SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended January 26, 1997 Commission File No. 0-12781 CULP, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-1001967 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or other organization) 101 S. Main St., High Point, North Carolina 27261-2686 (Address of principal executive offices) (zip code) (910) 889-5161 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO Common shares outstanding at January 26, 1997: 11,352,477 Par Value: $.05
INDEX TO FORM 10-Q January 26, 1997 Part I - Financial Information. Page - ------------------------------------------ ------- Item 1. Consolidated Financial Statements: Statements of Income--Three and Nine Months Ended I-1 January 26, 1997 and January 28, 1996 Balance Sheets--January 26, 1997, January 28, 1996 and April 28, 1996 I-2 Statements of Cash Flows---Nine Months I-3 ended January 26, 1997 and January 28, 1996 Statements of Shareholders' Equity I-4 Notes to Financial Statements I-5 Sales by Product Category/Business Unit I-9 International Sales by Geographic Area I-10 Item 2. Management's Discussion and Analysis of Financial I-11 Condition and Results of Operation Part II - Other Information - ------------------------------------- Item 1. Legal Proceedings II-1 Item 2. Changes in Securities II-1 Item 3. Default Upon Senior Securities II-1 Item 4. Submission of Matters to a Vote of Security Holders II-1 Item 5. Other Information II-1 Item 6. Exhibits and Reports on Form 8-K II-1-II-6 Signatures II-7
CULP, INC. CONSOLIDATED INCOME STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 26, 1997 AND JANUARY 28, 1996 (Amounts in Thousands, Except for Per Share Data) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) Amounts Percent of Sales January 26, January 28, % Over 1997 1996 (Under) 1997 1996 ---------- ---------- -------- ------- ------- <S> <C> <C> <C> <C> <C> Net sales $ 97,468 86,476 12.7 % 100.0 % 100.0 % Cost of sales 80,317 71,447 12.4 % 82.4 % 82.6 % ---------- --------- -------- ------- ------- Gross profit 17,151 15,029 14.1 % 17.6 % 17.4 % Selling, general and administrative expenses 10,760 9,639 11.6 % 11.0 % 11.1 % ---------- --------- -------- ------- ------- Income from operations 6,391 5,390 18.6 % 6.6 % 6.2 % Interest expense 1,228 1,279 (4.0)% 1.3 % 1.5 % Interest income (73) 0 ** % (0.1)% 0.0 % Other expense (income), net 421 266 58.3 % 0.4 % 0.3 % ---------- --------- -------- ------- ------- Income before income taxes 4,815 3,845 25.2 % 4.9 % 4.4 % Income taxes * 1,805 1,430 26.2 % 37.5 % 37.2 % ---------- --------- -------- ------- ------- Net income $ 3,010 2,415 24.6 % 3.1 % 2.8 % ========== ========= ======== ======== ======== Average shares outstanding 11,342 11,232 1.0 % Net income per share $0.27 $0.22 22.7 % Dividends per share $0.0325 $0.0275 18.2 % </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED (UNAUDITED) Amounts Percent of Sales January 26 January 28, % Over 1997 1996 (Under) 1997 1996 ---------- ---------- -------- ------- ------- <S> <C> <C> <C> <C> <C> Net sales $ 293,201 249,505 17.5 % 100.0 % 100.0 % Cost of sales 241,008 206,171 16.9 % 82.2 % 82.6 % ---------- ---------- -------- ------- ------- Gross profit 52,193 43,334 20.4 % 17.8 % 17.4 % Selling, general and administrative expenses 33,328 27,768 20.0 % 11.4 % 11.1 % ---------- ---------- -------- ------- ------- Income from operations 18,865 15,566 21.2 % 6.4 % 6.2 % Interest expense 3,652 3,964 (7.9)% 1.2 % 1.6 % Interest income (190) 0 ** % (0.1)% 0.0 % Other expense (income), net 1,117 592 88.7 % 0.4 % 0.2 % ---------- ---------- -------- ------- ------- Income before income taxes 14,286 11,010 29.8 % 4.9 % 4.4 % Income taxes * 5,356 4,080 31.3 % 37.5 % 37.1 % ---------- ---------- -------- ------- ------- Net income $ 8,930 6,930 28.9 % 3.0 % 2.8 % ========== ========= ======== ======== ======== Average shares outstanding 11,317 11,218 0.9 % Net income per share $0.79 $0.62 27.4 % Dividends per share $0.0975 $0.0825 18.2 % </TABLE> * Percent of sales column is calculated as a % of income before income taxes. ** Measurement is not meaningful. I-1
CULP, INC. CONSOLIDATED BALANCE SHEETS JANUARY 26, 1997, JANUARY 28, 1996 AND APRIL 28, 1996 (Unaudited, Amounts in Thousands) <TABLE> <CAPTION> Amounts Increase January 26, January 28, (Decrease) * April 28, 1997 1996 Dollars Percent 1996 ---------- ----------- ------- ------- ---------- <S> <C> <C> <C> <C> <C> Current assets Cash and cash investments $ 406 1,841 1,435) (77.9)% 498 Accounts receivable 50,157 43,642 6,515 14.9 % 52,038 Inventories 50,755 49,960 795 1.6 % 47,395 Other current assets 3,701 3,436 265 7.7 % 4,167 ----------- ------- ------- ------- ------- Total current assets 105,019 98,879 6,140 6.2 % 104,098 Restricted investments 11,778 0 11,778 5,274 Property, plant & equipment, net 86,146 73,356 12,790 17.4 % 76,961 Goodwill 22,413 23,037 (624) (2.7)% 22,871 