UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended March 27, 2004

OR

For the Transition Period From ________ to ________

Commission File Number 1-9929

Insteel Industries, Inc.

Registrant’s telephone number, including area code: (336) 786-2141

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     The number of shares outstanding of the registrant’s common stock as of June 11, 2004 was 8,602,492.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

     The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in the audited financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 27, 2003.

     The unaudited consolidated financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.

(2) Recent Accounting Pronouncements

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46, “Consolidation of Variable Interest Entities — an interpretation of Accounting Research Bulletin (“ARB”) No. 51”. This Interpretation is intended to clarify the application of the majority voting interest requirement of ARB No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The controlling financial interest may be achieved through arrangements that do not involve voting interests.

     Subsequent to issuing FIN 46, the FASB issued FIN 46 (revised) (“FIN 46R”), which replaces FIN 46. Among other things, FIN 46R clarified and changed the definition and application of a number of provisions of FIN 46 including de facto agents, variable interests and variable interest entity (“VIE”). FIN 46R also expanded instances when FIN 46 should not be applied. FIN 46R was issued December 23, 2003 and, for the Company, is effective no later than the end of the second quarter of 2004. FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company has not identified any significant variable interests that would have a material impact on its financial statements upon adoption of FIN 46 at the end of the second quarter of fiscal 2004.

(3) Stock-Based Compensation

     The Company accounts for its employee stock option plans under the intrinsic value method prescribed by Accounting Principals Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment for FASB Statement No. 123.”

     SFAS No. 123, as amended by SFAS No. 148, permits companies to recognize, as expense over the vesting period, the fair value of all stock-based awards on the grant date. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because the Company’s stock-based compensation plans have characteristics significantly different from those of traded options and because changes in subjective input assumptions can materially affect the fair value estimate, management believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from the plan: Therefore, as permitted, the Company applies the existing accounting rules under APB No. 25 and provides pro forma net earnings and pro forma net earnings per share disclosures for stock-based awards made during the indicated period as if the fair value method defined in SFAS No. 123, as amended, had been applied. The Company’s pro forma net earnings for period ended March 29, 2003 are greater than its reported earnings due to the cancellation of certain options. Net earnings and net earnings per share for the three months and six months ended March 27, 2004 and March 29, 2003, respectively, are as follows:

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(4) Deferred Tax Assets

     The Company has recorded the following amounts for deferred tax assets and tax refunds receivable on its consolidated balance sheet as of March 27, 2004: a current deferred tax asset of $2.9 million (net of valuation allowance) in prepaid expenses and other, and a noncurrent deferred tax asset $5.4 million (net of valuation allowance) in other assets. The Company has gross federal operating loss carryforwards of $18.0 million that will expire in 19 - 20 years and gross state operating loss carryforwards of $37.2 million that begin to expire in six years, but principally expire in 14 - 20 years. The Company also has federal alternative minimum tax credit carryforwards of $360,000 that do not expire.

     The realization of the Company’s deferred tax assets is entirely dependent upon the Company’s ability to generate future taxable income. Generally accepted accounting principles (“GAAP”) require that the Company periodically assess the need to establish a valuation allowance against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized. Based on the Company’s projections of future operations, the Company believes that it will generate sufficient taxable income to utilize all of its federal net operating loss carryforwards. Under GAAP, however, projected financial performance alone is not sufficient to warrant the recognition of a deferred tax asset to the extent the Company has had cumulative losses in recent years. Rather, the presumption exists that absent recent historical evidence of the Company’s ability to generate taxable income, a valuation reserve against deferred tax assets should be established. Accordingly, in connection with the losses incurred for fiscal years 2001 and 2002, the Company established a valuation allowance of $7.5 million against its deferred tax assets in 2002. The valuation allowance was reduced during the fourth quarter of 2003 from $7.5 million to $1.3 million eliminating the valuation allowance on all federal net operating losses (“NOLs”) due to their anticipated utilization in 2004. The remaining $1.3 million valuation allowance is to offset various state NOLs that are not anticipated to be utilized during 2004. The valuation allowance established by the Company is subject to periodic review and adjustment based on changes in facts and circumstances.

(5) Pension Benefits

     The Company expects to contribute $572,000 to the defined benefit pension plan during the fiscal year ending October 2, 2004 and has contributed $249,000 during the six month period ended March 27, 2004. The net periodic pension costs and related components for the three months and six months ended March 27, 2004 and March 29, 2003, respectively are as follows:

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(Amounts in thousands)

(6) Credit Facilities

Previous Facility

     The Company had a senior secured credit facility with a group of banks, consisting of a $42.0 million revolving credit facility, a $28.5 million term loan and a $9.4 million term loan. In February 2003, the Company and its senior lenders agreed to an amendment to the credit agreement that extended the previously amended maturity date of the credit facility from October 15, 2003 to March 31, 2004. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margins that allow the Company to lower its interest rates through future reductions in the term loan; (2) additional fees which become payable to the lenders on certain dates unless a refinancing of the credit facility is completed before such dates; (3) the deferral of the payment dates of other contingent fees consistent with the period of time for which the maturity date was extended; (4) adjustments to the financial covenants that are applicable under the credit agreement; (5) limitations on the amount of capital expenditures to $1.8 million for each fiscal year; and (6) mandatory prepayments of the term loan should actual EBITDA exceed certain thresholds.

