- -------------------------------------------------------------------------------- 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 quarterly period ended August 2, 1998 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) (336) 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 2, 1998: 12,995,021 Par Value: $.05
INDEX TO FORM 10-Q For the period ended August 2, 1998 Part I - Financial Information. Page - ------------------------------------------ Item 1. Unaudited Interim Consolidated Financial Statements: Consolidated Statements of Income (Loss)--Three Months Ended I-1 August 2, 1998 and August 3, 1997 Consolidated Balance Sheets-August 2, 1998, August 3, 1997 and May 3, 1998 I-2 Consolidated Statements of Cash Flows---Three Months Ended August 2, 1998 I-3 and August 3, 1997 Consolidated Statements of Shareholders' Equity I-4 Notes to Consolidated Financial Statements I-5 Sales by Product Category/Business Unit I-10 International Sales by Geographic Area I-11 Item 2. Management's Discussion and Analysis of Financial I-12 Condition and Results of Operations Part II - Other Information - ------------------------------------- Item 6. Exhibits and Reports on Form 8-K II-1-II-7 Signature II-8
Item 1. Financial Statements CULP, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997 (Amounts in Thousands, Except for Per Share Data) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) -------------------------------------------------------- Amounts Percent of Sales --------------------- -------------------- August 2, August 3, % Over 1998 1997 (Under) 1999 1998 --------- ---------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> Net sales $ 110,667 99,498 11.2 % 100.0 % 100.0 % Cost of sales 97,056 82,765 17.3 % 87.7 % 83.2 % --------- ---------- ---------- --------- --------- Gross profit 13,611 16,733 (18.7) % 12.3 % 16.8 % Selling, general and administrative expenses 14,473 10,916 32.6 % 13.1 % 11.0 % --------- ---------- ---------- --------- --------- Income (loss) from operations (862) 5,817 (114.8) % (0.8)% 5.8 % Interest expense 2,361 1,280 84.5 % 2.1 % 1.3 % Interest income (53) (90) (41.1) % (0.0)% (0.1)% Other expense (income), net 770 242 218.2 % 0.7 % 0.2 % --------- ---------- ---------- --------- --------- Income (loss) before income taxes (3,940) 4,385 (189.9) % (3.6)% 4.4 % Income taxes * (1,300) 1,535 (184.7) % 33.0 % 35.0 % --------- ---------- ---------- --------- --------- Net income (loss) $ (2,640) 2,850 (192.6) % (2.4)% 2.9 % ========= ========== ========== ========= ========= Net income (loss) per share ($0.20) $0.23 (187.0) % Net income (loss) per share, assuming dilution ($0.20) $0.22 (190.9) % Dividends per share $0.0350 $0.0350 0.0 % Average shares outstanding 13,000 12,631 2.9 % Average shares outstanding, assuming dilution 13,203 12,929 2.1 % </TABLE> * Percent of sales column is calculated as a % of income (loss) before income taxes.
CULP, INC. CONSOLIDATED BALANCE SHEETS AUGUST 2, 1998, AUGUST 3, 1997 AND MAY 3, 1998 Unaudited (Amounts in Thousands) <TABLE> <CAPTION> Amounts Increase --------------------------- August 2, August 3, (Decrease) * ---------------------- May 3, 1998 1997 Dollars Percent 1998 ------------- ---------- ---------- --------- ------- Current assets <S> <C> <C> <C> <C> <C> Cash and cash investments $ 1,520 1,843 (323) (17.5) % 2,312 Accounts receivable 63,833 54,086 9,747 18.0 % 73,773 Inventories 79,358 60,715 18,643 30.7 % 78,594 Other current assets 7,511 6,126 1,385 22.6 % 7,808 ------------- ---------- ---------- --------- ------- Total current assets 152,222 122,770 29,452 24.0 % 162,487 Restricted investments 4,074 8,186 (4,112) (50.2) % 4,021 Property, plant & equipment, net 127,287 97,128 30,159 31.1 % 128,805 Goodwill 54,798 22,111 32,687 147.8 % 55,162 Other assets 4,317 3,124 1,193 38.2 % 4,340 ------------- ---------- ---------- --------- ------- Total assets $ 342,698 253,319 89,379 35.3 % 354,815 ============= ========== ========== ========= ======= Current liabilities Current maturities of long-term debt $ 3,250 100 3,150 3,150.0 % 3,325 Accounts payable 31,710 20,154 11,556 57.3 % 37,214 Accrued expenses 13,856 11,972 1,884 15.7 % 17,936 Income taxes payable 0 1,575 (1,575) (100.0)% 1,282 ------------- ---------- ---------- --------- ------- Total current liabilities 48,816 33,801 15,015 44.4 % 59,757 Long-term debt 154,383 96,016 58,367 60.8 % 152,312 Deferred income taxes 11,227 9,965 1,262 12.7 % 11,227 ------------- ---------- ---------- --------- ------- Total liabilities 214,426 139,782 74,644 53.4 % 223,296 Shareholders' equity 128,272 113,537 14,735 13.0 % 131,519 ------------- ---------- ---------- --------- ------- Total liabilities and shareholders' equity $ 342,698 253,319 89,379 35.3 % 354,815 ============= ========== ========== ========= ======= Shares outstanding 12,995 12,650 345 2.7 % 13,007 ============= ========== ========== ========= ======= </TABLE> * Derived from audited financial statements.
