exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). 10.17 $25,000,000 Revolving Note to Bank of America, Texas N.A. (filed as exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). 10.18 NationsBank of Texas, N.A. Guaranty Agreement (filed as exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). 10.19 Bank of America, Texas N.A. Guaranty Agreement (filed as exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). 10.20* Employment Agreement dated as of October 1, 1996 between the Company and Donald M. Spurgin. 21.1 Subsidiary. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule o Management contract or compensatory plan
EX-3.2 2 AMENDED AND RESTATED BYLAWS OF ENCORE WIRE CORP 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF ENCORE WIRE CORPORATION - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ARTICLE I. OFFICES Section 1. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II. MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of Dallas, State of Texas, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders shall be held on the first Tuesday in April, if not a legal holiday, and if a legal holiday, then on the next secular day following, at nine o'clock a.m., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than fifty days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before each annual meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing 2 the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president or the vice chairman and shall be called by the president, the vice chairman or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by a such stockholder, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. -2- 3 Section 11. Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, by any provision of the statutes, the meeting and vote of stockholders may be dispensed with if all of the stockholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken; or if the certificate of incorporation authorizes the action to be taken with the written consent of the holders of less than all of the stock who would have been entitled to vote upon the action if a meeting were held, then on the written consent of the stockholders having not less than such percentage of the number of votes as may be authorized in the certificate of incorporation; provided that in no case shall the written consent be by the holders of stock having less than the minimum percentage of the vote required by statute for the proposed corporate action, and provided that prompt notice must be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous consent. ARTICLE III. DIRECTORS Section 1. The number of directors which shall constitute the whole board shall be nine (9). The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual meeting of stockholders and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business of the corporation shall be managed by its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. -3- 4 Section 5. The first meeting of each newly elected Board of Directors shall be held immediately following and at the same place as the annual meeting of stockholders and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time and place, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 7. Special meetings of the Board of Directors may be called by the president or the vice chairman on twenty-four hours notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president, vice chairman or secretary in like manner and on like notice on the written request of two directors. Section 8. At all meetings of the Board of Directors a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 10. The members of the Board of Directors or any committee thereof may participate in a meeting of such board or committee utilizing conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. COMMITTEES OF DIRECTORS Section 11. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees the member or members thereof present at any meeting and not -4- 5 disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 12. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 13. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as a director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV. NOTICES Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by prepaid telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V. Section 1. Elected Officers. The officers of the corporation shall be chosen by the Board of Directors and shall be a chairman of the Board of Directors, a president, one or more vice presidents, a secretary and a treasurer. The officers of the corporation may also include a vice chairman, who shall be chosen by the Board of Directors. Section 2. Election. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose a chairman of the Board of Directors and a president from its members, and one or more vice presidents, a secretary and a treasurer, none of whom need be a member of the Board of Directors. The Board of Directors may also choose a vice -5- 6 chairman, who need not be a member of the Board of Directors. The Board of Directors, the chairman of the Board of Directors or the president at any time may also appoint one or more assistant secretaries and assistant treasurers. Section 3. Appointed Officers. The Board of Directors may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 4. Compensation. The salaries of the chairman of the Board of Directors, of the president, of the vice chairman, of any vice president and of the secretary and the treasurer of the corporation shall be fixed by the Board of Directors. Section 5. Term of Office; Removal; Filling of Vacancies. Except as may be otherwise provided by the Board of Directors or in these bylaws, each officer of the corporation shall hold office until the first meeting of directors after the next annual meeting of stockholders following his election or appointment and until his successor is chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the