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 August 3, 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 August 3, 1997: 12,649,128 Par Value: $.05
INDEX TO FORM 10-Q August 3, 1997 Part I - Financial Information. Page - ------------------------------------------------- Item 1. Consolidated Financial Statements: Statements of Income--Three Months Ended I-1 August 3, 1997 and July 28, 1996 Balance Sheets--August 3, 1997, July 28, 1996 and April 27, 1997 I-2 Statements of Cash Flows---Three Months I-3 ended August 3, 1997 and July 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 6. Exhibits and Reports on Form 8-K II-1-II-6 Signatures 11-7 <TABLE> CULP, INC. CONSOLIDATED INCOME STATEMENTS FOR THE THREE MONTHS ENDED AUGUST 3, 1997 AND JULY 28, 1996 (Amounts in Thousands, Except for Per Share Data) THREE MONTHS ENDED (UNAUDITED) Amounts Percent of Sales August 3, July 28, % Over 1997 1996 (Under) 1997 1996 ---- ---- ------- ---- ---- <S> <C> <C> <C> <C> <C> Net sales $ 99,498 90,529 9.9 % 100.0 % 100.0 % Cost of sales 82,765 74,609 10.9 % 83.2 % 82.4 % Gross profit .............. 16,733 15,920 5.1 % 16.8 % 17.6 % Selling, general and administrative expenses 10,916 10,864 0.5 % 11.0 % 12.0 % Income from operations 5,817 5,056 15.1 % 5.8 % 5.6 % Interest expense 1,280 1,182 8.3 % 1.3 % 1.3 % Interest income (90) (57) ** % (0.1)% (0.1)% Other expense (income), net 242 395 (38.7)% 0.2 % 0.4 % Income before income taxes 4,385 3,536 24.0 % 4.4 % 3.9 % Income taxes * 1,535 1,326 15.8 % 35.0 % 37.5 % ----- ----- ------ ------ ------ Net income $ 2,850 2,210 29.0 % 2.9 % 2.4 % ====== ===== ====== ====== ====== Average shares outstanding 12,631 11,297 11.8 % Net income per share $0.23 $0.20 15.0 % Dividends per share $0.0350 $0.0325 7.7 % </TABLE> * Percent of sales column is calculated as a % of income before income taxes. ** Measurement is not meaningful.
<TABLE> <CAPTION> CULP, INC. CONSOLIDATED BALANCE SHEETS AUGUST 3, 1997, JULY 28, 1996 AND APRIL 27, 1997 Unaudited (Amounts in Thousands) Amounts Increase August 3, July 28, (Decrease) April 28, * April 27," 1997 1996 Dollars Percent 1996 1997 <S> <C> <C> <C> <C> <C> <C> Current assets Cash and cash investments $ 1,843 1,709 134 7.8 % 498 830 Accounts receivable 54,086 42,262 11,824 28.0 % 52,038 56,691 Inventories 60,715 51,676 9,039 17.5 % 47,395 53,463 Other current assets 6,126 3,911 2,215 56.6 % 4,167 5,450 Total current assets 122,770 99,558 23,212 23.3 % 104,098 116,434 Restricted investments 8,186 5,244 2,942 56.1 % 5,274 11,018 Property, plant & equipment, net 97,128 78,292 18,836 24.1 % 76,961 91,231 Goodwill 22,111 22,720 (609) (2.7)% 22,871 22,262 Other assets 3,124 2,469 655 26.5 % 2,440 3,007 ----- ----- --- ------ ----- ----- Total assets $ 253,319 208,283 45,036 21.6 % 211,644 243,952 ========== ======= ====== ==== ======= ======= Current Liabilities Current maturities of long-term debt $ 100 7,100 (7,000) (98.6)% 7,100 100 Accounts payable 20,154 24,233 (4,079) (16.8)% 27,308 29,903 Accrued expenses 11,972 13,295 (1,323) (10.0)% 12,564 15,074 Income taxes payable 1,575 1,295 280 21.6 % 197 1,580 ----- ----- --- ------ --- ----- Total current liabilities 33,801 45,923 (12,122) (26.4)% 47,169 46,657 Long-term debt 96,016 70,916 25,100 35.4 % 74,941 76,541 Deferred income taxes 9,965 8,088 1,877 23.2 % 8,088 9,965 ----- ----- ----- ------ ----- ----- Total liabilities 139,782 124,927 14,855 11.9 % 130,198 133,163 ------- ------- ------ ------ ------- ------- Shareholders' equity 113,537 83,356 30,181 36.2 % 81,446 110,789 - -------------------- ------- ------ ------ ------ ------ ------- Total liabilities and shareholders' equity $ 253,319 208,283 45,036 21.6 % 211,644 243,952 ========== ======= ====== ==== ======= ======= Shares outstanding 12,650 11,303 1,347 11.9 % 11,290 12,609 ====== ====== ===== ==== ====== ====== Derived from audited financial statements. * Derived from audited financial statements. </TABLE>