     Under the amended terms of the credit agreement, interest rates on the credit facility are determined based upon a base rate that is established at the higher of the prime rate or 0.50% plus the federal funds rate, plus, in either case, an applicable interest rate margin. As of March 27, 2004, interest rates on the credit facility were as follows: 6% on the revolver and 8% on the term loans.

     Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. At March 27, 2004, approximately $13.2 million was available under the revolving credit facility. In addition, under the amended terms of the credit agreement, the Company is subject to financial covenants that require the maintenance of EBITDA and net worth above specified levels. The Company was in compliance with all of the financial covenants as of March 27, 2004. The senior secured credit facility is collateralized by all of the Company’s assets.

     The Company and its senior lenders have agreed to certain modifications in the credit facility through a series of amendments to the credit agreement. The previous amendments had the effect of increasing the Company’s interest expense from the amounts that would have been incurred under the original terms of the credit agreement as a result of: (1) increases in the applicable interest rate margins; (2) additional fees, a portion of which are calculated based upon the Company’s stock price, payable to the lenders on certain dates and in increasing amounts based upon the timing of the completion of a refinancing of the credit facility; and (3) a reduction in the term of the credit facility and the period over which the capitalized financing costs are amortized, resulting in higher amortization expense. Upon an event of default, the lenders would be entitled to the right to payment of that portion of the fees that are calculated based upon the Company’s stock price.

     As required by its lenders under the terms of the credit facility, in April 2000, the Company entered into interest rate swap agreements to reduce the financial impact of future interest rate fluctuations on its earnings and cash flows. These agreements effectively converted $50.0 million of the Company’s variable rate debt to a fixed rate of 7.08% plus the applicable margin under the credit facility. The Company has designated its interest rate swap agreements as cash flow hedges and formally assesses on an ongoing basis whether these agreements are highly effective in offsetting the changes in

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the fair values of the interest cash flows under its senior secured credit facility. Interest rate differentials paid or received under these swap agreements are recognized in income over the life of the agreements as adjustments to interest expense. Changes in the fair value of the swap agreements are recorded as a component of “accumulated other comprehensive loss.” As of March 27, 2004, the fair value of the swap agreements was ($2.7 million) and was recorded in other liabilities on the Company’s consolidated balance sheet. In connection with the refinancing that was completed on June 3, 2004, the Company terminated the interest rate swap agreements in May 2004 for payments totaling $2.1 million.

New Facility

     In March 2004, the Company reached preliminary agreements with new lenders for the refinancing of its senior secured credit facility. In order to facilitate the anticipated refinancing, the Company’s existing lenders agreed to an extension in the maturity date of the current credit facility from March 31, 2004 to May 17, 2004 and a subsequent extension from May 17, 2004 to June 4, 2004. On June 3, 2004, the Company entered into a new $82.0 million senior secured debt facility with one lender, consisting of a $60.0 million revolver, a $17.0 million Term Loan A and a $5.0 million Term Loan B, which has a four-year term maturing on June 2, 2008. Proceeds from the financing were used to pay off the Company’s existing credit facility (approximately $62.4 million outstanding as of the closing date) and will support its working capital, capital expenditure and general corporate requirements going forward. The credit facility is secured by all of the Company’s assets.

     Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of June 3, 2004, approximately $42.2 million was outstanding on the revolver and excess availability was $10.9 million. The Term Loan A amortizes over 47 months, beginning on July 1, 2004, at $283,000 per month with the remaining principal balance due on June 2, 2008. The Term Loan B does not amortize and the entire principal balance is due in a single payment on June 2, 2008.

     Interest rates on the revolver and Term Loan A are based upon (1) a base rate that is established at the higher of the prime rate or 0.50% plus the federal funds rate, or (2) at the election of the Company, a LIBOR rate, plus in either case, an applicable interest rate margin. Interest rates on the Term Loan B are based upon the higher of the prime rate or 0.50% plus the federal funds rate plus an applicable interest rate margin. The applicable interest rate margins are initially 1.50% for the base rate and 3.00% for the LIBOR rate on the revolver, 2.25% for the base rate and 3.75% for the LIBOR rate on Term Loan A, and 7.00% for the base rate on Term Loan B. Beginning on April 2, 2005, the applicable interest rate margins will be adjusted within the following ranges on a quarterly basis based upon the Company’s leverage ratio: 1.00% — 1.75% for the base rate and 2.50% — 3.25% for the LIBOR rate on the revolver, 1.50% — 2.25% for the base rate and 3.00% — 3.75% for the LIBOR rate on Term Loan A, and 5.00% — 7.00% for the base rate on Term Loan B. In addition, the applicable interest rate margins may be adjusted further based on the amount of excess availability on the revolver and the occurrence of certain events of default provided for under the credit facility.

     The Company’s ability to borrow available amounts under the credit facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if the Company is unable to make certain representations and warranties, including that a Material Adverse Change (as defined in the Credit Agreement) has not occurred with respect to the Company.