Other assets 2,906 2,432 474 19.5 % 2,440 ----------- ------- ------- -------- ------- Total assets 228,262 197,704 30,558 15.5 % 211,644 =========== ======= ======= ======== ======= Current Liabilities Current maturities of long-term debt $ 6,100 11,555 (5,455) (47.2)% 7,100 Accounts payable 20,833 22,516 (1,683) (7.5)% 27,308 Accrued expenses 15,644 11,181 4,463 39.9 % 12,564 Income taxes payable 1,753 1,336 417 31.2 % 197 Total current liabilities 44,330 46,588 (2,258) (4.8)% 47,169 ----------- ------- ------- ------- ------- Long-term debt 86,266 68,112 18,154 26.7 % 74,941 Deferred income taxes 8,088 5,381 2,707 50.3 % 8,088 Total liabilities 138,684 120,081 18,603 15.5 % 130,198 ----------- ------- ------- ------- ------- Shareholders' equity 89,578 77,623 11,955 15.4 % 81,446 Total liabilities and shareholders' equity $228,262 197,704 30,558 15.5 % 211,644 =========== ======= ======= ======== ======== Shares outstanding 11,352 11,265 87 0.8 % 11,290 =========== ======= ======= ======== ======== </TABLE> Derived from audited financial statements. I-2
CULP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JANUARY 26, 1997 AND JANUARY 28, 1996 (Unaudited, Amounts in Thousands) <TABLE> <CAPTION> NINE MONTHS ENDED ------------------------ Amounts ------------------------ January 26, January 28, 1997 1996 ------------- ----------- Cash flows from operating activities: <S> <C> <C> Net income $ 8,930 6,930 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 9,440 9,278 Amortization of intangible assets 634 544 Provision for deferred income taxes 0 (37) Changes in assets and liabilities: Accounts receivable 1,881 610 Inventories (3,360) (4,189) Other current assets 466 (242) Other assets (642) (57) Accounts payable (2,213) (2,838) Accrued expenses 3,080 (351) Income taxes payable 1,556 675 ------------ ---------- Net cash provided by (used in) operating activities 19,772 10,323 ------------ ----------- Cash flows from investing activities: Capital expenditures (18,625) (7,710) Purchases of restricted investments (9,681) 0 Purchase of investments to fund deferred compensation liability 0 (1,286) Proceeds from sale of restricted investments 3,177 795 ------------ ---------- Net cash provided by (used in) investing activities (25,129) (8,201) ------------ ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt 15,900 10,500 Principal payments on long-term debt (5,575) (4,575) Change in accounts payable-capital expenditures (4,262) (6,896) Dividends paid (1,103) (926) Proceeds from sale of common stock 305 223 ------------ ---------- Net cash provided by (used in) financing activities 5,265 (1,674) ------------ ---------- Increase (decrease) in cash and cash investments (92) 448 Cash and cash investments at beginning of period 498 1,393 ----------- ---------- Cash and cash investments at end of period $ 406 1,841 ============ ========== </TABLE> I-3
CULP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> Capital Contributed Total Common Stock in Excess Retained Shareholders' ------------ of Par Value Earnings Equity Shares Amount --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance, April 30, 19 11,204,766 $ 560 $ 16,577 $ 54,259 $ 71,396 Cash dividends (1,236) (1,236) ($.11 per share) Net income 10,980 10,980 Common stock issued in connection with stock option plan 85,534 5 301 306 --------------------------------------------------------------------------------- Balance, April 28, 19 11,290,300 $ 565 $ 16,878 $ 64,003 $ 81,446 Cash dividends (1,103) (1,103) ($.0975 per share) Net income 8,930 8,930 Common stock issued in connection with stock option plan 62,177 1 304 305 --------------------------------------------------------------------------------- Balance, January 26, 11,352,477 $ 566 $ 17,182 $ 71,830 $ 89,578 ================================================================================= </TABLE> I-4
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which the management of the company considers necessary for a fair statement of results for the interim periods. Certain amounts for fiscal year 1996 have been reclassified to conform with the fiscal year 1997 presentation. Such reclassifications had no effect on net income as previously reported. All such adjustments are of a normal recurring nature. The results of operations for the nine months ended January 26, 1997 are not necessarily indicative of the results to be expected for the full year. ============================================================================== 2. Accounts Receivable A summary of accounts receivable follows (dollars in thousands): - ------------------------------------------------------------------------------ January 26, 1997 April 28, 1996 - ------------------------------------------------------------------------------ Customers $ 51,807 $ 53,321 Factors -0- 71 Allowance for doubtful accounts (1,304) (1,016) Reserve for returns