CULP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997 Unaudited (Amounts in Thousands) <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------ Amounts ---------------------- August 2, August 3, 1998 1997 ----------- ---------- Cash flows from operating activities: <S> <C> <C> Net income (loss) $ (2,640) 2,850 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 4,376 3,256 Amortization of intangible assets 398 181 Changes in assets and liabilities: Accounts receivable 9,940 2,605 Inventories (764) (7,252) Other current assets 297 (676) Other assets (11) (147) Accounts payable (3,017) (5,852) Accrued expenses (4,080) (2,923) Income taxes payable (1,282) (5) --------- ---------- Net cash provided by (used in) operating activities 3,217 (7,963) --------- ---------- Cash flows from investing activities: Capital expenditures (2,858) (9,153) Purchases of restricted investments (53) (8,590) Sale of restricted investments 0 11,422 ----------- ---------- Net cash used in investing activities (2,911) (6,321) ----------- ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt 2,071 19,500 Principal payments on long-term debt (75) (25) Change in accounts payable-capital expenditures (2,487) (3,897) Dividends paid (455) (443) Common stock issued (purchased) (152) 162 ----------- ---------- Net cash provided by (used in)financing activities (1,098) 15,297 ----------- ---------- Increase (decrease) in cash and cash investments (792) 1,013 Cash and cash investments at beginning of period 2,312 830 ----------- ---------- Cash and cash investments at end of period $ 1,520 1,843 =========== ========== </TABLE>
CULP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> Capital Common Stock Contributed Total ---------------------- in Excess Retained Shareholders' Shares Amount of Par Value Earnings Equity -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance, April 27, 1997 12,608,759 $ 630 $ 33,899 $ 76,260 $ 110,789 Cash dividends ($0.14 per share) (1,786) (1,786) Net income 15,513 15,513 Common stock issued in connection with stock option plans 114,051 6 997 1,003 Common stock issued in connection with acquisition of Artee Industries,Incorporated's assets 284,211 14 5,386 5,400 Stock options issued in connection with acquisition of Phillips' assets 600 600 - -------------------------------------------------------------------------------------------------------- Balance, May 3, 1998 13,007,021 650 40,882 89,987 131,519 Cash dividends ($0.035 per share) (455) (455) Net loss (2,640) (2,640) Common stock issued in connection with stock option plans 1,000 8 8 Common stock purchased (13,000) (41) (119) (160) - -------------------------------------------------------------------------------------------------------- Balance, August 2, 1998 12,995,021 $ 650 $ 40,849 $ 86,773 $ 128,272 ======================================================================================================== </TABLE>
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiary, include all adjustments, consisting only of normal, recurring adjustments and accruals, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are incorporated by reference in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on July 31, 1998 for the fiscal year ended May 3, 1998. The three-month period ended August 2, 1998 includes the results of Phillips, Wetumpka and Artee which were acquired on August 5, 1997, December 30, 1997 and February 2, 1998, respectively. ================================================================================ 2. Accounts Receivable A summary of accounts receivable follows (dollars in thousands): - -------------------------------------------------------------------------------- August 2, 1998 May 3, 1998 - -------------------------------------------------------------------------------- Customers $ 65,295 $ 75,695 Allowance for doubtful accounts (816) (1,244) Reserve for returns and allowances (646) (678) - -------------------------------------------------------------------------------- $ 63,833 $ 73,773 ================================================================================ 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 