<TABLE> <CAPTION> CULP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 3, 1997 AND JULY 28, 1996 (Amounts in Thousands) THREE MONTHS ENDED ------------------ Amounts ------- August 3, July 28, 1997 1996 ---- ---- Cash flows from operating activities: <S> <C> <C> Net income $ 2,850 2,210 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 3,256 3,144 Amortization of intangible assets 181 198 Provision for deferred income taxes 0 0 Changes in assets and liabilities: Accounts receivable 2,605 9,776 Inventories (7,252) (4,281) Other current assets (676) 280 Other assets (147) (76) Accounts payable (5,852) 131 Accrued expenses (2,923) 731 Income taxes payable (5) 1,098 --- ----- Net cash provided by (used in) operating activities (7,963) 13,211 ------- ------ Cash flows from investing activities: Capital expenditures (9,153) (4,475) Purchases of restricted investments (8,590) (53) Purchase of investments to fund deferred compensation liability 0 0 Sale of restricted investments 11,422 59 ------ ------- Net cash used in investing activities (6,321) (4,469) Cash flows from financing activities: ------ ------ Proceeds from issuance of long-term debt 19,500 0 Principal payments on long-term debt (25) (4,025) Change in accounts payable-capital expenditures (3,897) (3,206) Cash dividends paid (443) (368) Proceeds from common stock issued 162 68 ------ ------ Net cash provided by (used in) financing activities 15,297 (7,531) ------ ------ Increase (decrease) in cash and cash investments 1,013 1,211 Cash and cash investments at beginning of period 830 498 ----- ------ Cash and cash investments at end of period $ 1,843 1,709 ====== ====== </TABLE>
<TABLE> <CAPTION> Culp, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except per share data) Capital Contributed Total Common Stock in Excess Retained Shareholders' Shares Amount of Par Value Earnings Equity - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance, April 28, 1996 11,290,300 $ 565 $ 16,878 $ 64,003 $ 81,446 Proceeds from public offering of 1,200,000 shares 1,200,000 60 16,235 16,295 Cash dividends (1,513) (1,513) ($0.13 per share) Net income 13,770 13,770 Common stock issued in connection with stock - --------------------------------------------------------------------------------------------------------------------- option plan 118,459 5 786 791 Balance, April 27, 1997 12,608,759 $ 630 $ 33,899 $ 76,260 $ 110,789 Cash dividends ($0.035 per share) (443) (443) Net income 2,850 2,850 Common stock issued in connection with stock option plans 40,969 2 339 341 - --------------------------------------------------------------------------------------------------------------------- Balance, August 3, 1997 12,649,728 $ 632 $ 34,238 $ 78,667 $ 113,537 ===================================================================================================================== </TABLE>
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 1997 have been reclassified to conform with the fiscal year 1998 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 three months ended August 3, 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): - ------------------------------------------------------------------------ August 3, 1997 April 27, 1997 - ------------------------------------------------------------------------ Customers $ 56,108 $58,568 Allowance for doubtful accounts (1,344) (1,500) Reserve for returns and allowances ( 678) (377) - ------------------------------------------------------------------------ $ 54,086 $56,691 ======================================================================== 3. Inventories Inventories are carried at the lower of cost or market. Cost is determined for substantially all inventories using the LIFO (last-in, first-out) method. A summary of inventories follows (dollars in thousands): - ------------------------------------------------------------------------ August 3, 1997 April 27, 1997 - ------------------------------------------------------------------------ Raw materials $ 37,941 $ 32,025 Work-in-process 4,255 4,627 Finished goods 22,113 20,212 - ------------------------------------------------------------------------ Total inventories valued at FIFO cost 64,309 56,864 Adjustments of certain inventories to the LIFO cost method (3,594) (3,401) - ------------------------------------------------------------------------ $ 60,715 $ 53,463 ======================================================================== 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): - ------------------------------------------------------------------------ August 3, 1997 April 27, 1997 - ------------------------------------------------------------------------ Accounts payable-trade $ 18,304 $ 24,156 Accounts payable-capital expenditures 1,850 5,747 - ------------------------------------------------------------------------ $ 20,154 $ 29,903 ======================================================================== 6. Accrued Expenses A summary of accrued expenses follows (dollars in thousands): - ------------------------------------------------------------------------ August 3, 1997 April 27, 1997 - ------------------------------------------------------------------------ Compensation and benefits $ 7,807 $ 10,217 Other 4,165 4,857 - ------------------------------------------------------------------------ $ 11,972 $ 15,074 ======================================================================== 7. Long-term Debt A summary of long-term debt follows (dollars in thousands): - ------------------------------------------------------------------------ August 3, 1997 April 27, 1997 - ------------------------------------------------------------------------ Industrial revenue bonds and other obligations $ 40,116 $ 31,641 Revolving credit facility 52,000 41,000 Revolving line of credit 4,000 4,000 - ------------------------------------------------------------------------ 96,116 76,641 Less current maturities (100) (100) - ------------------------------------------------------------------------ $ 96,016 76,541 ======================================================================== On April 23, 1997, the company entered into a revolving credit agreement (the "Credit Agreement") providing for a five-year unsecured multi-currency revolving credit facility with a syndicate of banks in the United States and Europe. The Credit Agreement provides for a revolving loan commitment of $125,000,000 which declines $5,000,000 at each of four annual dates beginning in April 1998. The agreement requires payment of a quarterly facility fee in advance. The company has a $4,000,000 revolving line of credit which expires on August 31, 1998 and will automatically be extended for an additional three-month period on each November 30, February 28, May 31, and August 31 unless the bank notifies the company that the line of credit will not be extended. On July 17, 1997, the company obtained $8,500,000 of new industrial revenue bond (IRB) financing related to the expansion of its plant and equipment at its Lumberton, North Carolina facility. The final maturity of this IRB is the year 2014. The remaining IRBs are substantially due in one-time payments at various dates from 2008 to 2013 and are collateralized by restricted investments of $8,186,000 and letters of credit for $41,341,000 at August 3, 1997. The company's loan agreements require, among other things, that the company maintain compliance with certain positive and negative financial covenants. At August 3, 1997, the company was in compliance with these required financial covenants. At August 3, 1997, the company had three interest rate swap agreements with a bank 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. notational amounts 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 The company believes it could terminate these agreements as of August 3, 1997 for approximately $338,000. Net amounts paid under these agreements increased interest expense by approximately $60,000 in 1998 and $92,000 in 1997. 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 principal payment requirements of long-term debt during the next five years are: 1998 - $75,000; 1999 - $4,075,000; 2000 - $200,000; 2001 - $200,000; and 2002 - $52,154,000. 8. Cash Flow Information Payments for interest and income taxes during the period were (dollars in thousands) - ------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------ . Interest $ 1,231 $ 1,006 Income taxes 445 228 ======================================================================== 9. Foreign Exchange Forward Contracts The company generally enters into foreign exchange forward and option 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. The company had approximately $1,214,000 of outstanding foreign exchange option contracts as of August 3, 1997 (denominated in Belgian francs). The contracts outstanding at August 3, 1997 mature at various dates in fiscal 1998. 10. Subsequent Event On August 5, 1997, the Company completed the acquisition of the business and certain assets relating to the upholstery fabric businesses operating as Phillips Weaving Mills, Phillips Velvet Mills, Phillips Printing and Phillips Mills. These operating units were purchased from Phillips Industries, Inc., a privately owned corporation based in High Point, North Carolina. Based on the terms of the definitive asset purchase agreement, the transaction is valued for accounting and reporting purposes at approximately $36 million (including cash, retirement of debt and a non-compete agreement) under generally accepted accounting principles. Terms of the purchase also include additional compensation contingent upon attaining specified future growth objectives and an option for 100,000 shares of the Company's common stock.