and allowances ( 346) (338) - ------------------------------------------------------------------------------ $ 50,157 $ 52,038 ============================================================================== 3. Inventories Inventories are carried at the lower of cost of market. Cost is determined for substantially all inventories using the LIFO (last-in, first-out) method. A summary of inventories follows (dollars in thousands): - ------------------------------------------------------------------------------ January 26, 1997 April 28, 1996 - ------------------------------------------------------------------------------ Raw materials $ 31,042 $ 29,150 Work-in-process 3,548 5,067 Finished goods 20,842 16,708 - ------------------------------------------------------------------------------ Total inventories valued at FIFO cost 55,432 50,925 Adjustments of certain inventories to the LIFO cost method (4,677) (3,530) - ------------------------------------------------------------------------------ $ 50,755 $ 47,395 ============================================================================== I-5
4. Restricted Investments. Restricted investments were purchased with proceeds from industrial revenue bond issues and are invested pending application of such proceeds to project costs or repayment of the bonds. The investments are stated at cost which approximates market value. 5. Accounts Payable A summary of accounts payable follows (dollars in thousands): - ------------------------------------------------------------------------------ January 26, 1997 April 28, 1996 - ------------------------------------------------------------------------------ Accounts payable-trade $ 19,357 $ 21,570 Accounts payable-capital expenditures 1,476 5,738 - ------------------------------------------------------------------------------ $ 20,833 $ 27,308 ============================================================================== 6. Accrued Expenses A summary of accrued expenses follows (dollars in thousands): - ------------------------------------------------------------------------------ January 26, 1997 April 28, 1996 - ------------------------------------------------------------------------------ Compensation and benefits $ 10,791 $ 8,153 Other 4,853 4,411 - ------------------------------------------------------------------------------ $ 15,644 $ 12,564 ============================================================================== 7. Long-term Debt A summary of long-term debt follows (dollars in thousands): - ------------------------------------------------------------------------------ January 26, 1997 April 28, 1996 - ------------------------------------------------------------------------------ Industrial revenue bonds and other obligations $ 31,666 $ 22,241 Revolving credit line 29,700 23,300 Term loan 31,000 35,500 Subordinated note payable -0- 1,000 - ------------------------------------------------------------------------------ 92,366 82,041 Less current maturities (6,100) (7,100) - ------------------------------------------------------------------------------ $ 86,266 $ 74,941 ============================================================================== I-6
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The company has an unsecured loan agreement with two banks, which provides for a $31,000,000 five-year term loan and a $33,500,000 revolving credit line, which also has a five-year term. The term loan requires monthly installments of $500,000 and a final payment of $6,500,000 on March 1, 2001. The revolving credit line requires payment of an annual facility fee in advance. The company's loan agreements require, among other things, that the company maintain certain financial ratios. At January 26, 1997, the company was in compliance with these required financial covenants. At January 26, 1997, the company had three interest rate swap agreements in order to reduce its exposure to floating interest rates on a portion of its variable rate borrowings. The following table summarizes certain data regarding the interest rate swaps: notional amount interest rate expiration date --------------- ------------- --------------- $ 15,000,000 7.3% April 2000 $ 5,000,000 6.9% June 2002 $ 5,000,000 6.6% July 2002 Net amounts paid under these agreements increased interest expense for the nine months ended January 26, 1997 and January 28, 1996 by approximately $233,000 and $196,000, respectively. Management believes the risk of incurring losses resulting from the inability of the bank to fulfill its obligation under the interest rate swap agreements to be remote and that any losses incurred would be immaterial. The estimated amount at which the company could have terminated these agreements as of January 26, 1997 is approximately $185,000. ============================================================================== 8. Cash Flow Information Payments for interest