- ------------------------------------------------------------------------------- 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 October 29, 1995 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 October 29, 1995: 11,219,016 Par Value: $.05
- ------------------------------------------------------------------------------- INDEX TO FORM 10-Q October 29, 1995 Part I - Financial Information. Page - ------------------------------------------ ------- Item 1. Financial Statements: Statements of Income--Three and Six Months Ended I-1 October 29, 1995 and October 30, 1994 Balance Sheets--October 29, 1995, October 30, 1994, I-2 and April 30, 1995 Statements of Cash Flows---Six Months I-3 ended October 29, 1995 and October 30, 1994 Statements of Shareholders' Equity I-4 Notes to Financial Statements I-5 Sales by Business Unit I-9 Export and Foreign Sales by Geographic Area I-10 Sales by Business Unit - Trend Analysis I-11 Item 2. Management's Discussion and Analysis of Financial I-12 Condition and Results of Operation Part II - Other Information - ------------------------------------- Item 1. Legal Proceedings II-1 Item 2. Changes in Securities II-1 Item 3. Default Upon Senior Securities II-1 Item 4. Submission of Matters to a Vote of Security Holders II-1 Item 5. Other Information II-2 Item 6. Exhibits and Reports on Form 8-K II-2-II-6 Signatures II-7
CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED INCOME STATEMENTS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 29, 1995 AND OCTOBER 30, 1994 (Amounts in Thousands, Except for Per Share Data) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) Amounts Percent of Sales October 29, October 30, % Over 1995 1994 (Under) 1996 1995 <S> <C> <C> <C> <C> <C> Net sales 90,672 78,445 15.6 % 100.0 % 100.0 % Cost of sales 74,565 64,272 16.0 % 82.2 % 81.9 % Gross profit 16,107 14,173 13.6 % 17.8 % 18.1 % Selling, general and administrative expenses 9,675 8,363 15.7 % 10.7 % 10.7 % Income from operations 6,432 5,810 10.7 % 7.1 % 7.4 % Interest expense 1,388 1,144 21.3 % 1.5 % 1.5 % Interest income 0 (24) (100.0)% 0.0 % (0.0)% Other expense (income), net 219 190 15.3 % 0.2 % 0.2 % Income before income taxes 4,825 4,500 7.2 % 5.3 % 5.7 % Income taxes * 1,825 1,700 7.4 % 37.8 % 37.8 % Net income 3,000 2,800 7.1 % 3.3 % 3.6 % Average shares outstanding 11,211 11,205 0.1 % Net income per share $0.27 $0.25 8.0 % Dividends per share $0.0275 $0.025 10.0 % SIX MONTHS ENDED (UNAUDITED) Amounts Percent of Sales October 29, October 30, % Over 1995 1994 (Under) 1996 1995 Net sales 163,029 144,794 12.6 % 100.0 % 100.0 % Cost of sales 134,724 119,521 12.7 % 82.6 % 82.5 % Gross profit 28,305 25,273 12.0 % 17.4 % 17.5 % Selling, general and administrative expenses 18,129 15,932 13.8 % 11.1 % 11.0 % Income from operations 10,176 9,341 8.9 % 6.2 % 6.5 % Interest expense 2,685 2,221 20.9 % 1.6 % 1.5 % Interest income 0 (47) (100.0)% 0.0 % (0.0)% Other expense (income), net 326 367 (11.2)% 0.2 % 0.3 % Income before income taxes 7,165 6,800 5.4 % 4.4 % 4.7 % Income taxes * 2,650 2,550 3.9 % 37.0 % 37.5 % Net income 4,515 4,250 6.2 % 2.8 % 2.9 % Average shares 11,209 11,202 0.1 % Net income per share $0.40 $0.38 5.3 % Dividends per share $0.055 $0.05 10.0 % </TABLE> * Percent of sales column is calculated as a % of income before income taxes. I-1
CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED BALANCE SHEETS OCTOBER 29, 1995, OCTOBER 30, 1994 AND APRIL 30, 1995 (Unaudited, Amounts in Thousands) <TABLE> <CAPTION> Amounts Increase October 29, October 30, (Decrease) * April 30, 1995 1994 Dollars Percent 1995 <S> <C> <C> <C> <C> <C> Current assets Cash and cash investments 930 257 673 261.9 % 1,393 Accounts receivable 46,930 42,727 4,203 9.8 % 44,252 Inventories 49,632 42,504 7,128 16.8 % 45,771 Other current assets 3,415 2,510 905 36.1 % 3,194 Total current assets 100,907 87,998 12,909 14.7 % 94,610 Restricted investments 0 1,624 (1,624) (100.0)% 795 Property, plant & equipment, net 73,876 68,848 5,028 7.3 % 75,805 Goodwill 23,189 18,725 4,464 23.8 % 22,600 Other assets 2,432 1,209 1,223 101.2 % 1,189 Total assets 200,404 178,404 22,000 12.3 % 194,999 Current Liabilities Current maturities of long-term debt 11,555 6,008 5,547 92.3 % 11,555 Accounts payable 30,175 28,685 1,490 5.2 % 32,250 Accrued expenses 11,075 8,688 2,387 27.5 % 11,532 Income taxes payable 1,729 1,653 76 4.6 % 661 Total current liabilities 54,534 45,034 9,500 21.1 % 55,998 Long-term debt 65,137 63,462 1,675 2.6 % 62,187 Deferred income taxes 5,382 3,477 1,905 54.8 % 5,418 Total liabilities 125,053 111,973 13,080 11.7 % 123,603 Shareholders' equity 75,351 66,431 8,920 13.4 % 71,396 Total liabilities and stockholders' equity 200,404 178,404 22,000 12.3 % 194,999 Shares outstanding 11,219 11,205 14 0.1 % 11,205 </TABLE> * Derived from audited financial statements. I-2
CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED OCTOBER 29, 1995 AND OCTOBER 30, 1994 (Unaudited, Amounts in Thousands) <TABLE> <CAPTION> SIX MONTHS ENDED Amounts October 29, October 30, 1995 1994 <S> <C> <C> Cash flows from operating activities: Net income 4,515 4,250 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 6,138 5,340 Amortization of intangible assets 358 298 Provision for deferred income taxes (36) (272) Changes in assets and liabilities: Accounts receivable (2,678) (5,984) Inventories (3,861) (5,908) Other current assets (221) (11) Other assets (1,309) (470) Accounts payable (2,075) (901) Accrued expenses (457) 530 Income taxes payable 1,068 1,017 Net cash provided by (used in) operating activities 1,442 (2,111) Cash flows from investing activities: Capital expenditures (5,090) (10,184) Purchases of restricted investments 0 (46) Proceeds from sale of restricted investments 795 1,345 Business acquired 0 0 Net cash provided by (used in) investing activities (4,295) (8,885) Cash flows from financing activities: Proceeds from issuance of long-term debt 6,000 8,000 Principal payments on long-term debt (3,050) (92) Net increase (decrease) in bank overdrafts 0 1,120 Dividends paid (617) (560) Proceeds from sale of common stock 57 92 Net cash provided by (used in) financing activities 2,390 8,560 Increase (decrease) in cash and cash investments (463) (2,436) Cash and cash investments at beginning of period 1,393 2,693 Cash and cash investments at end of period 930 257 </TABLE> I-3
Culp, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> Capital Contributed Total Common Stock in Excess Retained Shareholders' Shares Amount of Par Value Earnings Equity <S> <C> <C> <C> <C> <C> Balance, May 1, 1994 11,177,353 $ 558 $ 16,487 $ 45,604 $ 62,649 Cash dividends (1,120) (1,120) ($.10 per share) Net income 9,775 9,775 Common stock issued in connection with stock option plan 27,413 2 90 92 Balance, April 30, 1995 11,204,766 $ 560 $ 16,577 $ 54,259 $ 71,396 Cash dividends (617) (617) ($.055 per share) Net income 4,515 4,515 Common stock issued in connection with stock option plan 14,250 1 56 57 Balance, October 29, 1995 11,219,016 $ 561 $ 16,633 $ 58,157 $ 75,351 </TABLE> I-4
Culp, Inc. NOTES TO FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Certain amounts for fiscal year 1995 have been reclassified to conform with the fiscal year 1996 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 six months ended October 29, 1995 are not necessarily indicative of the results to be expected for the full year. ======================================================= 2. Accounts Receivable The company factors a portion of its accounts receivable, on a nonrecourse basis. The factoring arrangements are used solely for credit purposes, and not for borrowing purposes. A summary of accounts receivable follows (dollars in thousands): <TABLE> <CAPTION> - -- ----------------------------------------------------------------------------------------------------------- October 29, 1995 April 30, 1995 - -- ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Customers $ 46,767 $ 44,014 Factors 1,029 1,314 Allowance for doubtful accounts (513) (739) Reserve for returns and allowances (353) (337) - -- ----------------------------------------------------------------------------------------------------------- $ 46,930 $ 44,252 </TABLE> ========================================================= 3. Inventories Inventories are carried at the lower of cost of market. Cost is determined for substantially all inventories using the LIFO (last-in, first-out) method. A summary of inventories follows (dollars in thousands): <TABLE> <CAPTION> - -- ----------------------------------------------------------------------------------------------------------- October 29, 1995 April 30, 1995 - -- ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Raw materials $ 30,714 $ 25,385 Work-in-process 3,680 3,465 Finished goods 18,706 19,834 - -- ----------------------------------------------------------------------------------------------------------- Total inventories valued at FIFO cost 53,100 48,684 Adjustments of certain inventories to the LIFO cost method (3,468) (2,913) - -- ----------------------------------------------------------------------------------------------------------- $ 49,632 $ 45,771 </TABLE> ======================================================== I-5