whole Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD Section 6. The chairman of the board shall, when present, preside at meetings of the Board of Directors and the stockholders. He shall assist the Board of Directors in the formulation of policies of the corporation and shall be available to other officers for consultation and advice. Where formulation of policies of the corporation does not require action by the Board of Directors, such policies shall be formulated by the chairman of the board in collaboration with the president. He shall have power and general authority to execute bonds, deeds and contracts in the name of the corporation and to affix the corporate seal thereto; to sign stock certificates; to cause the employment or appointment of such employees and agents of the corporation as the proper conduct of operations may require and to fix their compensation, subject to the provisions of these bylaws; to remove or suspend any employee or agent who shall have been employed or appointed under his authority or under the authority of an officer subordinate to him; and to suspend for cause, pending final action by the authority which shall have elected or appointed him, any officer subordinate to the chairman of the board. He shall have such other powers and duties as may, from time to time, be prescribed by the Board of Directors. THE VICE CHAIRMAN Section 7. The vice chairman, if one is elected, shall have the power to call special meetings of the stockholders and of the Board of Directors for any purpose or purposes, and, in the absence of the chairman of the board, the vice chairman shall preside at all meetings of the Board of Directors unless he shall be absent. The vice chairman shall advise and counsel the other officers of the corporation and shall exercise such powers and perform such duties as shall -6- 7 be assigned to or required of him from time to time by the Board of Directors or the chairman of the board. THE PRESIDENT Section 8. The President shall be the chief executive officer of the corporation, shall, in the absence of the chairman of the board, preside (1) at all meetings of the stockholders and (2) in the absence of the vice chairman, if one is elected, at all meetings of the Board of Directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors and all policies formulated by the Board of Directors, or by the chairman of the board in collaboration with the president, are carried into effect. The president shall have power and general authority to execute bonds, deeds and contracts in the name of the corporation and to affix the corporate seal thereto; to sign stock certificates; to cause the employment or appointment of such employees and agents of the corporation as the proper conduct of operations may require and to fix their compensation, subject to the provisions of these bylaws; to remove or suspend any employee or agent who shall have been employed or appointed under his authority or under authority of an officer subordinate to him; to suspend for cause, pending final action by the authority which shall have elected or appointed him, any officer subordinate to the president; and in general to exercise all the powers usually appertaining to the office of president and chief executive officer of a corporation, except as otherwise provided by statute, the certificate of incorporation or these bylaws. In the event of the absence or disability of the president, his duties shall be performed and his powers may be exercised by the vice presidents in the order of their seniority, unless otherwise determined by the president, the chairman of the board, the Executive Committee or the Board of Directors. THE VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS Section 9. In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers or and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 10. The assistant vice president, or if there be more than one, the assistant vice presidents in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall in the absence of any vice president or in the event of the inability or refusal to act of any vice president, perform the duties and exercise the powers of such vice president and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARIES Section 11. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation -7- 8 and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 12. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 13. The treasurer shall have custody of the corporate funds and securities of the corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. Section 14. The treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 15. If required by the Board of Directors, the treasurer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control be longing to the corporation. Section 16. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. -8- 9 ARTICLE VI. CERTIFICATES OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation, by the chairman or vice-chairman of the board of directors, or the president or a vice president and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Section 2. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFERS OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful -9- 10 action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of and to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII. GENERAL PROVISIONS INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1. (a) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was -10- 11 serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsection (a) or (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsection (a) or (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Reasonable expenses, including court costs and attorneys' fees, incurred by a person who was or is a witness or who was or is named as a defendant or respondent in any threatened, pending or completed action, claim, suit or proceeding, whether civil, criminal, administrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding (a "Proceeding"), by reason of the fact that such individual is or was a director or officer of the corporation, or while a director or officer of the corporation is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, trust, employee benefit plan or other enterprise, shall be paid by the corporation at reasonable intervals in advance of the final disposition of such Proceeding, and without the determination set forth in Section 1(d) of this Article VII, upon receipt by the corporation of a written affirmation by such person of his good faith belief that he has met the standard of conduct necessary for indemnification under this Section 1, and a written undertaking by or on behalf of such person to repay the amount paid or reimbursed by the corporation if it is ultimately determined that he is not entitled to be indemnified by the corporation as authorized in this Section 1. Such written undertaking shall be an unlimited obligation of such person and it may be accepted without reference to financial ability to make -11- 12 repayment. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (f) The indemnification provided by this section shall not be deemed exclusive of any other rights to which those indemnified may be entitled under the certificate of incorporation or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. INTERESTED DIRECTORS AND OFFICERS; QUORUM Section 2. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if (i) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote -12- 13 thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board or of a committee which authorizes the contract or transaction. DIVIDENDS Section 3. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 4. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS Section 5. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 6. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 7. The corporate seal shall have inscribed thereon the name of the corporation and shall be in such form as may be approved from time to time by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed, imprinted or in any manner reproduced. ARTICLE VIII. AMENDMENTS These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. -13- EX-10.20 3 EMPLOYMENT AGREEMENT OCT 1 1996 - DONALD M SPURGIN 1 EXHIBIT 10.20 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of October 1, 1996, between Encore Wire Corporation, a Delaware corporation (the "Company"), and Donald M. Spurgin, an individual residing in Whitewright, Texas (the "Employee"). WHEREAS, the Company desires to employ the Employee, and the Employee desires to be employed by the Company, on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company and the Employee hereby agree as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to enter the employ of the Company, for the period set forth in Paragraph 2, in the position and with the duties and responsibilities set forth in Paragraph 3, and upon the other terms and conditions herein provided. 2. Term. The employment of the Employee by the Company as provided in Paragraph 1 shall be for a period commencing on October 1, 1996 through and ending on September 6, 2001, the Employee's 64th birthday, unless sooner terminated as herein provided. 3. Position and Duties. During the term of his employment hereunder, the Employee shall serve as an executive of the Company, accountable to the Chairman of the Board and the Board of Directors of the Company. In such capacity, the Employee shall render consulting services relating to the operations of the Company's manufacturing plant and shall have such other duties, functions, responsibilities and authority delegated to him from time to time by the Chairman of the Board or the Board of Directors of the Company and shall be available for duties during normal business hours when requested; provided, that reasonable notice is given. 4. Compensation and Related Matters. (a) Base Salary. During the Employment Term, the Company shall pay to the Employee for his services hereunder a salary at the rate of $99,000 per year, payable in installments in accordance with the general payroll practices of the Company in effect at the time such payment is made, but in no event less frequently than monthly. (b) Employee Benefits. During the term of his employment hereunder, the Employee shall be entitled to participate in employee benefit plans, programs and arrangements relating to life insurance, medical, dental, accident and disability provided by the Company from time to time to its employees generally. 5. Termination of Employment. (a) Death. The Employee's employment hereunder shall terminate automatically upon his death. 2 (b) Termination by Company. The Company may terminate the Employee's employment hereunder for Cause (as defined below). For purposes of this Agreement, "Cause" shall mean any of the following: (i) willful misconduct by the Employee that is materially and demonstrably detrimental to the Company, monetarily or otherwise; or (ii) conviction of the Employee of a felony. (c) Termination by Employee. The Employee may terminate his employment hereunder upon 15 days' written notice to the Company. 6. Confidentiality. During the term of this Agreement and for a period of three years following the termination of his employment hereunder, the Employee shall hold in strict confidence and shall not, directly or indirectly, disclose or reveal to any person, or use for his own personal benefit or for the benefit of anyone else, any trade secrets, confidential dealings or other confidential or proprietary information of any kind, nature or description (whether or not acquired, learned, obtained or developed by the Employee alone or in conjunction with others) belonging to or concerning the Company, except (i) with the prior written consent of the Company duly authorized by the Chairman of the Board of the Company, (ii) in the course of the proper performance of the Employee's duties hereunder or (iii) as required by applicable law or legal process. The provisions of this Paragraph 6 shall continue in effect notwithstanding termination of the Employee's employment hereunder for any reason. 