and income taxes during the period were (dollars in thousands) - ------------------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------------------ . Interest $ 3,437 $ 3,990 Income taxes 4,003 3,148 ============================================================================== 9. Foreign Exchange Forward Contracts The company generally enters into foreign exchange forward contracts as a hedge against its exposure to currency fluctuations on firm commitments to purchase certain machinery and equipment and raw materials. Machinery and equipment and raw material purchases hedged by foreign exchange forward contracts are valued by using the exchange rate of the applicable foreign exchange forward contract. At January 26, 1997, the company had approximately $2,600,000 of foreign exchange forward contracts outstanding. I-7
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. Subsequent Event On January 30, 1997, the company sold 1,200,000 shares of common stock in a public offering which provided net proceeds of approximately $16,300,000. The net proceeds from the offering were used to reduce outstanding borrowings under the company's revolving credit line. I-8
CULP, INC. SALES BY PRODUCT CATEGORY/BUSINESS UNIT FOR THREE MONTHS AND NINE MONTHS ENDED JANUARY 26, 1997 AND JANUARY 28, 1996 (Amounts in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) Amounts Percent of Total Sales January 26, January 28, % Over Product Category/Business 1997 1996 (Under) 1997 1996 <S> <C> <C> <C> <C> <C> Upholstery Fabrics Culp Textures $ 20,389 20,685 (1.4)% 20.9 % 23.9 % Rossville/Chromatex 18,953 18,567 2.1 % 19.4 % 21.5 % 39,342 39,252 0.2 % 40.4 % 45.4 % Velvets/Prints 40,387 31,836 26.9 % 41.4 % 36.8 % 79,729 71,088 12.2 % 81.8 % 82.2 % Mattress Ticking Culp Home Fashions 17,739 15,388 15.3 % 18.2 % 17.8 % * $ 97,468 86,476 12.7 % 100.0 % 100.0 % </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED (UNAUDITED) Amounts Percent of Total Sales January 26, January 28, % Over Product Category/Business 1997 1996 (Under) 1997 1996 <S> <C> <C> <C> <C> <C> Upholstery Fabrics Culp Textures $ 65,191 60,984 6.9 % 22.2 % 24.4 % Rossville/Chromatex 58,840 51,885 13.4 % 20.1 % 20.8 % 124,031 112,869 9.9 % 42.3 % 45.2 % Velvets/Prints 115,487 87,440 32.1 % 39.4 % 35.0 % 239,518 200,309 19.6 % 81.7 % 80.3 % Mattress Ticking Culp Home Fashions 53,683 49,196 9.1 % 18.3 % 19.7 % * $293,201 249,505 17.5 % 100.0% 100.0% </TABLE> *US. sales were $70,931 and $67,506 for the three months of fiscal 1997 and fiscal 1996, respectively; and $220,791 and $196,543 for the nine months of fiscal 1997 and fiscal 1996, respectively. The percentage increases in U.S. sales were 5.1% for the three months and 12.3% for the nine months. I-9
CULP, INC. INTERNATIONAL SALES BY GEOGRAPHIC AREA FOR THREE MONTHS AND NINE MONTHS ENDED JANUARY 26, 1997 AND JANUARY 28, 1996 (Amounts in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) Percent of the Company's Amounts Total Sales January 26, January 28, % Over 1997 1996 (Under) 1997 1996 <S> <C> <C> <C> <C> <C> Geographic Area North America (Excluding USA) $ 6,482 5,488 18.1 % 6.7 % 6.3 % Europe 7,213 5,590 29.0 % 7.4 % 6.5 % Middle East 4,580 2,383 92.2 % 4.7 % 2.8 % Far East & Asia 6,862 4,052 69.3 % 7.0 % 4.7 % South America 855 703 21.6 % All other areas $ 26,537 18,970 39.9 % 27.2 % 21.9 % </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED (UNAUDITED) Percent of the Company's Amounts Total Sales January 26, January 28, % Over Geographic Area 1997 1996 (Under) 1997 1996 <S> <C> <C> <C> <C> <C> North America (Excluding USA)$ 20,555 16,275 26.3 % 7.0 % 6.5 % Europe 17,573 13,072 34.4 % 6.0 % 5.2 % Middle East 13,736 7,933 73.2 % 4.7 % 3.2 % Far East & Asia 15,893 9,821 61.8 % 5.4 % 3.9 % South America 2,464 2,297 7.3 % 0.8 % 0.9 % All other areas 2,189 3,564 (38.6)% $ 72,410 52,962 36.7 % 24.7 % 21.2 % </TABLE> International sales , and the percentage of total sales, for each of the last seven fiscal years follows: fiscal 1991- $20,295 (12%); fiscal 1992-$ 34,094 (18%); fiscal 1993-$40,729 (20%); fiscal 1994-$44,038 (18%); fiscal 1995- $57,971 (19%); and fiscal 1996-$77,397 (22%). Certain amounts for fiscal year 1996 have been reclassified to conform with the fiscal 1997 presentation. I-10