<TABLE> <CAPTION> CULP, INC. SALES BY PRODUCT CATEGORY/BUSINESS UNIT FOR THREE MONTHS ENDED AUGUST 3, 1997 AND JULY 28, 1996 (Amounts in thousands) THREE MONTHS ENDED (UNAUDITED) Amounts Percent of Total Sales ------- ---------------------- August 3, July 28, % Over Product Category/Business Unit 1997 1996 (Under) 1997 1996 - ------------------------------ ---- ---- ------- ---- ---- Upholstery Fabrics <S> <C> <C> <C> <C> <C> Culp Textures $ 21,693 20,801 4.3 % 21.8 % 23.0 % Rossville/Chromatex 18,121 18,165 (0.2)% 18.2 % 20.1 % ------ ------ ------ ------ ------ 39,814 38,966 2.2 % 40.0 % 43.0 % Velvets/Prints 38,397 34,867 10.1 % 38.6 % 38.5 % ------ ------ ------ ------ ------ 78,211 73,833 5.9 % 78.6 % 81.6 % Mattress Ticking Culp Home Fashions 21,287 16,696 27.5 % 21.4 % 18.4 % ------ ------ ------ ------ ------ * $ 99,498 90,529 9.9 % 100.0 % 100.0 % ======= ====== === ===== ===== </TABLE> *U.S. sales were $74,407 and $70,556 for the three months of fiscal 1998 and fiscal 1997, respectively; The percentage increase in U.S. sales was 5.5 % for the three months. "*US. Domestic sales were $79,304 and $71,112 for the three months of fiscal 1997 and fiscal 1996, respectively; and $149,860 and $129,025 for the six months of fiscal 1997 and fiscal 1996, respectively. The percentage increases in U.S. Domestic sales was 11.5% for the three months and 16.1% for the six months. <TABLE> <CAPTION>
CULP, INC. INTERNATIONAL SALES BY GEOGRAPHIC AREA FOR THREE MONTHS ENDED AUGUST 3, 1997 AND JULY 28, 1996 (Amounts in thousands) THREE MONTHS ENDED (UNAUDITED) ------------------------------ Amounts Percent of Total Sales ------- ---------------------- August 3, July 28, % Over Geographic Area 1997 1996 (Under) 1997 1996 - --------------- ---- ---- ------- ---- ---- <S> <C> <C> <C> <C> <C> North America (Excluding USA) $ 7,044 6,056 16.3 % 28.1 % 30.3 % Europe 6,919 6,120 13.1 % 27.6 % 30.6 % Middle East 6,564 4,196 56.4 % 26.2 % 21.0 % Far East & Asia 3,524 2,627 34.1 % 14.0 % 13.2 % South America 246 431 (42.9) % 1.0 % 2.2 % All other areas 794 543 46.2 % 3.2 % 2.7 % - --------------- --- --- ---- - ----- ----- $ 25,091 19,973 25.6 % 100.0 % 100.0 % ====== ====== ==== ===== ===== "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%); " "fiscal 1996-$ 77,397 (22%); and fiscal 1997-$ 101,571 (25%). Year-to-date international sales represented 25% and 22% of total " sales for 1998 and 1997 respectively. Certain amounts for fiscal year 1997 have been reclassified to conform with the fiscal year 1998 presentation. </TABLE>
I-15 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THREE MONTHS ENDED AUGUST 3, 1997 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 August 3, 1997, net sales rose 9.9% to $99.5 million compared with $90.5 million in the year-earlier period. Net income for the quarter totaled $2.9 million, or $0.23 per share, compared with $2.2 million, or $0.20 per share, for the first quarter of fiscal 1997. The increase in sales reflected significantly higher shipments of mattress ticking and, to a lesser degree, a gain in overall sales of upholstery fabrics to both U.S.-based and international manufacturers. The trend in incoming orders during the period remained positive, but the general pace of business was not as strong as a year ago. The growth in demand in some product categories and to U.S. manufacturers of residential furniture as a group began slowing during the second half of fiscal 1997. That pattern continued into fiscal 1998. Business conditions in the U.S. residential furniture industry have been negatively affected by the recent bankruptcies of two of the largest retailers of residential furniture. For the first quarter, sales to the U.S. residential furniture industry were down slightly compared to a year ago, but overall sales to U.S. customers (including bedding and other markets) increased 6% from a year ago. Sales to customers outside the United States rose 26% 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 Months Ended August 3, 1997 Compared With Three Months Ended July 28, 1996 Net Sales. Net sales for the first quarter increased by $9.0 million, or 9.9%, compared with the year-earlier period. The Company's sales of upholstery fabrics increased $4.4 million, or 5.9% in the first quarter compared with the prior year. Sales from the Velvets/Prints business unit were up 10.1.