Culp, Inc. NOTES TO FINANCIAL STATEMENTS (unaudited) 4. Accounts Payable: A summary of accounts payable follows (dollars in thousands): <TABLE> <CAPTION> - -- ----------------------------------------------------------------------------------------------------------- October 29, 1995 April 30, 1995 - -- ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Bank overdraft $ -0- $ -0- Accounts payable-trade 24,279 22,647 Accounts payable-capital expenditures 5,896 9,603 - -- ----------------------------------------------------------------------------------------------------------- $ 30,175 $ 32,250 </TABLE> ========================================================= 5. Accrued Expenses A summary of accrued expenses follows (dollars in thousands): <TABLE> <CAPTION> - -- ----------------------------------------------------------------------------------------------------------- October 29, 1995 April 30, 1995 - -- ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Compensation and benefits $4,763 $ 5,252 Acquisition costs 1,189 1,595 Other 5,123 4,685 - -- ----------------------------------------------------------------------------------------------------------- $ 11,075 $ 11,532 </TABLE> ======================================================== 6. Long-term Debt A summary of long-term debt follows (dollars in thousands). <TABLE> <CAPTION> - -- ----------------------------------------------------------------------------------------------------------- October 29, 1995 April 30, 1995 - -- ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Industrial Revenue Bonds $ 15,737 $ 15,787 Revolving Credit Line 16,000 10,000 Term Loan 38,500 41,500 Subordinated note payable 1,000 1,000 Convertible note payable 5,455 5,455 - -- ----------------------------------------------------------------------------------------------------------- $ 76,692 $ 73,742 Less current maturities (11,555) (11,555) - -- ----------------------------------------------------------------------------------------------------------- $ 65,137 $ 62,187 </TABLE> I-6
Culp, Inc. NOTES TO FINANCIAL STATEMENTS (unaudited) The company has a loan agreement with two banks, which provides for a $44,000,000 seven-year term loan and a $33,500,000 revolving credit line. The revolving credit line has a six-year term, or can be terminated by either of the participating banks upon a thirteen-month notice to the company. In connection with the purchase of Rayonese Textile Inc., the company issued a convertible note payable of $5,455,000 bearing interest at 6.0%. The note is payable on March 6, 1998 or upon 45 days notice to the company by the holders starting on March 6, 1996 and is secured by the stock and assets of Rayonese. Due to the holders' 45-day notice provision, the convertible note is classified as a current maturity in the accompanying consolidated financial statements. At the option of the holder after March 6, 1996, the note is convertible into the company's common stock at a conversion price of $12.50 per share. The note is not redeemable at the option of the company. The company's loan agreements require, among other things, that the company maintain certain financial ratios. At October 29, 1995, the company was in compliance with these required covenants. At October 29, 1995, the company had five interest rate swap agreements with two banks in order to reduce its exposure to floating interest rates on a portion of its variable rate borrowings. The following table summarizes certain data regarding the interest rate swaps: notional amount interest rate expiration date $ 3,300,000 6.4% July 1996 900,000 7.6% July 1996 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 have terminated these agreements as of October 29, 1995 is approximately $685,000. Net amounts paid under these agreements increased interest expense for the six months ended Octoer 29, 1995 and October 30, 1994 by approximately $79,000 and $85,000, respectively. Management believes the risk of incurring losses resulting from the inability of the bank to fulfill its obligation under the interest rate swap agreements to be remote and that any losses incurred would be immaterial. ======================================================== 7. Acquisition On March 6, 1995, the company acquired Rayonese Textile Inc. (Rayonese), a manufacturer of home furnishings fabrics based near Montreal, Canada. The transaction has a preliminary estimated value of approximately $10.5 million and included the purchase of 100% of the Rayonese common stock and the assumption of Rayonese's funded debt. The acquisition was accounted for as a purchase, and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. I-7