Management's Discussion and Analysis of Operations The following analysis of the financial condition and results of operations should be read in conjunction with the Financial Statements and Notes and other exhibits included elsewhere in this report. Overview For the three months ended January 26, 1997, net sales rose 13% to $97.5 million compared with $86.5 million in the year-earlier period. Net income for the quarter totaled $3.0 million, or $0.27 per share, compared with $2.4 million, or $0.22 per share, for the third quarter of fiscal 1996. The increase in sales primarily reflected higher shipments of upholstery fabrics and, to a lesser degree, increased sales of mattress ticking to both U.S.-based and international manufacturers. The company experienced a generally favorable pattern in incoming orders during the period, but the year-to-year gain in sales was lower than in either the first or second fiscal quarters. Business with U.S.-based customers increased 5% from a year ago while sales to customers outside the United States rose 40% for the quarter. International sales are continuing to account for an increasing percentage of the company's total sales. Demand for the company's products is dependent on the various factors which affect consumer purchases of upholstered furniture and bedding including housing starts and sales of existing homes, the level of consumer confidence, prevailing interest rates for home mortgages and the availability of consumer credit. Three And Nine Months Ended January 26, 1997 Compared With Three And Nine Months Ended January 28, 1996 Net Sales. For the third fiscal quarter, net sales increased $11 million, or 13%, compared with the year-earlier period. Sales of upholstery fabrics increased $8.6 million, or 12%, from a year ago. In this product category, Velvets/Prints had significantly higher sales for the quarter and first nine months, Rossville/Chromatex had slightly higher sales for the quarter and substantially higher sales for the nine month period, and Culp Textures had slightly lower sales for the quarter with a moderate increase for the nine month period. Sales of mattress ticking for the quarter rose $2.4 million, or 15%, from a year ago. International sales, consisting primarily of upholstery fabrics increased $7.6 million from the year-earlier period. International sales accounted for 27% of the company's sales for the third quarter and 25% for the first nine months compared with 22% and 21%, respectively, a year ago. I-11
Gross Profit and Cost of Sales. Gross profit for the third quarter and first nine months increased both in absolute dollars and as a percentage of net sales. Factors contributing to the higher profitability included the increased absorption of fixed costs as a result of the growth in sales as well as the benefit from the company's ongoing capital investment in equipment designed to lower manufacturing costs and raise productivity. During the first nine months, the company also began to experience a stabilization in the cost of raw materials and, in some instances, has realized lower costs. Selling, general and administrative expenses. Selling, general and administrative expenses decreased as a percentage of net sales for the third quarter and increased as a percentage of sales for the first nine months of fiscal 1997. Although the company is continuing to emphasize cost-containment programs, planned increases in expenses related to resources for designing new fabrics and higher selling commissions related to international sales contributed to the higher ratio of SG&A expenses to net sales for the first nine months. The accrual for incentive-based compensation thus far in fiscal 1997 has also been a significant factor behind the increase in these expenses. Interest Expense. Net interest expense of $1.2 million for the third quarter was down from $1.3 million in the year-earlier period due to lower average borrowings outstanding. Income Taxes. The effective tax rate for the third quarter and first nine months was 37.5% Other Expense. Other expense increased $525,000 for the first nine months of fiscal 1997 compared with a year ago, principally due to the non-recurring write-off of certain fixed assets totaling $175,000 and the recognition in the year-earlier period of a gain of $100,000 related to an indemnification for an environmental matter. Liquidity and Capital Resources Liquidity. Cash and cash investments were $406,000 as of January 26, 1997 compared with $498,000 at the end of fiscal 1996. Funded debt (long-term debt, including current maturities, less restricted investments) increased to $80.6 million at the close of the third quarter from $76.8 million at the end of fiscal 1996. As a percentage of total capital (funded debt plus total shareholders' equity), the company's borrowings amounted to 47.4% as of January 26, 1997 compared with 48.5% at the end of fiscal 1996. The company's working capital as of January 26, 1997 was $60.7 million compared with $56.9 million at the close of fiscal 1996. I-12