     Financial Covenants

     The terms of the credit facility require the Company to maintain certain fixed charge coverage and leverage ratios during the term of the credit facility. Commencing with the fiscal quarter ending on October 2, 2004, the Company must have a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.15 at the end of each fiscal quarter for the 12-month period then ended (or, for the fiscal quarters ending on or before July 2, 2005, the period commencing on June 1, 2004 and ending on the last day of such fiscal quarter). In addition, the Company must maintain a Leverage Ratio (as defined in the Credit Agreement) of not more than 3.25 as of the last day of each quarter through July 1, 2006, and not more than 3.00 thereafter. The Company is also required to have consolidated EBITDA equal to at least $15.0 million for the quarter ending June 26, 2004.

     Negative Covenants

     In addition, the terms of the credit facility restrict the Company’s ability to, among other things:

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•		engage in certain business combinations or divestitures;
•		make capital expenditures;
•		make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans;
•		incur or assume indebtedness;
•		issue securities;
•		enter into certain transactions with affiliates of the Company; or
•		permit liens to encumber the Company’s property and assets.

     The Company is limited to Capital Expenditures (as defined in the Credit Agreement) of not more than $5.0 million for the period beginning on May 30, 2004 and ending on October 2, 2004, and not more than $7.0 million for each fiscal year thereafter through the year ended September 29, 2007, and for the period beginning on September 30, 2007 and ending on June 2, 2008, plus for any of these periods, up to a $2.0 million carryover of the amount by which actual Capital Expenditures are less than the applicable limitation for the prior period.

     Events of Default

     Under the terms of the credit facility, an event of default will occur with respect to the Company upon the occurrence of, among other things:

•		a default or breach by the Company or any of its subsidiaries under any agreement resulting in the acceleration of amounts due in excess of $500,000 under such other agreement;
•		certain payment defaults by the Company or any of its subsidiaries in excess of $500,000
•		certain events of bankruptcy or insolvency with respect to the Company;
•		an entry of judgment against the Company or any of its subsidiaries for greater than $500,000, which amount is not covered by insurance; or
•		a change of control of the Company.

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(7) Earnings Per Share

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

     Options to purchase 534,000 shares and 545,000 shares for the three months ended March 27, 2004 and March 29, 2003, respectively, were antidilutive and were not included in the diluted EPS computation. Options to purchase 534,000 shares and 759,000 shares for the six months ended March 27, 2004 and March 29, 2003, respectively, were antidilutive and were not included in the diluted EPS computation.

(8) Comprehensive Income (Loss)

     The components of comprehensive income (loss), net of tax, for the three months and six months ended March 27, 2004 and March 29, 2003, respectively, are as follows:

     The change in the accumulated other comprehensive loss for the six months ended March 27, 2004 is as follows:

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(9) Other Financial Data

     Balance sheet information:

(10) Subsequent Event

     At the time of the Company’s acquisition of Florida Wire and Cable, Inc. (“FWC”), FWC was a party to a Rod Supply Agreement (the “Agreement”) with its parent, GS Industries, Inc. (“GSI”) which was to remain in effect through its termination date of December 31, 2004. The Agreement required FWC to purchase and GSI to supply 80% of FWC’s requirement for certain grades of wire rod subject to a minimum purchase and supply quantity of 99,000 tons per year and a maximum purchase and supply quantity of 150,000 tons per year. On October 1, 2002, FWC was merged into Insteel Wire Porducts Company, wholly owned subsidiary of the Company.

     In February 2001, GSI and certain of its subsidiaries, including Georgetown Steel Corporation, filed for bankruptcy protection. During GSI’s bankruptcy proceeding, the Agreement was assigned to Georgetown Steel Corporation. Georgetown Steel Corporation emerged from bankruptcy in July 2002 as Georgetown Steel Company LLC (“GSC”). In October 2003, GSC filed for bankruptcy protection and permanently discontinued operations at its steel mill.

     Following the closure of its steel mill, GSC breached the terms of the Agreement by failing to supply wire rod to the Company and the Company was forced to cover its requirements in the open market at prices in excess of the prices as defined in the Agreement. Due to its immediate need for raw materials, the Company incurred substantial excess costs in covering its wire rod requirements for the first quarter of fiscal 2004. In response, the Company elected to defer the payment

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of the outstanding balances owed to GSC at September 27, 2003 pending a settlement for the recovery of the excess costs that it had incurred.

     On December 4, 2003 GSC filed suit against the Company in United States Bankruptcy Court for the District of South Carolina seeking payment by the Company of its pre-petition obligation to GSC (approximately $4.9 million) and alleging that (i) the Agreement had been disregarded by the parties and was not effective, (ii) the Company wrongfully withheld payments for material that was not subject to the terms of the Agreement, and (iii) the Company wrongfully withheld payments for material that it claimed was defective. The Company answered the complaint on January 9, 2004. On April 22, 2004, the Company and GSC agreed to a settlement which resulted in a $0.8 million gain ($1.1 million settlement offset by $0.3 million rod claim) for the Company that will be recorded in other income in the third quarter of fiscal 2004. Under the terms of the agreement, the Company will pay GSC the amount of $3.8 million over a period of six months ending in October 2004.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

     This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “believes,” “anticipates,” “expects,” “plans” and similar expressions are intended to identify forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, such forward-looking statements are subject to a number of risks and uncertainties, and the Company can provide no assurances that such plans, intentions or expectations will be achieved. Many of these risks are discussed in detail in the Company’s periodic reports, in particular in its report on Form 10-K year ended September 27, 2003, filed with the U.S. Securities and Exchange Commission on June 11, 2004. You should carefully read these risk factors.