% from the prior year. This unit has continued to benefit from increased international sales, but the strength in the U.S. dollar weakened relative to other international currencies has affected demand somewhat. Sales from the Culp Textures business unit were up for the quarter, but shipments by the Rossville/Chromatex unit were lower. Sales from the Culp Home Fashions unit, which principally consists of mattress ticking and bedding products, rose 27.5% from a year ago. The overall pace of business within the United States was not as strong as a year ago, reflecting a trend that initially developed during the second half of fiscal 1997. Sales to U.S.-based accounts rose 6% from a year ago, and international sales, consisting primarily of upholstery fabrics, increased to $25.1 million, up 25.6% from a year ago. International shipments accounted for 25.2% of the Company's sales for the first quarter, up from 22.1% a year ago. Gross Profit and Cost of Sales. Gross profit for the first quarter increased by $813,000 and amounted to 16.8% of net sales compared with 17.6% a year ago. Factors which affected the company's profitability during the quarter included the slower growth in demand for certain fabric categories and from U.S. manufacturers of residential furniture as a group and start-up costs related to expansion projects. These factors were offset in part by 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. Management expects that gross profit will continue to be affected by start-up costs throughout the second fiscal quarter. Selling, general and administrative expenses. Selling, general and administrative expenses decreased as a percentage of net sales to 11.0% compared with 12.0% a year ago. The company is continuing to incur higher expenses related to expanded resources for designing new fabrics and increased selling commissions associated with international sales. These factors were offset by steps to contain operating expenses and by lower accruals as a percentage of net sales for incentive-based compensation plans. Interest Expense. Net interest expense for the first quarter $1.3 million was essentially unchanged from a year ago. Net interest expense is expected to increase in subsequent periods due principally to borrowings related to the acquisition of Phillips Mills that was completed on August 5, 1997. Other Expense. Other expense decreased $153,000 for the first quarter compared with a year ago, principally due to the non-recurring write-off a year ago of certain fixed assets totaling $150,000. Earnings Per Share. Earnings per share for the first quarter of fiscal 1998 totaled $0.23 compared with $0.20 a year ago. The weighted average number of outstanding shares increased 11.8% from a year ago, principally due to the Company's secondary offering completed in February 1997. Liquidity and Capital Resources Liquidity. Cash and cash investments were $1.8 million as of August 3, 1997, compared with $830,000 at the end of fiscal 1997. Funded debt (long-term debt, including current maturities, less restricted investments) increased to $87.9 million at the close of the first quarter, up from $72.8 million as of July 28, 1996 and $65.6 million at the end of fiscal 1997. As a percentage of total capital (funded debt plus total shareholders' equity), the company's borrowings amounted to 43.6% as of August 3, 1997, compared with 46.6% as of July 28, 1996 and 37.2% at the end of fiscal 1997. The company's working capital as of August 3, 1997 was $89.0 million compared with $69.8 million at the close of fiscal 1997. Because of seasonal factors, the Company typically generates the majority of its cash from operating activities during the second fiscal half. Cash of $8.0 million was used during the first quarter to fund operating activities, principally increases in inventories and accounts payable. Capital expenditures during the first quarter totaled $9.2 million. Financing activities, principally long-term borrowings, provided $15.3 million in cash to fund operating activities and capital investments. Financing Arrangements. As of August 3, 1997, the Company had outstanding balances of $52 million under its $125 million syndicated five-year, unsecured, multi-currency revolving credit facility. The Company also