Cash flow from operations was $19.8 million for the first nine months of fiscal 1997, consisting of $19.0 million from earnings (net income plus depreciation, amortization and deferred income taxes) and $768,000 from changes in working capital. The funds from operations were used principally to fund capital expenditures of $18.6 million. Financing Arrangements. The company has an unsecured loan agreement with two banks, which provides for a $31.0 million five-year term loan and a $33.5 million revolving credit agreement, both of which mature on March 1, 2001. As of January 26, 1997, the company had outstanding balances of $60.7 million under the bank facilities and an additional $3.8 million in borrowings available under the revolving credit facility. On December 17, 1996, the company received "best efforts' commitments from its principal bank lenders, Wachovia Bank of North Carolina, N.A. and First Union National Bank of North Carolina to refinance the existing term loan and revolving line of credit with a $125 million syndicated five-year, unsecured, multi-currency credit facility. Although the agent for the lenders, Wachovia Bank of Georgia, N.A., has agreed to use commercially reasonable efforts to complete this refinancing, subject to certain conditions including the completion of satisfactory loan documentation, there can be no assurance that this refinancing will be completed. The company also has a total of $31.1 million in currently outstanding industrial revenue bonds ("IRBs") which have been used to finance capital expenditures. The IRBs are collateralized by restricted investments of $11.8 million as of January 26, 1997 and letters of credit for the outstanding balance of the IRBs and certain interest payments due thereunder. In December 1996, the company borrowed a total of $9.5 million under two IRBs to finance certain capital investments and expects to finance approximately $8.0 million through an additional IRB to fund a new wet-printing facility in Lumberton, North Carolina. As of January 26, 1997, the company was in compliance with the required financial covenants of its loan agreements. Capital Expenditures. The company is continuing a significant program of capital expenditures intended to increase capacity, enhance manufacturing efficiencies through modernization and increase vertical integration. The company expects total capital expenditures for fiscal 1997 will be approximately $31 million and is currently planning to spend approximately $20 million in fiscal 1998. The company believes that cash flows from operations, funds from a recently completed secondary offering and funds available under existing credit facilities and committed IRB financings will be sufficient to fund capital expenditures and working capital requirements during the remainder of fiscal 1997 and for fiscal 1998. I-13
Stock Offering. On January 30, 1997 the company sold 1.2 million shares in a public offering which provided net proceeds of approximately $16.3 million. The company plans to use the net proceeds on a near-term basis to reduce the outstanding balance of its revolving line of credit. Inflation The company experienced generally higher costs of raw materials during fiscal 1996 and fiscal 1995. Other operating expenses, such as labor, utilities and manufacturing supplies, also increased over these periods. Competitive conditions did not allow the company to fully offset the impact of these increases through higher prices, thereby putting pressure on profit margins. The cost of the company's raw materials has stabilized during the first nine months of fiscal 1997, and in some cases, has declined, thereby helping to raise margins. The net impact on margins from changes in the costs of raw materials will continue to be influenced by product mix, other operating costs and competitive conditions. Forward-Looking Information This discussion on Form 10-Q contains forward-looking statements that are inherently subject to risks and uncertainties. Factors that could influence the matters discussed in the forward-looking statements include the level of housing starts and sales of existing homes, consumer confidence and trends in disposable income. Decreases in these economic indicators could have a negative effect on the company's business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could adversely affect the company. I-14
Part II - OTHER INFORMATION - ------------------------------------------- Item 1. Legal Proceedings There are no legal proceedings that are required to be disclosed under this item. Item 2. Change in Securities None Item 3. Default Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report or incorporated by reference: 3(i) Articles of Incorporation of the company, as amended, were filed as Exhibit 3(i) to the company's Form 10-Q for the quarter ended January 29, 1995, filed March 15, 1995, and are incorporated herein by reference. 3(ii) Restated and Amended Bylaws of the company, as amended, were filed as Exhibit 3(b) to the company's Form 10-K for the year ended April 28, 1991, filed July 25, 1991, and are incorporated herein by reference. 4(a) Form of Common Stock Certificate of the company was filed as Exhibit 4(a) to Amendment No. 1 to the company's registration statement No. 2-85174, filed on August 30, 1983, and is incorporated herein by reference. 10(a) Loan Agreement dated December 1, 1988 with Chesterfield County, South Carolina relating to Series 1988 Industrial Revenue Bonds in the principal amount of $3,377,000 and related Letter of II-1