     All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only to the respective dates on which such statements are made and the Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

     It is not possible to anticipate and list all risks and uncertainties that may affect the future operations or financial performance of the Company; however, they would include, but are not limited to, the following:

     • general economic and competitive conditions in the markets in which the Company operates;

     • the cyclical nature of the steel industry;

     • changes in U.S. or foreign trade policy affecting steel imports or exports;

     • fluctuations in the cost and availability of the Company’s primary raw material, hot-rolled steel wire rod from domestic
       and foreign suppliers;

     • the Company’s ability to raise selling prices in order to recover increases in wire rod prices;

     • interest rate volatility;

     • unanticipated changes in customer demand, order patterns and inventory levels;

     • legal, environmental or regulatory developments that significantly impact the Company’s operating costs;

     • unanticipated plant outages, equipment failures or labor difficulties; and

     • continuing escalation in medical costs that affect employee benefit expenses.

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Results of Operations

Statements of Operations – Selected Data
($ in thousands)

N/M = Not meaningful

Second Quarter of Fiscal 2004 Compared to Second Quarter of Fiscal 2003

Net Sales

     Net sales for the quarter increased 61% to $73.8 million from $45.9 million in the same year-ago period primarily due to higher sales of concrete reinforcing products. Shipments for the quarter rose 22% while average selling prices increased 32% from the prior year levels. Sales of concrete reinforcing products (welded wire fabric and PC strand) increased 71% from the year-ago quarter, increasing to 90% of consolidated sales from 85%. Sales of industrial wire products (tire bead wire and other industrial wire) increased 8% from the year-ago quarter, but declined to 10% of consolidated sales from 15%.

Gross Profit

     Gross profit increased 347% to $16.5 million, or 22.4% of net sales in the quarter compared with $3.7 million, or 8.1% of net sales in the same year-ago period. The increase in gross profit was largely driven by higher shipment levels together with increased spreads between average selling prices and raw material costs.

Selling, General and Administrative Expense

     Selling, general and administrative expense (“SG&A expense”) increased 44% to $4.3 million, or 5.8% of net sales in the quarter from $3.0 million, or 6.5% of net sales in the same year-ago period. The increase in SG&A expense was primarily due to higher incentive plan expense resulting from the improved financial performance of the Company together with legal fees related to the dumping and countervailing duty cases that were filed by a coalition of domestic PC strand producers, including the Company, against certain countries exporting into the U.S. market.

Earnings Before Interest and Income Taxes

     The Company’s earnings before interest and income taxes for the quarter were $12.3 million compared to $693,000 in the same year-ago period.

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Interest Expense

     Interest expense for the quarter decreased $95,000, or 4%, to $2.4 million from $2.5 million in the same year-ago period. The decrease was due to lower average borrowing levels on the Company’s senior secured credit facility ($271,000), partially offset by higher average interest rates ($129,000) and higher amortization of capitalized financing costs ($47,000).

Income Taxes

     The effective income tax rate increased to 38.1% in the quarter from 34.4% in the same year-ago period due to the profitable results of the Company in the current year quarter in comparison to the prior year loss together with the reduced impact of permanent book — tax differences.

Net Earnings (Loss)

     The Company’s net earnings for the quarter were $6.2 million, or 73 cents per share compared to a loss of $1.2 million, or 14 cents per share, in the same year-ago period.

First Six Months of Fiscal 2004 Compared With First Six Months of Fiscal 2003

Net Sales

     Net sales for the first six months of fiscal year 2004 increased 40% to $130.0 million from $92.7 million in the same year-ago period primarily due to higher sales of concrete reinforcing products. Shipments for the six-month period rose 18% while average selling prices increased 19% from the prior year levels. Sales of concrete reinforcing products (welded wire fabric and PC strand) increased 48% from the year-ago period, increasing to 89% of consolidated sales from 85%. Sales of industrial wire products (tire bead wire and other industrial wire) increased 2% from the year-ago period, but declined to 11% of consolidated sales from 15%.

Gross Profit

     Gross profit more than doubled to $23.9 million, or 18.4% of net sales for the first six months of fiscal 2004 compared with $7.7 million, or 8.3% of net sales in the same year-ago period. The increase in gross profit was largely driven by higher shipment levels together with increased spreads between average selling prices and raw material costs.

Selling, General and Administrative Expense

     SG&A expense increased 37% to $7.9 million, or 6.0% of net sales for the first six months of fiscal 2004 from $5.7 million, or 6.2% of net sales in the same year-ago period. The increase in SG&A expense was primarily due to higher incentive plan expense resulting from the improved financial performance of the Company together with legal fees related to the dumping and countervailing duty cases that were filed by a coalition of domestic PC strand producers, including the Company, against certain countries exporting into the U.S. market.

