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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Date of Report (Date of earliest event reported) October 15, 1997
CULP, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-12781 56-1001967
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
101 South Main Street
High Point, North Carolina 27260
(Address of principal executive offices)
(910) 889-5161
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
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Item 5. Other Events
See attached Press Release (2 pages) and Financial Information Release (6
pages), both dated October 15, 1997, related to the acquisition of Artee
Industries, Inc.
Forward Looking Information. The discussion in this Form 8-K may contain
statements that could be deemed forward-looking statements, which are
inherently subject to risks and uncertainties. These statements are
characterized by such words as "expect," "believe," "estimate," "project," and
"plan" and their derivatives. Factors that could influence the matters
discussed include the financial performance of the business acquired, the
degree to which the company is successful in integrating the business acquired
into its operations, and general factors that influence the company's
business, including 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 adversely affect the company.
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 hereunto duly authorized.
CULP, INC.
(Registrant)
By: Franklin N. Saxon
Senior Vice President and
Chief Financial Officer
By: Stephen T. Hancock
Stephen T. Hancock
General Accounting Manager
Dated: October 15, 1997
CULP To Acquire Artee Industries
Page 2
October 15, 1997
- MORE -
FOR IMMEDIATE RELEASE
CULP TO ACQUIRE ARTEE INDUSTRIES
STRATEGIC ACQUISITION EXTENDS VERTICAL INTEGRATION
INTO SPUN YARN MANUFACTURING
ROBERT T. DAVIS TO JOIN CULP'S BOARD OF DIRECTORS
HIGH POINT, North Carolina (October 15, 1997) Culp, Inc. (NYSE: CFI) today
announced that it has signed a definitive asset purchase agreement to acquire
the business and certain assets relating to the spun yarn manufacturing
operations of Artee Industries, Incorporated, a privately-held company based
in Shelby, North Carolina. Terms of the agreement include an initial
transaction value of approximately $17 million, including stock, cash, notes
and the assumption of certain liabilities, and an additional payment of up to
approximately $7 million contingent upon the future profitability of the
acquired operations. Closing of the transaction, which is subject to certain
conditions set forth in the agreement, is expected about April 1998.
Subsequent to the completion of the acquisition, Robert T. Davis, chairman of
Artee Industries, is expected to be elected to Culp's Board of Directors,
expanding the number of directors to ten.
"This agreement represents an outstanding opportunity to extend Culp's
vertical integration into spun yarn manufacturing," remarked Robert G. Culp,
III, chief executive officer. "Artee Industries is a successful company that
supplies Culp and several other leading fabric manufacturers with a range of
spun yarns. A primary goal is to maintain the high level of customer service
that we and others have come to expect from Artee Industries. Our plans are
to establish the acquired operations as a separate business unit with the
present management and support the investments necessary to continue
expanding capacity and broadening the variety of yarns that Artee markets.
We are especially pleased with the prospect of having Bob Davis join Culp's
Board of Directors. He has established Artee as one of Culp's key suppliers,
and we look forward to his guidance in maximizing the value of these
acquired resources."
Robert T. Davis said, "We are delighted with this chance to join the
Culp organization. Culp has established clear leadership in our industry,
and we believe that Artee can contribute positively to the Company's
continued growth. We expect our marketing program to benefit significantly
from Culp's strong financial resources which will enable us to fund a
stepped-up effort to expand capacity and develop new yarns using a variety of
fibers."
Culp indicated that the assets being acquired include manufacturing
facilities in Shelby, Cherryville and Lincolnton, North Carolina. Artee
Industries manufactures and markets a variety of spun yarns, including
WrapSpun TM, open-end spun and chenille yarns. Artee Industries is currently
generating annualized net sales of approximately $36 million, of which
shipments to Culp account for approximately $20 million. Culp reported net
sales of $399 million for its most recent fiscal year ended April 27, 1997.
Culp added, "Although we extrude some of our own polypropylene yarn,
the addition of these assets from Artee Industries will enable us to start
controlling much of Culp's requirements for spun and chenille yarns.
Acquiring these resources is a sound strategic step for us. We have
increasingly been directing more of Culp's resources toward marketing fabrics
with innovative patterns and designs. Having an internal source for spun
yarns will blend well with the accelerated design initiatives of each of our
business units. We are confident there is considerable potential to link
Artee's resources with our other yarn manufacturing capabilities and produce
fabrics that embody innovative textures and styles. The end result should be
even more versatility to provide distinctive fabrics to a worldwide base of
manufacturers of furniture, bedding and other home furnishings."
-30-
CULP, INC. FINANCIAL INFORMATION RELEASE
ACQUISITION OF ARTEE INDUSTRIES, INC.