Credit and Reimbursement Agreement dated December 1, 1988 with First Union National Bank of North Carolina were filed as Exhibit 10(n) to the company's Form 10-K for the year ended April 29, 1989, and are incorporated herein by reference. 10(b) Loan Agreement dated November 1, 1988 with the Alamance County Industrial Facilities and Pollution Control Financing Authority relating to Series A and B Industrial Revenue Refunding Bonds in the principal amount of $7,900,000, and related Letter of Credit and Reimbursement Agreement dated November 1, 1988 with First Union National Bank of North Carolina were filed as exhibit 10(o) to the company's Form 10-K for the year ended April 29, 1990, and are incorporated herein by reference. 10(c) Loan Agreement dated January 5, 1990 with the Guilford County Industrial Facilities and Pollution Control Financing Authority, North Carolina, relating to Series 1989 Industrial Revenue Bonds in the principal amount of $4,500,000, and related Letter of Credit and Reimbursement Agreement dated January 5, 1990 with First Union National Bank of North Carolina was filed as Exhibit 10(d) to the company's Form 10-K for the year ended April 19, 1990, filed on July 15, 1990, and is incorporated herein by reference. 10(d) Loan Agreement dated as of December 1, 1993 between Anderson County, South Carolina and the company relating to $6,580,000 Anderson County, South Carolina Industrial Revenue Bonds (Culp, Inc. Project) Series 1993, and related Letter of Credit and Reimbursement Agreement dated as of December 1, 1993 by and between the company and First Union National Bank of North Carolina were filed as Exhibit 10(o) to the Company's Form 10-Q for the quarter ended January 30, 1994, filed March 16, 1994, and is incorporated herein by reference. 10(e) Severance Protection Agreement, dated September 21, 1989, was filed as Exhibit 10(f) to the company's Form 10-K for the year ended April 29, 1990, filed on July 25 1990, and is incorporated herein by reference.(*) 10(f) Lease Agreement, dated January 19, 1990, with Phillips Interests, Inc. was filed as Exhibit 10(g) to the company's Form 10-K for the year ended April 29, 1990, filed on July 25, 1990, and is incorporated herein by reference. 10(g) Management Incentive Plan of the company, dated August 1986 and amended July, 1989, was filed as Exhibit 10(o) to the company's Form 10-K for the year ended May 3, 1992, filed on August 4, 1992, and is incorporated herein by reference.(*) 10(h) Lease Agreement, dated September 6, 1988, with Partnership 74 was filed as Exhibit 10(h) to the company's Form 10-K for the year ended April 28, 1991, filed on July 25, 1990, and is incorporated herein by reference. 10(i) Amendment and Restatement of the Employees's Retirement Builder Plan of the company dated May 1, 1981 with amendments dated January 1, 1990 and January 8, 1990 were filed as Exhibit 10(p) to the company's Form 10-K for the year ended May 3, 1992, filed on August 4, 1992, and is incorporated herein by reference.(*) 10(j) First Amendment of Lease Agreement dated July 27, 1992 with Partnership 74 Associates was filed as Exhibit 10(n) to the company's Form 10-K for the year ended May 2, 1993, filed on July 29, 1993, and is incorporated herein by reference. 10(k) Second Amendment of Lease agreement dated April 16, 1993, with Partnership 52 Associates was filed as Exhibit 10(l) to the company's Form 10-K for the year ended May 2, 1993, filed on July 29, 1993, and is incorporated herein by reference. 10(l) 1993 Stock Option Plan was filed as Exhibit 10(o) to the company's Form 10-K for the year ended May 2, 1993, filed on July 29, 1993, and is incorporated herein by reference.(*) 10(m) First Amendment to Loan Agreement dated as of December 1, 1993 by and between The Guilford County Industrial Facilities and Pollution Control Financing Authority and the company, was filed as Exhibit 10(p) to the company's Form 10-Q, filed on March 15, 1994, and is incorporated herein by reference. 10(n) First Amendment to Loan Agreement dated as of December 16, 1993 by and between The Alamance County Industrial Facilities and Pollution Control Financing Authority and the company, was filed as Exhibit 10(q) to the company's Form 10-Q filed, on March 15, 1994, and is incorporated herein by reference. 10(o) First Amendment to Loan Agreement dated as of December 16, 1993 by and between Chesterfield County, South Carolina and II-3