7. Noncompetition. (a) Employee agrees that he will not engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor or in any other individual or representative capacity during the three-year period following termination of his employment hereunder, in any business or activity engaged in by the Company at that time in any location where the Company is engaged in such business; provided that, this Section 7 shall not preclude Employee from making personal investments in securities of companies that are registered on a national stock exchange, if the aggregate amount owned by Employee and all family members and affiliates does not exceed 1% of such company's outstanding securities. (b) Employee will not during the three-year period following termination of his employment hereunder, solicit, entice, persuade or induce, directly or indirectly, any employee (or person who within the preceding ninety (90) days was an employee) of the Company or any other person who is under contract with or rendering services to the Company, to (i) terminate his or her employment by, or contractual relationship with, such person, (ii) refrain from extending or renewing the same (upon the same or new terms), (iii) refrain from rendering services to or for such person, (iv) become employed by or to enter into contractual relations with any persons other than such person, or (v) enter into a relationship with a competitor of the Company. 8. Withholding Taxes. The Company shall withhold from any payments to be made to the Employee hereunder such amounts (including social security contributions and federal income taxes) as shall be required by federal, state, and local withholding tax laws. -2- 3 9. Injunctive Relief. In recognition of the fact that a breach by the Employee of any of the provisions of Paragraphs 6 and 7 will cause irreparable damage to the Company for which monetary damages alone will not constitute an adequate remedy, the Company shall be entitled as a matter of right (without being required to prove damages or furnish any bond or other security) to obtain a restraining order, an injunction or other equitable relief from any court of competent jurisdiction restraining any further violation of such provisions by the Employee. Such right to equitable relief shall not be exclusive but shall be in addition to all other rights and remedies to which the Company may be entitled at law or in equity. 10. Survival. Neither the expiration or the termination of the term of the Employee's employment hereunder shall impair the rights or obligations of either party hereto which shall have accrued hereunder prior to such expiration or termination. 11. Notices. All notices and other communications required or permitted to be given hereunder by either party hereto shall be in writing and shall be given by hand delivery or by first class registered or certified United States mail, postage prepaid, return receipt requested, to the party for which intended at the following addresses (or at such other addresses as shall be specified by the parties by like notice): If to the Company, at: Encore Wire Corporation P.O. Box 1149 McKinney, Texas 75069-0545 Attention: Vincent A. Rego If to the Employee, at: Route 1, Box 116K Whitewright, Texas 75491 All such notices and other communications shall be effective only upon receipt by the addressee. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to such subject matter. 13. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that the Employee shall not assign or otherwise transfer this Agreement or any of his rights or obligations hereunder without the prior written consent of the Company. 14. Amendment. This Agreement may not be modified or amended in any respect except by an instrument in writing signed by the party against whom such modification or amendment is sought to be enforced. -3- 4 15. Waiver. Any term or condition of this Agreement may be waived at any time by the party hereto which is entitled to have the benefit thereof, but such waiver shall only be effective if evidenced by a writing signed by such party, and a waiver on one occasion shall not be deemed to be a waiver of the same or any other type of breach on a future occasion. No failure or delay by a party hereto in exercising any right or power hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right or power. 16. Severability. If any provision of this Agreement is held to be unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be deemed inoperative to the extent it is deemed unenforceable and (c) in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. 17. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer, and the Employee has executed this Agreement, as of the date first set forth above. ENCORE WIRE CORPORATION By: /s/ Vincent A. Rego --------------------------------------------- Vincent A. Rego, Chairman of the Board, President and Chief Executive Officer "COMPANY" /s/ Donald M. Spurgin -------------------------------------------------- Donald M. Spurgin "EMPLOYEE" -4- EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 SUBSIDIARY EWC Leasing Corp., a Nevada corporation EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-38729, Form S-8 No. 33-89126 and Form S-8 No. 33-54484) pertaining to the 1989 Stock Option Plan of Encore Wire Corporation of our report dated January 23, 1998, with respect to the consolidated financial statements of Encore Wire Corporation included in the Form 10-K for the year ended December 31, 1997. /s/ Ernst & Young LLP - --------------------- Dallas, Texas March 23, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,165 0 44,977 675 30,597 77,015 66,125 14,797 128,755 33,305 0 0 0 108 69,902 128,755 254,640 254,640 201,323 15,895 0 341 1,225 35,856 14,163 21,693 0 0 0 21,693 2.06 1.97
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