Culp, Inc. NOTES TO FINANCIAL STATEMENTS (unaudited) The preliminary estimated fair values of assets and retained liabilities acquired are summarized below: <TABLE> <CAPTION> - -- ----------------------------------------------------------------------------------------------------------- March 6, 1995 - -- ----------------------------------------------------------------------------------------------------------- <S> <C> Accounts receivable, net $ 2,195 Inventories 1,878 Other current assets 39 Property, plant and equipment 3,965 Goodwill 5,034 Accounts payable and accrued expenses (2,656) $ 10,455 </TABLE> ======================================================== 8. Cash Flow Information Payments for interest and income taxes during the period were (dollars in thousands) <TABLE> <CAPTION> - -- ----------------------------------------------------------------------------------------------------------- 1996 1995 - -- ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest $ 2,870 $ 2,071 Income taxes 1,582 1,533 </TABLE> ======================================================== 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. The company does not engage in foreign currency speculation. Machinery and equipment and raw material purchases hedged by foreign exchange forward or option contracts are valued by using the exchange rate of the applicable foreign exchange forward or option contract. At October 29, 1995, the company had no foreign exchange forward or option contracts outstanding. I-8
CULP, INC. FINANCIAL INFORMATION RELEASE SALES BY BUSINESS UNIT FOR THREE MONTHS AND SIX MONTHS ENDED OCTOBER 29, 1995 AND OCTOBER 30, 1994 (Amounts in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) Amounts Percent of Total Sales October 29, October 30, % Over Business Units 1995 1994 (Under) 1996 1995 <S> <C> <C> <C> <C> <C> Upholstery Fabrics Flat Wovens Culp Textures 22,715 22,834 (0.5)% 25.1 % 29.1 % Rossville/Chromatex 17,960 15,758 14.0 % 19.8 % 20.1 % 40,675 38,592 5.4 % 44.9 % 49.2 % Velvets/Prints 32,081 26,439 21.3 % 35.4 % 33.7 % 72,756 65,031 11.9 % 80.2 % 82.9 % Mattress Ticking 17,916 * 13,414 33.6 % 19.8 % 17.1 % 90,672 78,445 15.6 % 100.0 % 100.0 % SIX MONTHS ENDED (UNAUDITED) Amounts Percent of Total Sales October 29, October 30, % Over Business Units 1995 1994 (Under) 1996 1995 Upholstery Fabrics Flat Wovens Culp Textures 40,299 42,447 (5.1)% 24.7 % 29.3 % Rossville/Chromatex 33,318 30,898 7.8 20.4 % 21.3 73,617 73,345 0.4 % 45.2 % 50.7 % Velvets/Prints 55,604 47,083 18.1 % 34.1 % 32.5 % 129,221 120,428 7.3 % 79.3 % 83.2 % Mattress Ticking 33,808 * 24,366 38.8 % 20.7 % 16.8 % 163,029 144,794 12.6 % 100.0 % 100.0 % </TABLE> * Includes Rayonese shipments of $2,053 for the three months and $3,822 for the six months. The percent increase in sales without Rayonese was 20.0% for the three months and 17.4% for the six months. On a consolidated basis, without Rayonese shipments, the percent sales increase for the three months was 13.0% and for the six months was 10.0%. I-9
CULP, INC. FINANCIAL INFORMATION RELEASE EXPORT AND FOREIGN SALES BY GEOGRAPHIC AREA FOR THREE MONTHS AND SIX MONTHS ENDED OCTOBER 29, 1995 AND OCTOBER 30, 1994 (Amounts in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) Amounts Percent of Total Sales October 29, October 30, % Over Geographic Area 1995 1994 (Under) 1996 1995 <S> <C> <C> <C> <C> <C> North America (Excluding USA) 6,223 4,184 48.7 % 31.8 % 28.7 % Europe 4,297 3,892 10.4 % 22.0 % 26.7 % Middle East 3,437 1,905 80.4 % 17.6 % 13.1 % Far East & Asia 3,079 2,086 47.6 % 15.7 % 14.3 % South America 397 876 (54.7)% 2.0 % 6.0 % All other areas 2,127 1,652 28.8 % 10.9 % 11.3 % 19,560 * 14,595 34.0 % 100.0 % 100.0 % SIX MONTHS ENDED (UNAUDITED) Amounts Percent of Total Sales October 29, October 30, % Over Geographic Area 1995 1994 (Under) 1996 1995 North America (Excluding USA) 10,790 7,793 38.5 % 31.7 % 30.3 % Europe 7,482 6,890 8.6 % 22.0 % 26.8 % Middle East 5,549 2,768 100.5 % 16.3 % 10.8 % Far East & Asia 4,841 4,131 17.2 % 14.2 % 16.1 % South America 843 1,184 (28.8)% 2.5 % 4.6 % All other areas 4,499 2,938 53.1 % 13.2 % 11.4 % 34,004 * 25,704 32.3 % 100.0 % 100.0 % </TABLE> * Includes Rayonese shipments of $2,053 for the three months and $3,822 for the six months. The percent increase in sales without Rayonese was 20.0% for the three months and 17.4% for the six months. I-10