the company, was filed as Exhibit 10(r) to the company's Form 10-Q, filed on March 15, 1994, and is incorporated herein by reference. 10(p) Amendment to Lease dated as of November 4, 1994, by and between the company and RDC, Inc. was filed as Exhibit 10(w) to the company's Form 10-Q, for the quarter ended January 29, 1995, filed on March 15, 1995, and is incorporated herein by reference. 10(q) Amendment to Lease Agreement dated as of December 14, 1994, by and between the company and Rossville Investments, Inc. (formerly known as A & E Leasing, Inc.).was filed as Exhibit 10(y) to the company's Form 10-Q, for the quarter ended January 29, 1995, filed on March 15, 1995, and is incorporated herein by reference. 10(r) Interest Rate Swap Agreement between company and First Union National Bank of North Carolina dated April 17, 1995, was filed as Exhibit 10(aa) to the company's Form 10-K for the year ended April 30, 1995, filed on July 26, 1995, and is incorporated herein by reference. 10(s) Performance-Based Stock Option Plan, dated June 21, 1994, was filed as Exhibit 10(bb) to the company's Form 10-K for the year ended April 30, 1995, filed on July 26, 1995, and is incorporated herein by reference.(*) 10(t) Interest Rate Swap Agreement between company and First Union National Bank of North Carolina, dated May 31, 1995 was filed as exhibit 10(w) to the company's Form 10-Q for the quarter ended July 30, 1995, filed on September 12, 1995, and is incorporated herein by reference. 10(u) Interest Rate Swap Agreement between company and First Union National Bank of North Carolina, dated July 7, 1995 was filed as exhibit 10(x) to the company's Form 10-Q for the quarter ended July 30, 1995, filed on September 12, 1995, and is incorporated herein by reference. 10(v) Second Amendment of Lease Agreement dated June 15, 1994 with Partnership 74 Associates was filed as Exhibit 10(v) to the company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. II-4
10(w) Lease Agreement dated November 1, 1993 by and between the company and Chromatex, Inc. was filed as Exhibit 10(w) to the company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(x) Lease Agreement dated November 1, 1993 by and between the company and Chromatex Properties, Inc. was filed as Exhibit 10(x) to the company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(y) Amendment to Lease Agreement dated May 1, 1994 by and between the company and Chromatex Properties, Inc. was filed as Exhibit 10(y) to the company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(z) Canada-Quebec Subsidiary Agreement on Industrial Development (1991), dated January 4, 1995, was filed as Exhibit 10(z) to the company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(aa) Loan Agreement between Chesterfield County, South Carolina and the company dated as of April 1, 1996 relating to Tax Exempt Adjustable Mode Industrial Development Bonds (Culp, Inc. Project) Series 1996 in the aggregate amount of $6,000,000 was filed as Exhibit 10(aa) to the company's Form 10-K for the year ended April 28, 1996 on July 25, 1996, and is incorporated herein by reference. 10(bb) 1996 Amended and Restated Credit Agreement dated as of April 1, 1996 by and among the company, First Union National Bank of North Carolina and Wachovia Bank of North Carolina, N.A. was filed as Exhibit 10(bb) to the company's Form 10-K for the year ended April 28, 1996 on July 25, 1996, and is incorporated herein by reference. 10(cc) Loan Agreement between the Alamance County Industrial Facilities and Pollution Control Financing Authority, North Carolina and the company, dated December 1, 1996, relating to Tax Exempt Adjustable Mode Industrial Development Revenue Bonds, (Culp, Inc. Project Series 1996) in the aggregate amount of $6,000,000. II-5
10(dd) Loan Agreement between Luzerne County, North Carolina and the company, dated as of December 1, 1996, relating to Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Culp, Inc. Project) Series 1996 in the aggregate principal amount of $3,500,000. 10(ee) First Amendment to 1996 Amended and Restated Credit Agreement, dated as of December 1, 1996, by and among the company, First Union National Bank of North Carolina, and Wachovia Bank of North Carolina, N.A 27 Financial Data Schedule. (b) Reports on Form 8-K: The following report on Form 8-K was filed during the period covered by this report: (1)Form 8-K dated November 6, 1996, included under Item 5, Other Events, disclosure of the company's press release for quarterly earnings and the company's Financial Information Release relating to the financial information for the second quarter ended October 27, 1996. (2)Form 8-K/A dated December 19, 1996, included under item 5, Other Events, amending the company's Form 8-K filed November 6, 1996. II-6
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. CULP, INC. (Registrant) Date: March 11, 1997 By: s/s Franklin N. Saxon Franklin N. Saxon Sr. Vice President and Chief Financial Officer (Authorized to sign on behalf of the registrant and also signing as principal accounting officer) Date: March 11, 1997 By s/s Stephen T. Hancock Stephen T. Hancock General Accounting Manager (Chief Accounting Officer)