Earnings Before Interest and Income Taxes

     The Company’s earnings before interest and income taxes for the first six months of fiscal 2004 were $16.0 million compared to $2.0 in the same year-ago period.

Interest Expense

     Interest expense for the first six months of fiscal 2004 increased slightly to $5.0 million from $4.9 million in the same year-ago period. The increase was primarily due to higher average interest rates ($373,000) and amortization of capitalized financing costs ($103,000), partially offset by lower average borrowing levels on the Company’s senior secured credit facility ($469,000).

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Income Taxes

     The effective income tax rate increased to 38.1% for the first six months of fiscal 2004 from 35.5% in the same year-ago period due to the profitable results of the Company in the current year quarter in comparison to the prior year loss together with the reduced impact of permanent book — tax differences.

Net Earnings (Loss)

     The Company’s net earnings for the first six months of fiscal 2004 were $6.9 million, or 81 cents per share compared to a loss of $1.9 million, or 23 cents per share, in the same year-ago period.

Liquidity and Capital Resources

Selected Financial Data
($ in thousands)

Cash Flow Analysis

     Operating activities provided $5.9 million of cash for the first six months of fiscal 2004 compared to $1.9 million in the same year-ago period. The increase was primarily due to the improvement in the Company’s financial performance in the current year compared to the prior year loss. The net change in the working capital components of receivables, inventories and accounts payable and accrued expenses used $5.6 million in the current year compared to $2.5 million in the same year-ago period.

     Investing activities used $1.3 million of cash for the first six months of fiscal 2004 compared to $419,000 in the same year-ago period. The Company expects that capital expenditures will remain at reduced levels in 2004 in comparison to the recent historical levels prior to 2001 in connection with its debt reduction efforts and consistent with the limitations imposed under the terms of its new credit facility. The Company is limited to capital expenditures of not more than $5.0 million for the period beginning on May 30, 2004 and ending on October 2, 2004, and not more than $7.0 million for each fiscal year thereafter through the year ended September 29, 2007, and for the period beginning on September 30, 2007 and ending on June 2, 2008, plus for any of these periods, up to a $2.0 million carryover of the amount by which actual capital expenditures are less than the applicable limitation for the prior period.

     Financing activities used $4.5 million of cash for the first six months of fiscal 2004 compared to $1.4 million in the same year-ago period. The increase in the financing requirements was primarily due to the $5.7 million decrease in debt in the current year.

     The Company’s total debt to capital ratio decreased to 62% at March 27, 2004 from 77% at March 29, 2003 primarily due to the combined impact of a $8.4 million reduction in long-term debt and a $17.2 million increase in shareholders’ equity in the current period. The Company believes that, in the absence of significant unanticipated cash

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demands, net cash generated by operating activities and amounts available under its revolving credit facility will be sufficient to satisfy its working capital and capital expenditure requirements.

Credit Facilities

Previous Facility

     The Company had a senior secured credit facility with a group of banks, consisting of a $42.0 million revolving credit facility, a $28.5 million term loan and a $9.4 million term loan. In February 2003, the Company and its senior lenders agreed to an amendment to the credit agreement that extended the previously amended maturity date of the credit facility from October 15, 2003 to March 31, 2004. The amendment also provided for certain other terms and conditions, including: (1) changes in the applicable margins that allow the Company to lower its interest rates through future reductions in the term loan; (2) additional fees which become payable to the lenders on certain dates unless a refinancing of the credit facility is completed before such dates; (3) the deferral of the payment dates of other contingent fees consistent with the period of time for which the maturity date was extended; (4) adjustments to the financial covenants that are applicable under the credit agreement; (5) limitations on the amount of capital expenditures to $1.8 million for each fiscal year; and (6) mandatory prepayments of the term loan should actual EBITDA exceed certain thresholds.

     Under the amended terms of the credit agreement, interest rates on the credit facility are determined based upon a base rate that is established at the higher of the prime rate or 0.50% plus the federal funds rate, plus, in either case, an applicable interest rate margin. As of March 27, 2004, interest rates on the credit facility were as follows: 6% on the revolver and 8% on the term loans.

     Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. At March 27, 2004, approximately $13.2 million was available under the revolving credit facility. In addition, under the amended terms of the credit agreement, the Company is subject to financial covenants that require the maintenance of EBITDA and net worth above specified levels. The Company was in compliance with all of the financial covenants as of March 27, 2004. The senior secured credit facility is collateralized by all of the Company’s assets.

     The Company and its senior lenders have agreed to certain modifications in the credit facility through a series of amendments to the credit agreement. The previous amendments had the effect of increasing the Company’s interest expense from the amounts that would have been incurred under the original terms of the credit agreement as a result of: (1) increases in the applicable interest rate margins; (2) additional fees, a portion of which are calculated based upon the Company’s stock price, payable to the lenders on certain dates and in increasing amounts based upon the timing of the completion of a refinancing of the credit facility; and (3) a reduction in the term of the credit facility and the period over which the capitalized financing costs are amortized, resulting in higher amortization expense. Upon an event of default, the lenders would be entitled to the right to payment of that portion of the fees that are calculated based upon the Company’s stock price.