Culp, Inc. SALES BY BUSINESS UNIT - TREND ANALYSIS 1994 vs 1995 vs 1996 (Amounts in thousands) <TABLE> <CAPTION> Fiscal 1994 Fiscal 1995 Fiscal 1996 Business Units Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3 Q4 TOTAL <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Upholstery Fabrics Flat Wovens Culp Textures 17,444 20,073 19,673 21,127 78,317 19,613 22,834 20,940 21,738 85,125 17,584 22,715 40,299 Rossville/Chromatex 0 0 14,330 16,717 31,047 15,140 15,758 16,397 16,470 63,765 15,358 17,960 33,318 17,444 20,073 34,003 37,844 109,364 34,753 38,592 37,337 38,208 148,890 32,942 40,675 0 0 73,617 Velvets/Prints 20,888 24,518 23,714 27,916 97,036 20,644 26,439 28,307 31,413 106,803 23,523 32,081 55,604 38,332 44,591 57,717 65,760 206,400 55,397 65,031 65,644 69,621 255,693 56,465 72,756 0 0 129,221 Mattress Ticking 8,251 9,395 9,531 11,472 38,649 10,952 13,414 12,147 15,820 52,333 15,892 17,916 33,808 46,583 53,986 67,248 77,232 245,049 66,349 78,445 77,791 85,441 308,026 72,357 90,672 0 0 163,029 Percent increase(decrease) from prior year: Business Units Upholstery Fabrics Flat Wovens Culp Textures (6.5) (5.2) 3.8 0.3 (1.9) 12.4 13.8 6.4 2.9 8.7 (10.3) (0.5) (5.1) Rossville/Chromatex N/A N/A N/A N/A N/A 100.0 100.0 14.4 (1.5) 105.4 1.4 14.0 7.8 (6.5) (5.2) 79.4 79.7 37.0 99.2 92.3 9.8 1.0 36.1 (5.2) 5.4 0.4 Velvets/Prints 7.4 16.5 10.0 8.3 10.5 (1.2) 7.8 19.4 12.5 10.1 13.9 21.3 18.1 0.6 5.7 42.5 40.4 23.1 44.5 45.8 13.7 5.9 23.9 1.9 11.9 7.3 Mattress Ticking 7.5 10.4 27.6 21.2 16.7 32.7 42.8 27.4 37.9 35.4 45.1 33.6 38.8 1.7 6.4 40.2 37.2 22.0 42.4 45.3 15.7 10.6 25.7 9.1 15.6 12.6 </TABLE> I-11
1 - ------------------------------------------------------------------------------ The following analysis of the financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this report. Overview For the three months ended October 29, 1995, net sales were $90.7 million, up 16% from $78.4 million in the year-earlier period. Net income for the quarter was $3.0 million, or $0.27 per share, compared with $2.8 million, or $0.25 per share, for the second quarter of fiscal 1995. Of the increase of $12.3 million in sales, $2.1 million was attributable to the contribution from Rayonese Textile, which was acquired during the fourth quarter of fiscal 1995 (see text below). The increase in sales, excluding that contribution, primarily reflected higher shipments of upholstery fabrics and mattress ticking to U.S.-based manufacturers and increased exports of upholstery fabrics. These same trends contributed to a gain in sales for the six months ended October 29, 1995 to $163.0 million, up 13% from $144.8 million in the first half of fiscal 1995. The company experienced a general slowing in demand from U.S.- based customers earlier in the year, but the pattern during the second quarter was more favorable. Although there remains some concern about the trend in consumer purchases of home furnishings over the next several quarters, the prevailing level of home mortgage rates appears to support a positive outlook for the industry. The current momentum in the company's incoming orders remains generally positive. Rayonese Textile Inc. Acquisition On March 6, 1995, the company completed the acquisition of Rayonese Textile Inc. The transaction has a preliminary estimated value of approximately $10.5 million and includes the purchase of 100% of the Rayonese common stock and the assumption of Rayonese's funded debt. The acquisition is described in more detail elsewhere in this report and in the company's filing with the Securities and Exchange Commission on Form 8-K filed December 23, 1994. Also see footnote 7 to the Consolidated Financial Statements. I-12
2 - ----------------------------------------------------------------------------- Analysis of Operations The table below sets forth certain items in the Statements of Income as a percentage of net sales. Income taxes are expressed as a percentage of income before income taxes. <TABLE> <CAPTION> Three Months Ended Six Months Ended October 29 October 30 October 29 October 30 1995 1994 1995 1994 <S> <C> <C> <C> <C> Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 82.2 81.9 82.6 82.5 ------------------------------------------------ Gross profit 17.8 18.1 17.4 17.5 Selling, general and administrative expenses 10.7 10.7 11.1 11.0 ------------------------------------------------ Income from operations 7.1 7.4 6.2 6.5 Interest expense 1.5 1.5 1.6 1.5 Interest income 0.0 0.0 0.0 0.0 Other expense (income), net 0.2 0.2 0.2 0.3 ------------------------------------------------ Income before income taxes 5.3 5.7 4.4 4.7 Income taxes (*) 37.8 37.8 37.0 37.5 ----------------------------------------------- Net Income 3.3% 3.6% 2.8% 2.9% =============================================== </TABLE> (*) Calculated as a percent of income before income taxes Three And Six Months Ended October 29, 1995 Compared With Three Months And Six Months Ended October 30, 1994 Sales by major business unit and export and foreign sales by geographic area for the three and six months are set forth in separate schedules on pages I-9 and I-10. I-13