2, 1998 May 3, 1998 - -------------------------------------------------------------------------------- Raw materials $ 47,829 $ 45,319 Work-in-process 6,395 6,608 Finished goods 30,527 31,017 - -------------------------------------------------------------------------------- Total inventories valued at FIFO cost 84,751 82,944 Adjustments of certain inventories to the LIFO cost method (2,364) (2,364) Adjustments of certain inventories to market (3,029) (1,986) - -------------------------------------------------------------------------------- $ 79,358 $ 78,594 ================================================================================ 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 2, 1998 May 3, 1998 - -------------------------------------------------------------------------------- Accounts payable-trade $ 31,323 $ 34,340 Accounts payable-capital expenditures 387 2,874 - -------------------------------------------------------------------------------- $ 31,710 $ 37,214 ==============================================================================
6. Accrued Expenses A summary of accrued expenses follows (dollars in thousands): - -------------------------------------------------------------------------------- August 2, 1998 May 3, 1998 - -------------------------------------------------------------------------------- Compensation and benefits $ 8,819 $ 12,212 Other 5,037 5,724 - -------------------------------------------------------------------------------- $ 13,856 $ 17,936 ================================================================================ 7. Long-Term Debt A summary of long-term debt follows (dollars in thousands): - -------------------------------------------------------------------------------- August 2, 1998 May 3, 1998 - -------------------------------------------------------------------------------- Senior unsecured notes $ 75,000 $ 75,000 Industrial revenue bonds and other obligations 34,712 34,787 Revolving credit facility 36,000 30,000 Revolving line of credit 2,071 6,000 Obligations to sellers 9,850 9,850 - -------------------------------------------------------------------------------- 157,633 155,637 Less current maturities (3,250) (3,325) - -------------------------------------------------------------------------------- $ 154,383 $ 152,312 ================================================================================ On April 2, 1998, the company completed the sale of $75,000,000 of senior unsecured notes (the "Notes") in a private placement to insurance companies. The Notes have a fixed coupon rate of 6.76% and an average term of 10 years. The principal payments become due from March 2006 to March 2010 with interest payable semi-annually. The company's revolving credit agreement (the "Credit Agreement") provides an unsecured multi-currency revolving credit facility, which expires in April 2002, with a syndicate of banks in the United States. The Credit Agreement provides for a revolving loan commitment of $88,000,000. The agreement requires payment of a quarterly facility fee in advance. The company's $6,000,000 revolving line of credit expires on August 31, 1999. However, the line of credit 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. The industrial revenue bonds (IRBs) are generally due in balloon maturities which occur at various dates from 2006 to 2013. The IRBs are collateralized by restricted investments of $4,074,000 and letters of credit for the outstanding balance of the IRBs and certain interest payments due thereunder. The company's loan agreements require, among other things, that the company maintain compliance with certain financial ratios. At August 2, 1998, the company was in compliance with these required financial covenants. At August 2, 1998, 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 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 The estimated amount at which the company could terminate these agreements as of August 2, 1998 is approximately $459,000. Net amounts paid under these agreements increased interest expense by approximately $59,000 in 1999 and $60,000 in 1998. 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.