October 15, 1997
A. Acquisition Summary
On October 14,1997, Culp entered into a definitive ASSET PURCHASE AGREEMENT
to acquire the business and substantially all assets and to assume certain
liabilities of Artee Industries, Incorporated ("Artee"), a yarn manufacturer.
The transaction value at closing is estimated at $17.4 million, and includes the
issuance of new shares of Culp common stock, cash and a note, as well as the
repayment at closing of Artee's interest-bearing debt. Also, there is an
"earn-out" which provides the opportunity for additional consideration of up to
$7.2 million (60% in stock and 40 % in cash), based upon the profitability of
Artee during Culp's fiscal year ending May 2, 1999. The acquisition will be
accounted for as a purchase, and therefore the results of Artee from the closing
date will be included in Culp's results. Closing of the transaction is expected
on May 4, 1998, or possibly earlier, if certain profitability levels are
reached. Conditions to closing are set forth in the agreement and include, among
other things, the satisfactory completion of Culp's due diligence and a minimum
net worth requirement.
The company believes the transaction will be considered an "asset purchase"
for income tax purposes, and therefore any goodwill would be deductible for tax
purposes over a 15 year period, and assets acquired and liabilities assumed
would be recorded at their fair market values. The company estimates that income
taxes could be reduced by approximately $ 1.5 million as a result of the
deductibility of goodwill and the fair market value adjustment of the assets
purchased, particularly fixed assets.
B. What products does Artee manufacture and market; and what are annual
sales by product line?
The company believes Artee is the largest producer of WrapSpun TM yarns in
North America (WrapSpun is a trademark of Artee Industries, Inc.). These yarns
are made from both short and long staple fiber, principally producer-dyed
acrylic, for use primarily in the upholstery fabrics market, and, to a lesser
extent, the carpet and apparel markets. Artee also has significant capacity to
manufacture open-end ("OE") spun yarns from short staple fiber, principally
producer-dyed acrylic for use primarily in the upholstery fabrics market, and,
to a lesser extent, the hosiery and apparel markets. During April 1997 Artee
began a major capital investment program to install substantial capacity to
produce chenille yarns, which is expected to be completed within one year. These
yarns are produced primarily from spun (wrap or open-end) acrylic or
polypropylene, or from filament polypropylene, but other fibers can also be
utilized to produce the chenille yarns.
Projected sales for calendar 1997 are estimated at $36 million. Sales to
Culp are approximately $20 million of this total. Sales by product line for the
same period are estimated as follows: WrapSpun TM yarns for upholstery market --
$19 million; WrapSpun TM yarns for carpet and other markets -- $7 million;
open-end spun yarns -- $7 million; and chenille yarns -- $3 million. The
chenille capacity in terms of yarn sales is expected to be over $14 million
annually, once the expansion project noted above is completed.
C. Where is Artee located, how many employees are there, and how will it be
managed?
Artee owns and operates three plants located in Shelby, Cherryville and
Lincolnton, North Carolina, all of which are about 50 miles west of Charlotte,
NC. In total, these facilities have over 300,000 square feet of manufacturing
space and are located on about 33 acres of land, which provides ample room for
possible expansion. The equipment in each plant is relatively modern. All of
this equipment was purchased new or has been rebuilt as new within the last 12
years.
Artee has about 300 hourly employees which are not represented by any
union. There are approximately 30 salaried employees.
Culp plans to operate Artee as an independent business unit headed by the
present management team. Artee has been a supplier to Culp since 1984 when
Robert T. Davis acquired the company. Prior to acquiring Artee, Bob Davis had an
outstanding career with such companies as Collins & Aikman and Dixie Yarns ,
both of which he served in senior executive positions. Additionally, he is
currently a director of the American Textile Manufacturers Institute. Management
is comprised of a small, but effective and experienced team of textile
professionals as follows: Robert (Bob) T. Davis (Chairman) , Robert (Rob) L.
Davis, (President & CEO), Louis W. Davis (Vice President of Sales), and J.
Marshall Bradley (Vice President of Operations). This group of executives has
run Artee for the last ten years.
After closing of the transaction, Bob Davis is expected to join the Culp
board of directors. Bob Davis will bring to the Culp board a wealth of industry
knowledge regarding yarn manufacturing, particularly in the area of spun yarns.
D. What is the expected composition of the estimated transaction value at
the closing date (dollars in thousands)?