3 - ----------------------------------------------------------------------------- Sales of upholstery fabrics for the second quarter were up $7.7 million (12%) from a year ago. Although sales of flat wovens increased somewhat for the second quarter, sales of these fabrics were essentially unchanged for the first half from a year ago. Sales of velvets/prints were up 21% for the second quarter, continuing the positive trend from earlier in the year. The gain in sales of mattress ticking for the second quarter primarily reflected higher shipments to existing accounts and to a lesser degree, a contribution of $2.1 million from Rayonese Textile, which was acquired on March 6, 1995. However, the U. S. bedding and home textiles markets have softened significantly since early August. This retail weakness is resulting in a sharply slower rate of growth in our mattress ticking business unit, which includes Rayonese. The company believes this softness is temporary and that business conditions will turn more positive in early 1996. Exports and international sales, consisting primarily of upholstery fabrics, increased to $19.6 million, up 34% from $14.6 million in the year-earlier period and a gain of 36% from the $14.4 million in the first quarter of fiscal 1996. Sales of Rayonese Textile are foreign sales and added to the increase on a year-to-year basis for the second quarter and first half. The base of the company's international customers is continuing to broaden, and, with the exception of South America, sales to each major geographic area were up through the first six months. Gross profit decreased as a percentage of net sales for the second quarter and first half due principally to higher prices for raw materials, a trend which began during the second half of fiscal 1995. The company has been able to offset some of the higher costs through increased operating efficiency as well as by raising prices. During the second quarter, a 2% price increase became effective for most of the company's fabrics and mattress ticking. Selling, general and administrative expenses rose slightly as a percentage of net sales for the first six months. Although the company is continuing to emphasize cost-containment programs, planned increases in expenses related to the design of new fabrics and to the company's marketing resources accounted for the higher ratio of expenses. Net interest expense for the second quarter increased to $1.4 million compared with $1.1 million in the year-earlier period. The increase for the second quarter as well as the first half principally reflects the additional borrowings related to the acquisition of Rayonese Textile and, to a lesser degree, higher interest rates over the past year. I-14
4 - ------------------------------------------------------------------------------ Other expense (income), net decreased for the first six months of fiscal 1996 due to a $100,000 credit from the favorable settlement of an environmental matter with the former owner of one of the company's facilities. The effective tax rate for the first six months declined to 37.0% compared to 37.5% last year. The lower tax rate for the first half was primarily due to a higher percentage of income being derived from international operations, which are taxed at a lower rate. Liquidity and Capital Resources The company continues to maintain a sound financial position. Funded long- and short-term debt increased to $76.7 million at the close of the second quarter, up from $72.9 million at the close of fiscal 1995. As a percentage of total capital (funded debt plus total shareholders' equity), the company's funded debt amounted to 50.4% as of October 29, 1995, down slightly from the end of fiscal 1995. The company's current ratio as of October 29, 1995 was 1.9 compared with 1.7 as of April 30, 1995. Shareholders' equity increased to $75.4 million as of October 29, 1995, compared with $71.4 million at the end of fiscal 1995. The company typically generates the majority of its cash from operating activities during the second