8. Cash Flow Information Payments for interest and income taxes during the period were (dollars in thousands) - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- . Interest $ 1,231 $ 1,231 Income taxes 1,637 445 ================================================================================ 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 and certain anticipated Canadian dollar expenses of the company's Canadian subsidiary. The company had no outstanding foreign exchange forward and option contracts as of August 2, 1998. 10. Net Income (Loss) Per Share The following table reconciles the numerators and denominators of net income (loss) per share and net income (loss) per share, assuming dilution for the three-month periods ended August 2, 1998 and August 3, 1997: <TABLE> <CAPTION> THREE MONTHS ENDED ---------------------------------------------------------------------- August 2, 1998 August 3, 1997 --------------------------------- ---------------------------------- (Amounts in thousands, (Loss) Shares Per Share Income Shares Per Share except per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ---------- --------- ----------- ------------ -------- <S> <C> <C> <C> <C> <C> <C> Net income (loss) per share ($2,640) 13,000 ($0.20) $2,850 12,631 $0.23 ========= ======== Effect of dilutive securities: Options - 203 - 298 ----------- ---------- ----------- ---------- Net income (loss) per share, assuming dilution ($2,640) 13,203 ($0.20) $2,850 12,929 $0.22 =========== ========== ========= =========== ========== ======== </TABLE> 11. New Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information," effective for periods beginning after December 15, 1997. The purpose of this standard is to disclose disaggregated information which provides information about the operating segments an enterprise engages in, consistent with the way management reviews financial information to make decisions about the enterprise's operating matters. The company will comply with the requirements of this standard for fiscal year end 1999. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The provisions of SFAS No. 133 are effective for financial statements beginning after June 15, 1999, although early adoption is allowed. The company has not determined the financial impact of adopting this SFAS and has not determined if it will adopt its provisions prior to its effective date. CULP, INC. SALES BY PRODUCT CATEGORY/BUSINESS UNIT FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997 <TABLE> <CAPTION> (Amounts in thousands) THREE MONTHS ENDED (UNAUDITED) --------------------------------------------------- Amounts Percent of Total Sales ------------------ ------------------- August 2, August 3, % Over 1998 1997 (Under) 1999 1998 Product Category/Business Unit - ------------------------- -------- -------- ---------- -------- --------- <S> <C> <C> <C> <C> <C> Upholstery Fabrics Culp Decorative Fabrics $ 51,445 39,814 29.2 % 46.5 % 40.0 % Culp Velvets/Prints 29,994 38,397 (21.9)% 27.1 % 38.6 % -------- -------- ---------- -------- --------- 81,439 78,211 4.1 % 73.6 % 78.6 % Mattress Ticking Culp Home Fashions 22,632 21,287 6.3 % 20.5 % 21.4 % Yarn Culp Yarn 6,596 0 100.0 % 6.0 % 0.0 % -------- -------- ---------- -------- --------- * $ 110,667 99,498 11.2 % 100.0% 100.0 % ======== ======== ========== ======== ========= * U.S. sales were $84,310 and $74,407 for the first three months of fiscal 1999 and fiscal 1998, respectively. The percentage increase in U.S. sales was 13.3% for the three months. </TABLE> CULP, INC. INTERNATIONAL SALES BY GEOGRAPHIC AREA FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997 <TABLE> <CAPTION> (Amounts in thousands) THREE MONTHS ENDED (UNAUDITED) ------------------------------------------------------- Amounts Percent of Total Sales --------------------- --------------------- August 2, August % Over 3, Geographic Area 1998 1997 (Under) 1999 1998 - ----------------------- ---------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> North America (Excluding USA) $ 7,253 7,044 3.0 % 27.5 % 28.1 % Europe 3,683 4,440 (17.0)% 14.0 % 17.7 % Middle East 8,300 6,564 26.4 % 31.5 % 26.2 % Far East & Asia 4,868 5,464 (10.9)% 18.5 % 21.8 % South America 1,000 339 195.0 % 3.8 % 1.4 % All other areas 1,253 1,240 1.0 % 4.8 % 4.9 % ---------- --------- --------- --------- --------- $ 26,357 25,091 5.0 % 100.0 % 100.0 % ========== ========= ========= ========= ========= </TABLE> International sales, and the percentage of total sales, for each of the last seven fiscal years follows: fiscal 1992-$ 37,913 (20%); fiscal 1993-$ 41,471 (21%); fiscal 1994-$ 44,038 (18%); fiscal 1995-$ 57,971 (19%); fiscal 1996- $77,397 (22%); fiscal 1997-$ 101,571 (25%); and fiscal 1998-$ 137,223 (29%). International sales for the current quarter represented 23.8% and 25.2% for 1999 and 1998, respectively. Certain amounts for fiscal year 1998 have been reclassified to conform with the fiscal year 1999 presentation.