     As required by its lenders under the terms of the credit facility, in April 2000, the Company entered into interest rate swap agreements to reduce the financial impact of future interest rate fluctuations on its earnings and cash flows. These agreements effectively converted $50.0 million of the Company’s variable rate debt to a fixed rate of 7.08% plus the applicable margin under the credit facility. The Company has designated its interest rate swap agreements as cash flow hedges and formally assesses on an ongoing basis whether these agreements are highly effective in offsetting the changes in the fair values of the interest cash flows under its senior secured credit facility. Interest rate differentials paid or received under these swap agreements are recognized in income over the life of the agreements as adjustments to interest expense. Changes in the fair value of the swap agreements are recorded as a component of “accumulated other comprehensive loss.” As of March 27, 2004, the fair value of the swap agreements was ($2.7 million) and was recorded in other liabilities on the Company’s consolidated balance sheet. In connection with the refinancing that was completed on June 3, 2004, the Company terminated the interest rate swap agreements in May 2004 for payments totaling $2.1 million.

New Facility

     In March 2004, the Company reached preliminary agreements with new lenders for the refinancing of its senior secured credit facility. In order to facilitate the anticipated refinancing, the Company’s existing lenders agreed to an extension in the maturity date of the current credit facility from March 31, 2004 to May 17, 2004 and a subsequent extension from May

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17, 2004 to June 4, 2004. On June 3, 2004, the Company entered into a new $82.0 million senior secured debt facility with one lender, consisting of a $60.0 million revolver, a $17.0 million Term Loan A and a $5.0 million Term Loan B, which has a four-year term maturing on June 2, 2008. Proceeds from the financing were used to pay off the Company’s existing credit facility (approximately $62.4 million outstanding as of the closing date) and will support its working capital, capital expenditure and general corporate requirements going forward. The credit facility is secured by all of the Company’s assets.

     Advances under the revolving credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of June 3, 2004, approximately $42.2 million was outstanding on the revolver and excess availability was $10.9 million. The Term Loan A amortizes over 47 months, beginning on July 1, 2004, at $283,000 per month with the remaining principal balance due on June 2, 2008. The Term Loan B does not amortize and the entire principal balance is due in a single payment on June 2, 2008.

     Interest rates on the revolver and Term Loan A are based upon (1) a base rate that is established at the higher of the prime rate or 0.50% plus the federal funds rate, or (2) at the election of the Company, a LIBOR rate, plus in either case, an applicable interest rate margin. Interest rates on the Term Loan B are based upon the higher of the prime rate or 0.50% plus the federal funds rate plus an applicable interest rate margin. The applicable interest rate margins are initially 1.50% for the base rate and 3.00% for the LIBOR rate on the revolver, 2.25% for the base rate and 3.75% for the LIBOR rate on Term Loan A, and 7.00% for the base rate on Term Loan B. Beginning on April 2, 2005, the applicable interest rate margins will be adjusted within the following ranges on a quarterly basis based upon the Company’s leverage ratio: 1.00% — 1.75% for the base rate and 2.50% — 3.25% for the LIBOR rate on the revolver, 1.50% — 2.25% for the base rate and 3.00% — 3.75% for the LIBOR rate on Term Loan A, and 5.00% — 7.00% for the base rate on Term Loan B. In addition, the applicable interest rate margins may be adjusted further based on the amount of excess availability on the revolver and the occurrence of certain events of default provided for under the credit facility.

     The Company’s ability to borrow available amounts under the credit facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if the Company is unable to make certain representations and warranties, including that a Material Adverse Change (as defined in the Credit Agreement) has not occurred with respect to the Company.

     Financial Covenants

     The terms of the credit facility require the Company to maintain certain fixed charge coverage and leverage ratios during the term of the credit facility. Commencing with the fiscal quarter ending on October 2, 2004, the Company must have a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.15 at the end of each fiscal quarter for the 12-month period then ended (or, for the fiscal quarters ending on or before July 2, 2005, the period commencing on June 1, 2004 and ending on the last day of such fiscal quarter). In addition, the Company must maintain a Leverage Ratio (as defined in the Credit Agreement) of not more than 3.25 as of the last day of each quarter through July 1, 2006, and not more than 3.00 thereafter. The Company is also required to have consolidated EBITDA equal to at least $15.0 million for the quarter ending June 26, 2004.

     Negative Covenants

     In addition, the terms of the credit facility restrict the Company’s ability to, among other things:

•		engage in certain business combinations or divestitures;
•		make capital expenditures;
•		make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans;
•		incur or assume indebtedness;
•		issue securities;
•		enter into certain transactions with affiliates of the Company; or

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•

permit liens to encumber the Company’s property and assets.

     The Company is limited to Capital Expenditures (as defined in the Credit Agreement) of not more than $5.0 million for the period beginning on May 30, 2004 and ending on October 2, 2004, and not more than $7.0 million for each fiscal year thereafter through the year ended September 29, 2007, and for the period beginning on September 30, 2007 and ending on June 2, 2008, plus for any of these periods, up to a $2.0 million carryover of the amount by which actual Capital Expenditures are less than the applicable limitation for the prior period.