has a total of $40 million in outstanding industrial revenue bonds ("IRBs") which have been used to finance capital expenditures. The IRBs are collateralized by restricted investments of $8.2 million as of August 3, 1997 and letters of credit for the outstanding balance of the IRBs and certain interest payments due thereunder. Because of federal tax laws, additional IRB financing will not be available to the Company until the amount of its outstanding IRBs is substantially reduced. The Company's loan agreements require, among other things, that the Company maintain certain financial ratios. As of August 3, 1997, the Company was in compliance with the required financial covenants. As of August 3, 1997, the Company had three interest rate swap agreements on a $25 million notional amount to reduce its exposure to floating interest rates. The effect of these contracts is to "fix" the interest rate payable on $25 million of the Company's bank borrowings at a weighted average rate of 7.1%. The Company also enters into foreign exchange forward contracts to hedge against currency fluctuations with respect to firm commitments to purchase machinery, equipment and certain raw materials when those commitments are denominated in foreign currencies. Capital Expenditures. The Company maintains a significant program of capital expenditures designed to increase capacity as needed, enhance manufacturing efficiencies through modernization and increase the company's vertical integration. The company anticipates spending approximately $27 million for capital expenditures in 1998. The company believes that cash flows from operations and funds available under existing credit facilities will be sufficient to fund capital expenditures and working capital requirements for the foreseeable future. Phillips Mills Acquisition On August 5, 1997, the Company completed the acquisition of the business and certain assets relating to the upholstery fabric businesses operating as Phillips Weaving Mills, Phillips Velvet Mills, Phillips Printing and Phillips Mills. These operating units were purchased from Phillips Industries, Inc., a privately owned corporation based in High Point, North Carolina. Based on the terms of the definitive asset purchase agreement, the transaction is valued for accounting and reporting purposes at approximately $36 million (including cash, retirement of debt and a non-compete agreement) under generally accepted accounting principles. Terms of the purchase also include additional compensation contingent upon attaining specified future growth objectives and an option for 100,000 shares of the Company's common stock. Funds for the cash portion of the transaction were provided from the Company's revolving credit facility. Inflation Although the Company's costs of raw materials have been relatively stable thus far in fiscal 1998, these expenses are generally higher than a year ago. Other operating expenses, such as labor, utilities and manufacturing supplies, have also increased. Competitive conditions have not allowed the company to offset the impact of these increases fully through higher prices, thereby putting pressure on profit margins. The net impact on margins will continued to be influenced by raw material prices, other operating costs and competitive conditions. Seasonality The company's business is slightly seasonal, with increased sales during the company's second and fourth fiscal quarters. This seasonality results from one-week closings of the company's manufacturing facilities, and the facilities of most of its customers in the United States, during the first and third quarters for the holiday weeks including July 4th and Christmas. Forward-Looking Information The company's report on Form 10-Q may contain statements that could be deemed forward-looking statements within the Private Securities Litigation Reform Act of 1995, which are inherently subject to risks and uncertainties. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. 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. Because of the increasing percentage of the Company's sales that is derived from shipments to customers outside the United States, the relative value of the U.S. dollar relative to other currencies can affect the competitiveness of the company's products in international markets.
OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report or incorporated by reference. Management contracts, compensatory plans, and arrangements are marked with an asterisk (*). 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. 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 was filed as Exhibit 10(n) to the Company's Form 10-K for the year ended April 29, 1989, and is 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, was filed as exhibit 10(o) to the Company's Form 10-K for the year ended April 29, 1990, and is incorporated herein by reference. 10(c) Loan Agreement dated January, 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, 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, was 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, 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 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 28, 1996, 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 28, 1996, 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. 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 principal 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, and is incorporated herein by reference. 10(bb) 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 was filed as Exhibit 10(cc) to the Company's Form 10-Q for the quarter ended January 26, 1997, and is incorporated herein by reference. 10(cc) Loan Agreement between Luzerne County, Pennsylvania 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 was filed as Exhibit 10(dd) to the Company's Form 10-Q for the quarter ended January 26, 1997, and is incorporated herein by reference. 10(dd) Second Amendment to Lease Agreement between Chromatex Properties, Inc. and the Company, dated April 17, 1997 was filed as Exhibit 10(dd) to the Company's Form 10-K for the year ended April 27, 1997, and is incorporated herein by reference. 10(ee) Lease Agreement between Joseph E. Proctor (doing business as JEPCO) and the Company, dated April 21, 1997. 10(ff) $125,000,000 Revolving Loan Facility dated April 23, 1997 by and among the Company and Wachovia Bank of Georgia, N.A., as agent, and First Union National Bank of North Carolina, as documentation agent. 10(gg) Revolving Line of Credit for $4,000,000 dated April 23, 1997 by and between the Company and Wachovia Bank of North Carolina, N.A. 10(hh) Reimbursement and Security Agreement between Culp, Inc. and Wachovia Bank of North Carolina, N.A., dated as of April 1, 1997, relating to $3,337,000 Principal Amount, Chesterfield County, South Carolina Industrial Revenue Bonds (Culp, Inc. Project) Series 1988. Additionally, there are Reimbursement and Security Agreements between Culp, Inc. and Wachovia Bank of North Carolina, N.A., dated as of April 1, 1997 in the following amounts and with the following facilities: $7,900,000 Principal Amount, Alamance County Industrial Facilities and Pollution Control Financing Authority Industrial Revenue Refunding Bonds (Culp, Inc. Project) Series A and B. $4,500,000 Principal Amount, Guilford County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds (Culp, Inc. Project) Series 1989. $6,580,000 Principal Amount, Anderson County South Carolina Industrial Revenue Bonds (Culp, Inc. Project) Series 1993. $6,000,000 Principal Amount, Chesterfield County, South Carolina Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Culp, Inc. Project) Series 1996. $6,000,000 Principal Amount, The Alamance County Industrial Facilities and Pollution Control Financing Authority Tax-exempt Adjustable Mode Industrial Development Revenue Bonds (Culp, Inc. Project) Series 1996. $3,500,000 Principal Amount, Luzerne County Industrial Development Authority Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Culp, Inc. Project) Series 1996. 10(ii) Loan Agreement and Reimbursement and Security Agreement dated July 1, 1997 with the Robeson County Industrial Facilities and Pollution Control Financing Authority relating to the issuance of Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Culp, Inc. Project), Series 1997 in the aggregate principal amount of $8,500,000. 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 August 12, 1997, 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 infor- mation for the first quarter ended August 3, 1997.
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: September 16, 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: September 16, 1997 By s/s Stephen T. Hancock Stephen T. Hancock General Accounting Manager