Management's Discussion and Analysis of Financial Condition and Results of Operations Item 2. 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 2, 1998, net sales rose 11.2% to $110.7 million compared with $99.5 million in the year-earlier period. The net loss for the quarter totaled ($2.6) million, or ($0.20) per share, compared with net income of $2.9 million, or $0.23 per share, for the first quarter of fiscal 1998. Sales increased due to sales of $15.7 million from Phillips Mills and Artee, which were acquired in fiscal 1998, offset by a decline in sales of certain products for the Culp Velvets/Prints division that are primarily marketed internationally. During the quarter, demand for Culp Velvets/Prints products being shipped directly or indirectly into the emerging markets of Russia and other former Soviet countries, India and Eastern Europe experienced a pronounced slowdown. All of these areas are generally experiencing very weak economic conditions which, in turn, have affected demand for furniture and other home furnishings. This decline in international sales was offset by increased sales of other products into other regions, principally the Middle East, and from international sales related to Phillips Mills. Excluding the contribution from acquired operations, sales of upholstery fabrics to US-based manufacturers were down 5.5% for the quarter from a year ago. This portion of the company's business has been generally soft throughout fiscal 1998 and into the beginning of fiscal 1999. 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 2, 1998 Compared with Three Months Ended August 3, 1997 Net Sales. Net sales for the first quarter increased by $11.2 million, or 11.2%, compared with the year-earlier period. The company's sales of upholstery fabrics increased $3.2 million, or 4.1%, compared with the prior year. Phillips Mills, which was acquired on August 5, 1997, contributed $9.1 million in incremental net sales for the quarter. The decline in net sales, excluding that incremental contribution, was due primarily to the results of Culp Velvets/Prints, which has experienced a material slowdown in international shipments, especially to areas such as Russia which have encountered significant economic difficulties. Sales from the Culp Decorative Fabrics business unit were up slightly from a year ago excluding the benefit of Phillips Mills. Sales from the Culp Home Fashions unit, which principally consists of mattress ticking and bedding products, rose 6.3% from a year ago. International sales, consisting primarily of upholstery fabrics, increased to $26.4 million, up 5.0% from a year ago. International shipments accounted for 23.8% of the company's sales for the first quarter, down from 25.2% a year ago. During the first quarter, demand for fabrics marketed by Culp Velvets/Prints slowed markedly in certain international regions that had been primary export areas for the company. This slowdown, which the company believes is industry-wide and linked to economic difficulties in these areas, is expected to affect the company's results into the second half of fiscal 1999. Gross Profit and Cost of Sales. Gross profit for the first quarter decreased by $3.1 million and amounted to 12.3% of net sales compared with 16.8% a year ago. The company was affected by an under absorption of fixed costs as a result of the decline in sales in certain business units, especially in those product categories where international sales represented a significant portion of sales. Competitive pressures were also responsible for lower margins in other product categories. The year-to-year comparisons were influenced by having one less week in the period versus a year ago. The cost of raw materials continues to remain relatively stable. The significant slowdown in international sales of certain fabrics, combined with other competitive issues, will likely lead to lower gross profit compared with the prior year into the second half of fiscal 1999. Selling, general and administrative expenses. Selling, general and administrative expenses increased as a percentage of net sales to 13.1% compared with 11.0% a year ago. As noted above, the company was affected by less than expected sales in certain product categories. Compared with a year ago, the company is incurring higher expenses related to expanded resources for designing and sampling fabrics with new patterns and textures and higher costs for marketing programs. Interest Expense. Net interest expense for the first quarter of $2.3 million was up from $1.2 million a year ago due principally to borrowings related to the acquisitions of Phillips Mills and Artee. The company has also incurred higher borrowings from a year ago to finance capital expenditures and additional working capital requirements. Other Expense. Other expense increased to $770,000 for the first quarter compared with $242,000 for the year-earlier period, principally due to the amortization of goodwill associated with the acquisitions of Phillips Mills and Artee and to the writeoff of certain fixed assets. Income Taxes. The effective tax rate for the first quarter was 33.0% compared with 35.0% in the year-earlier period. Net Income (Loss) Per Share. The net loss per share for the first quarter totaled ($0.20) compared with net income per share of $0.23 a year ago. Liquidity and Capital Resources Liquidity. Cash and cash investments were $1.5 million as of August 2, 1998, compared with $2.3 million at the end of fiscal 1998. Funded debt (long-term debt, including current maturities, less restricted investments) increased to $153.6 million at the close of the first quarter, up from $87.9 million as of August 3, 1997 and $151.6 million at the end of fiscal 1998. As a percentage of total capital (funded debt plus total shareholders' equity), the company's borrowings amounted to 54.5% as of August 2, 1998, compared with 43.6% as of August 3, 1997 and 53.5% at the end of fiscal 1998. The company's working capital as of August 2, 1998 was $103.4 million compared with $102.7 million at the close of fiscal 1998. Because of seasonal factors, the company typically generates the majority of its cash from operating activities during the second fiscal half. Cash of $3.2 million was provided by operating activities during the first quarter, consisting