     Events of Default

     Under the terms of the credit facility, an event of default will occur with respect to the Company upon the occurrence of, among other things:

•		a default or breach by the Company or any of its subsidiaries under any agreement resulting in the acceleration of amounts due in excess of $500,000 under such other agreement;
•		certain payment defaults by the Company or any of its subsidiaries in excess of $500,000
•		certain events of bankruptcy or insolvency with respect to the Company;
•		an entry of judgment against the Company or any of its subsidiaries for greater than $500,000, which amount is not covered by insurance; or
•		a change of control of the Company.

Off Balance Sheet Arrangements

     The Company has no material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, that have or are reasonably likely to have a material current or future impact on its financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses.

Critical Accounting Policies

     The Company’s financial statements have been prepared in accordance with accounting policies generally accepted in the United States. The Company’s discussion and analysis of its financial condition and results of operations are based on these financial statements. The preparation of the Company’s financial statements requires the application of these accounting policies in addition to certain estimates and judgments by the Company’s management. The Company’s estimates and judgments are based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. Actual results could differ from these estimates.

     The following critical accounting policies are used in the preparation of the financial statements:

     Revenue recognition and credit risk. The Company recognizes revenue from product sales when the product is shipped and risk of loss and title has passed to the customer. Substantially all of the Company’s accounts receivable are due from customers that are located in the U.S. and the Company generally requires no collateral depending upon the creditworthiness of the account. The Company provides an allowance for doubtful accounts based upon its assessment of the credit risk of specific customers, historical trends and other information. There is no disproportionate concentration of credit risk.

     Allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to change significantly, adjustments to the allowances may be required. While the Company believes its recorded trade receivables will be collected, in the event of default in payment of a trade receivable, the Company would follow normal collection procedures.

     Excess and obsolete inventory reserves. The Company writes down the carrying value of its inventory for estimated obsolescence to reflect the lower of the cost of the inventory or its estimated net realizable value based upon assumptions

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about future demand and market conditions. If actual market conditions for the Company’s wire products are substantially different than those projected by management, adjustments to these reserves may be required.

     Valuation allowances for deferred income tax assets. The Company has recorded valuation allowances related to a portion of its deferred income tax assets for which it cannot support the presumption that expected realization meets a “more likely than not” criteria. If the timing or amount of future taxable income is different than management’s current estimates, adjustments to the valuation allowances may be necessary.

     Accruals for self-insured liabilities and litigation. The Company has accrued its estimate of the probable costs related to self-insured medical and workers’ compensation claims and legal matters. These estimates have been developed in consultation with actuaries, the Company’s legal counsel and other advisors and are based on management’s current understanding of the underlying facts and circumstances. Because of uncertainties related to the ultimate outcome of these issues as well as the possibility of changes in the underlying facts and circumstances, adjustments to these reserves may be required in the future.

Outlook

     The Company believes that a gradual recovery in nonresidential construction spending from the depressed levels of recent years will lead to increased demand for its concrete reinforcing products. Additionally, limited supplies of wire rod, the Company’s primary raw material, have caused the Company, and many of its competitors, to adjust their product offerings and the relative availability of products based upon profitability. The recovery of demand and the Company’s more favorable cost structure together with rapidly rising costs of raw materials and changes in its selling practices have caused margins to expand significantly in fiscal 2004. The Company’s ability to continue to pass through higher raw material costs in its markets will be dependent on the competitive environment and the willingness of other producers to accept lower margins to retain volume at the expense of profitability. In the event that it is unsuccessful in recovering higher costs in its markets, the Company’s financial performance would be negatively impacted as a result of the compression in gross margin.

     The Company is continuing to pursue a broad range of initiatives to improve its financial performance and reduce debt. Over the prior year, the Company focused on increasing the productivity levels and reducing the operating costs of its manufacturing facilities as well as its selling and administrative activities. Additional resources were directed towards the development of the Company’s engineered structural mesh business as well as other niche products and these efforts will be intensified in the second half of fiscal 2004. The Company anticipates that these actions together with the disposal of excess assets will facilitate further reductions in debt and favorably impact its financial performance for fiscal 2004 (see “Cautionary Note Regarding Forward-Looking Statements”).

Item 3. Qualitative and Quantitative Disclosures About Market Risk

     The Company’s cash flows and earnings are subject to fluctuations resulting from changes in commodity prices, interest rates and foreign exchange rates. The Company manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. The Company monitors its underlying market risk exposures on an ongoing basis and believes that it can modify or adapt its hedging strategies as necessary.