fiscal half. During the first six months of fiscal 1996, the cash flow from operations totaled $1.4 million. Borrowings of $6.0 million under a revolving credit agreement were used to fund operations during the first six months. The company's borrowings are through financing arrangements with two banks which provide for a term loan of $44.0 million and a revolving credit line of $33.5 million. As of October 29, 1995, the company had $17.5 million in borrowings available under the revolving credit agreement. During the second quarter, the company's Board of Directors approved an increase in the capital expenditure budget for fiscal 1996 from $11.0 million to $15.5 million. The increase was due to the decision to accelerate two expansion projects originally planned for fiscal 1997. Capital spending during the first six months totaled $5.1 million. The company believes that cash flows from operations and funds available under existing credit facilities I-15
5 - ----------------------------------------------------------------------------- will be sufficient to fund capital expenditures as well as financing needs related to operations during the remainder of fiscal 1996. Inflation The company has experienced increases in raw material costs and the expense of other operating items. Although a price increase was implemented during the second quarter, competitive conditions have not allowed the company to fully offset these higher costs, a condition which has led to a slight decline in operating profit margins. The company believes inflationary pressure will impact profitability to a lesser degree during the remainder of fiscal 1996. I-16
PART II - OTHER INFORMATION - ------------------------------------------- ITEM 1. LEGAL PROCEEDINGS There are no legal proceedings that are required to be disclosed under this item. ITEM 2. CHANGE IN SECURITIES None ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the company was held in High Point, North Carolina on September 19, 1995. Of the 11,209,641 shares of common stock outstanding on the record date, 9,969,954 shares were present in person or by proxy. At the annual meeting, shareholders voted on: a) ratifying the appointment of KPMG Peat Marwick LLP as the independent auditors of the company for the current fiscal year; and b) the election of three directors: Howard L. Dunn, Jr., Earl N. Phillips, Jr., and Bland W. Worley. A. PROPOSAL TO RATIFY THE ELECTION OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS OF THE COMPANY FOR FISCAL YEAR 1995. For: 9,940,234 Against: 22,238 Abstain: 7,481 Broker Non-Votes: 0 B. PROPOSAL FOR ELECTION OF DIRECTORS: Howard L. Dunn, Jr. Bland W. Worley For: 9,758,798 For: 9,916,323 Authority Withheld: 211,156 Authority Withheld: 53,631 Broker Non Votes: 0 Broker Non Votes: 0 Earl N. Phillips, Jr. For: 9,702,916 Authority Withheld: 267,038 Broker Non Votes: 0 II-1
ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K <TABLE> <CAPTION> <S> <C> (a) The following exhibits are filed as part of this report or incorporated by reference herein. 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 and related Letter of Credit and Reimbursement Agreement dated December 1, 1988 with First Union National Bank of North Carolina were filed as Exhibit 10(n) to the company's Form 10-K for the year ended April 29, 1989, and are incorporated herein by reference. 10(b) Loan Agreement dated November 1, 1988 with the Alamance County Industrial Facilities and Pollution Control Financing Authority relating to Series A and B Industrial Revenue Refunding Bonds in the principal amount of $7,900,000, and related Letter of Credit and Reimbursement Agreement dated November 1, 1988 with First Union National Bank of North Carolina were filed as exhibit 10(o) to the company's Form 10-K for the year ended April 29, 1990, and are incorporated herein by reference. 10(c) Loan Agreement dated January 5, 1990 with the 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 II-2