of $2.1 million from earnings (net loss plus depreciation and amortization) and $1.1 million from changes in working capital. Capital expenditures during the first quarter totaled $2.9 million. Financing activities used $1.1 million in cash, consisting of a $2.5 million decrease in accounts payable-capital expenditures, $0.5 million of dividends paid, $0.2 million for purchase of common stock, and offset by $2.1 million in proceeds from issuance of long-term debt. Financing Arrangements. As of August 2, 1998, the company had outstanding balances of $36 million under a $88 million syndicated five-year, unsecured, multi-currency revolving credit facility. The company also has $75 million of senior unsecured notes ("Notes") with insurance companies. The Notes have a fixed coupon rate of 6.76% and an average term of 10 years. In addition, the company has a total of $34.7 million in outstanding industrial revenue bonds ("IRBs") which have been used to finance capital expenditures. The IRBs are collateralized by restricted investments of $4.1 million as of August 2, 1998 and letters of credit for the outstanding balance of the IRBs and certain interest payments due thereunder. In July 1998, the company amended the syndicated revolving credit facility to decrease the facility from $100 million to $88 million and amend certain covenants. As of August 2, 1998, the company was in compliance with the required financial covenants of its loan agreements. If the company experiences continued losses or substantially lower earnings compared to prior comparable periods, the financial results could cause the company to be out of compliance with the financial covenants under its revolving credit facility. The company intends to work with its lenders under the revolving credit facility in order to amend covenants or make other arrangements to prevent a default from occurring under this facility. As of August 2, 1998, the company had three interest rate swap agreements to reduce its exposure to floating interest rates on a $25 million notional amount. 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 and option contracts to hedge against currency fluctuations with respect to firm commitments to purchase certain machinery, equipment, raw materials and certain anticipated Canadian dollar expenses of the company's Canadian subsidiary. Capital Expenditures. The company maintains an ongoing 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 $10-$15 million in fiscal 1999. 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. 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. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information," effective for periods beginning after December 15, 1997. The purpose of this standard is to disclose disaggregated information which provides information about the operating segments an enterprise engages in, consistent with the way management reviews financial information to make decisions about the enterprise's operating matters. The company will comply with the requirements of this standard for fiscal year end 1999. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The provisions of SFAS No. 133 are effective for financial statements beginning after June 15, 1999, although early adoption is allowed. The company has not determined the financial impact of adopting this SFAS and has not determined if it will adopt its provisions prior to its effective date. Year 2000 Considerations Management has developed a plan to modify the company's information technology to recognize the year 2000. The plan has three distinct areas of focus - traditional information systems, technology used in support areas, and preparedness of suppliers and customers. The initiative for traditional information systems started as far back as 1992 and has substantially completed the assessment, required changes and testing of the company's operational systems (order entry, billing, sales, finished goods) and financial systems (payroll, human resources, accounts payable, accounts receivable, general ledger, fixed assets). Currently the company is focused on the remaining systems that support the company's manufacturing processes and plans to be substantially complete by May 1, 1999. The second area of focus has been an assessment of non-traditional information technology which includes the electronics in equipment such as telephone switches and manufacturing equipment. A plan, targeted to be substantially complete by December 31, 1998, has been formed to evaluate all these components at every location, to be followed during 1999 with installation and testing of required changes. The third area of focus is to communicate with suppliers and vendors to understand their level of compliance and assure a constant flow of materials to support business plans. Communication to date has shown a high level of awareness and planning by these parties. Formal contingency plans will not be formulated until the company has identified specific areas where there is a substantial risk of year 2000 problems occurring, and no such areas are identified as of this date. The plan is being administered by a team of internal staff and management and the cost of this initiative, principally represented by internal resources, is not expected to be material to the company's results of operations or financial position. This project is not expected to have a significant effect on the company's operations, though no assurance can be given in this regard. Forward-Looking Information The company's quarterly report on Form 10-Q contains statements that could be deemed "forward-looking statements," within the meaning of the federal securities laws. Such statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by qualifying words such as "expect," "believe," "estimate," "plan" and "project" and their derivatives. Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income and general economic conditions. 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 affect the company adversely. In addition, strengthening of the U.S. dollar against other currencies could make the company's products less competitive on the basis of price in markets outside the United States, and economic and political instability in international areas could affect the demand for the company's products.