Commodity Prices

     The Company does not generally use derivative commodity instruments to hedge its exposures to changes in commodity prices. The principal commodity price exposure is hot-rolled carbon steel wire rod, the Company’s primary raw material, which is purchased from both domestic and foreign suppliers and denominated in U.S. dollars. Historically the Company has typically negotiated quantities and pricing on a quarterly basis for both domestic and foreign steel wire rod purchases to manage its exposure to price fluctuations and to ensure adequate availability of material consistent with its requirements. The recent tightening of supply in the rod market together with the rising costs of rod producers has resulted in increased price volatility. In some instances, rod producers have resorted to increasing the frequency of price adjustments, typically on a monthly basis. The Company’s ability to acquire steel wire rod from foreign sources on favorable terms is impacted by fluctuations in foreign currency exchange rates, foreign taxes, duties, tariffs, and other trade actions. Although changes in wire rod costs and selling prices tend to be correlated, depending upon market conditions, there may be periods

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during which the Company is unable to fully recover increased rod costs through higher selling prices, which reduces its gross profit and cash flow from operations.

Interest Rates

     The Company has debt obligations that are sensitive to changes in interest rates under its senior secured credit facility. As required by its lenders under the terms of its senior secured credit facility, in April 2000, the Company entered into interest rate swap agreements to reduce the financial impact of future interest rate fluctuations on its earnings and cash flows. These agreements effectively converted $50.0 million of the Company’s floating rate debt to a fixed rate of 7.08% plus the applicable margin under the credit facility. Interest rate differentials paid or received under these swap agreements are recognized in income over the life of the agreements as adjustments to interest expense. Based on the Company’s interest rate exposure and floating rate debt levels as of March 27, 2004, and considering the effect of the interest rate swap, a 100 basis point change in interest rates would have an estimated $0.1 million impact on pre-tax earnings over a one-year period. In connection with the refinancing that was completed on June 3, 2004, the Company terminated the interest rate swap agreements in May 2004 for payments totaling $2.1 million.

Foreign Exchange Exposure

     The Company has not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, although such transactions have not been material in the past. The Company will occasionally hedge firm commitments for certain equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by the Company on a case-by-case basis. There were no forward contracts outstanding as of March 27, 2004.

Item 4. Controls and Procedures

     The Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There has been no change in the Company’s internal control over financial reporting during the quarter ended December 27, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

     At the time of the Company’s acquisition of Florida Wire and Cable, Inc. (“FWC”), FWC was a party to a Rod Supply Agreement (the “Agreement”) with its parent, GS Industries, Inc. (“GSI”) which was to remain in effect through its termination date of December 31, 2004. The Agreement required FWC to purchase and GSI to supply 80% of FWC’s requirement for certain grades of wire rod subject to a minimum purchase and supply quantity of 99,000 tons per year and a maximum purchase and supply quantity of 150,000 tons per year. On October 1, 2002, FWC was merged into IWP.

     In February 2001, GSI and certain of its subsidiaries, including Georgetown Steel Corporation, filed for bankruptcy protection. During GSI’s bankruptcy proceeding, the Agreement was assigned to Georgetown Steel Corporation. Georgetown Steel Corporation emerged from bankruptcy in July 2002 as Georgetown Steel Company LLC (“GSC”). In October 2003, GSC filed for bankruptcy protection and permanently discontinued operations at its steel mill.

     Following the closure of its steel mill, GSC breached the terms of the Agreement by failing to supply wire rod to the Company and the Company was forced to cover its requirements in the open market at prices in excess of the prices as defined in the Agreement. Due to its immediate need for raw materials, the Company incurred substantial excess costs in covering its wire rod requirements for the first quarter of fiscal 2004. In response, the Company elected to defer the payment of the outstanding balances owed to GSC at September 27, 2003 pending a settlement for the recovery of the excess costs that it had incurred.

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     On December 4, 2003 GSC filed suit against the Company in United States Bankruptcy Court for the District of South Carolina seeking payment by the Company of its pre-petition obligation to GSC (approximately $4.9 million) and alleging that (i) the Agreement had been disregarded by the parties and was not effective, (ii) the Company wrongfully withheld payments for material that was not subject to the terms of the Agreement, and (iii) the Company wrongfully withheld payments for material that it claimed was defective. The Company answered the complaint on January 9, 2004. On April 22, 2004, the Company and GSC agreed to a settlement which resulted in a $0.8 million gain ($1.1 million settlement offset by $0.3 million rod claim) for the Company that will be recorded in other income in the third quarter of fiscal 2004. Under the terms of the agreement, the Company will pay GSC the amount of $3.8 million over a period of six months ending in October 2004.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders during the second quarter of fiscal 2004.

Item 6. Exhibits and Reports on Form 8-K

a.

Exhibits:

b.

Reports of Form 8-K

     On February 17, 2004, the Company filed a Report on Form 8-K (Item 5) announcing that its common stock has ceased trading on the OTC Bulletin Board and that it expects its common stock to begin trading on the Pink Sheets.

     On March 25, 2004, the Company filed a Report on Form 8-K (Item 5) announcing that it had reached preliminary agreements with new lenders for the refinancing of its senior secured credit facility.

     On June 3, 2004, the Company filed a Report on Form 8-K announcing that it had entered into a credit agreement with GE Commercial Finance.

     On June 10, 2004, the Company filed a Report on Form 8-K regarding its results of operations for the fourth fiscal quarter and year ended September 27, 2003, the first fiscal quarter ended December 27, 2003, and the second fiscal quarter and six months ended March 27, 2004.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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