$4,500,000, and related Letter of Credit and Reimbursement Agreement dated January 5, 1990 with First Union National Bank of North Carolina was filed as Exhibit 10(d) to the company's Form 10-K for the year ended April 19, 1990, filed on July 15, 1990, and is incorporated herein by reference. 10(d) Loan Agreement dated as of December 1, 1993 between Anderson County, South Carolina and the company relating to $6,580,000 Anderson County, South Carolina Industrial Revenue Bonds (Culp, Inc. Project) Series 1993, and related Letter of Credit and Reimbursement Agreement dated as of December 1, 1993 by and between the company and First Union National Bank of North Carolina were filed as Exhibit 10(o) to the Company's Form 10-Q for the quarter ended January 30, 1994, filed March 16, 1994, and is incorporated herein by reference. 10(e) Severance Protection Agreement, dated September 21, 1989, was filed as Exhibit 10(f) to the company's Form 10-K for the year ended April 29, 1990, filed on July 25 1990, and is incorporated herein by reference. 10(f) Lease Agreement, dated January 19, 1990, with Phillips Interests, Inc. was filed as Exhibit 10(g) to the company's Form 10-K for the year ended April 29, 1990, filed on July 25, 1990, and is incorporated herein by reference. 10(g) 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(h) 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(i) 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. II-3
10(j) 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(k) 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, and related Reimbursement and Security Agreement dated as of December 1, 1993 between the company and Wachovia Bank of North Carolina, National Association 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(l) 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, and related First Amendment to Letter of Credit and Reimbursement Agreement dated as of December 16, 1993 between First Union National Bank of North Carolina and the company was filed as Exhibit 10(q) to the company's Form 10-Q filed, filed on March 15, 1994, and is incorporated herein by reference. 10(m) First Amendment to Loan Agreement dated as of December 16, 1993 by and between Chesterfield County, South Carolina and the company, and related First Amendment to Letter of Credit and Reimbursement Agreement dated as of December 16, 1993 by and between First Union National Bank of North 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(n) Interest Rate Swap Agreements between company and NationsBank of Georgia (formerly The Citizens and Southern National Bank) dated July 14, 1989 were filed as Exhibit 10(t) to the company's Form 10-K, filed on July 27, 1994, and are incorporated herein by reference. 10(o) 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. II-4
10(p) 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(q) 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(r) 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(s) 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(t) 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(u) 1995 Amended and Restated Credit Agreement by and among Culp, Inc., First Union National Bank of North Carolina and Wachovia Bank of North Carolina, N.A., dated July 1, 1995 was filed as exhibit 10(y) 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) Copy of Second Amendment of Lease Agreement dated June 15, 1994 with Partnership 74 Associates. 10(w) Copy of Lease Agreement dated November 1, 1993 by and between the company and Chromatex, Inc. 10(x) Copy of Lease Agreement dated November 1, 1993 by and between the company and Chromatex Properties, Inc. II-5
10(y) Copy of Amendment to Lease Agreement dated May 1, 1994 by and between the company and Chromatex Properties, Inc. 10(z) Copy of Canada-Quebec Subsidiary Agreement on Industrial Development (1991), dated January 4, 1995. 27 Financial Data Schedule. </TABLE> (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 11, 1995, 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 July 30, 1995. II-6
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CULP, INC. (Registrant) Date: December 12, 1995 By: s/s Franklin N. Saxon --------------------- ------------------------------- Franklin N. Saxon Vice President and Chief Financial Officer (Authorized to sign on behalf of the registrant and also signing as principal accounting officer) Date: December 12, 1995 By: s/s Stephen T. Hancock ---------------------- ------------------------------- Stephen T. Hancock General Accounting Manager (Chief Accounting Officer) II-7
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Exhibit Article <C> <C> 10(v) Second Amendment of Lease Agreement dated June 15, 1994 with Partnership 74 Associates 10(w) Lease Agreement dated November 1, 1993 by and between the company and Chromatex, Inc. 10(x) Lease Agreement dated November 1, 1993 by and between the company and Chromatex Properties, Inc. 10(y) Amendment to Lease Agreement dated May 1, 1994 by and between the company and Chromatex Properties, Inc. 10(z) Canada-Quebec Subsidiary Agreement on Industrial Development (1991), dated January 4, 1995. </TABLE>