Culp, Inc. Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 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 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, 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) Form of 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 Employee'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 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. 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 was filed as Exhibit 10(ee) to the Company's Form 10-K for the year ended April 27, 1997, and is incorporated herein by reference. 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 was filed as Exhibit 10(ff) to the Company's Form 10-K for the year ended April 27, 1997, and is incorporated herein by reference. 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. was filed as Exhibit 10(gg) to the Company's Form 10-K for the year ended April 27, 1997, and is incorporated herein by reference. 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 was filed as Exhibit 10(hh) to the Company's Form 10-K for the year ended April 27, 1997, and is incorporated herein by reference. 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 was filed as Exhibit 10(ii) to the Company's Form 10-Q for the quarter ended August 3, 1997, and is incorporated herein by reference. 10(jj) Asset Purchase Agreement dated as of August 4, 1997 by and between Culp, Inc., Phillips Weaving Mills, Inc., Phillips Printing Mills, Inc., Phillips Velvet Mills, Inc., Phillips Mills, Inc., Phillips Property Company, LLC, Phillips Industries, Inc. and S. Davis Phillips was filed as Exhibit (10jj) to the Company's Form 10-Q for the quarter ended November 2, 1997, and is incorporated herein by reference. 10(kk) Asset Purchase Agreement dated as of October 14, 1997 among Culp, Inc., Artee Industries, Incorporated, Robert T. Davis, Robert L. Davis, Trustee u/a dated 8/25/94, Robert L. Davis, Louis W. Davis, Kelly D. England, J. Marshall Bradley, Frankie S. Bradley and Mickey R. Bradley was filed as Exhibit 10(kk) to the Company's Form 10-Q for the quarter ended November 2, 1997, and is incorporated herein by reference. 10(ll) Form of Note Purchase Agreement (providing for the issuance by Culp, Inc. of its $20 million 6.76% Series A Senior Notes due 3/15/08 and its $55 million 6.76% Series B Senior Notes due 3/15/10), each dated March 4, 1998, between Culp, Inc. and each of the following: 1. Connecticut General Life Insurance Company; 2. The Mutual Life Insurance Company of New York; 3. United of Omaha Life Insurance Company; 4. Mutual of Omaha Insurance Company; 5. The Prudential Insurance Company of America; 6. Allstate Life Insurance Company; 7. Life Insurance Company of North America; and 8. CIGNA Property and Casualty Insurance Company This agreement was filed as Exhibit 10(ll) to the Company's Form 10-K for the year ended May 3, 1998, and is incorporated herein by reference. 10(mm) First Amendment to Credit Agreement dated July 22, 1998 among Culp, Inc., Wachovia Bank, N.A., as agent, First Union National Bank, as documentation agent, and Wachovia Bank, N.A., First Union National Bank, SunTrust Bank, Atlanta, and Cooperatieve Centrale Raiffeisen-Boerenleeenbank B.A., Rabobank Nederland, New York Branch. 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 20, 1998, 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 first quarter ended August 2, 1998. SIGNATURE 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, 1998 By: s/s Phillip W. Wilson Phillip W. Wilson Vice President and Chief Financial and Accounting Officer (Authorized to sign on behalf of the registrant and also signing as principal financial officer)