Fair value of purchased assets, net of current liabilities
assumed (1) $8,400
Interest-bearing debt with bank and shareholder
( to be repaid at closing) 8,500
Acquisition costs (legal, accounting, professional, etc) 500
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Estimated transaction value $ 17,400
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(1) Subject to possible adjustment based upon the audited closing
date balance sheet
Page 2 of 6
E. What are the provisions of the "earn-out" ?
An "earn-out" of between $2.2 million and $7.2 million is possible based
upon Artee's pretax income (calculated on an historical basis as defined in the
agreement) for Culp's fiscal year ending May 2, 1999. At $2.2 million of pretax
income , the "earn-out" consideration begins and the payout is at a level of
$2.2 million. At $5.2 million of pretax income, the "earn-out" consideration
ends and the payout is at a level of $7.2 million. The "earn-out" increases on a
pro rata basis above the minimum pretax income threshold of $2.2 million up to
the maximum pretax income amount of $5.2 million. Any payout under the
"earn-out" will be made 60% in stock and 40% in cash. The number of Culp shares
to be issued is based upon a price of $19.00 per share, subject to adjustment
under a "collar" provision based upon the price of Culp's stock at the time the
"earn-out" is paid. In the event that Culp stock is under $15.00 per share, the
company has the option to pay some or all of the stock portion in cash.
If the minimum threshold level of $ 2.2 million in pretax income were reached
in Culp's fiscal year 1999, the EPS contribution to Culp is estimated at $.05
(after accounting for additional interest expense and shares outstanding as
well as goodwill amortization and income taxes ).
F. How will the acquisition be financed at closing (dollars in thousands,
except share data)?
Bank debt (1) $ 10,400
Issuance of new Culp shares (284,211 @ $19.00) (2) 5,400
Note payable to sellers (3) 1,600
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Estimated transaction value $ 17,400
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(1) Source is Culp's revolving credit facility. This assumes all of Artee's
bank and shareholder debt will be repaid at closing, which is estimated at
$8.5 million. Another $1.9 million will be required at or near closing for
the cash payment at closing plus professional fees;
(2) Culp shares are planned to be freely tradable upon issuance except for
applicable volume limitations under rules of the SEC. If the price of Culp
stock is less than $15.00, Culp has the option to pay in cash rather than
stock;
(3) The key terms are: interest rate of 6.5%; payable upon completion of
the audited closing date balance sheet; and unsecured.
Page 3 of 6
G. What are certain estimated additional expense items related to Artee for
Culp's fiscal 1999 (dollars in thousands) ?
Interest expense $ 900
Depreciation 1,100
Amortization of goodwill ( $4,000/40 years) 100
H. What is the estimated opening balance sheet (dollars in thousands, except
share data)?
Accounts receivable(1) $ 4,000
Inventory 3,000
Other current assets 500
Property, plant equipment (2) 9,700
Goodwill 4,000
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Total assets 21,200
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Accounts payable (3,000)
Accrued expenses ( 800)
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Net assets $ 17,400
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Long-term debt (Culp's credit facility) $ 10,400
Seller note payable (Short term)(3) 1,600
Common stock (4) 5,400
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Transaction value (estimated at closing) $ 17,400
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(1) Includes an estimated $2,000 in receivables from Culp;
(2) Estimated; allocation of purchase price dependent upon asset
appraisals;
(3) Will be classified as a current liability because it is payable
upon completion of the audited closing date balance sheet, which
is expected in 60 to 90 days after closing;
(4) 284,211 shares, valued at $19.00 per share; subject to a "collar".
Page 4 of 6
I. What does Culp view as the principal business reasons for acquiring Artee
Industries ?
The following is a summary of Culp's goals and the key elements of its
business plan for Artee:
1. EXTEND CULP'S VERTICAL INTEGRATION INTO SPUN YARNS
a) manufacturing its own spun yarns is an important additional vertical
integration step for Culp; spun yarns are used as filling yarns in textured
woven fabrics and as pile (or face) yarn in velvets;
b) Culp believes that buying an existing operation is more cost effective
and certainly much faster than building the capability;
c) WrapSpun TM yarns for upholstery currently have strong demand because of
(1) the resurgence of velvets and (2) WrapSpun TM yarns used in chenille
(both factors apparently due to the consumers' desire for softer fabrics);
Artee is the largest producer of WrapSpunTM yarns for the home furnishings
industry;
d) Culp plans to transfer outside purchases of open-end ("OE") and
WrapSpunTM yarns to Artee over the next two years as additional capacity
becomes available;
e) captive spun yarn production should lower raw material costs.
2. INCREASE CAPACITY TO PRODUCE CHENILLE YARNS
a) investment to capitalize on expected continued growth in popularity of
chenille fabrics;
b) particular emphasis planned for WrapSpunTM chenille yarns which yield
especially soft fabrics;
c) expansion underway at Artee will complement planned installation of
chenille capacity at Culp in the current fiscal year. Culp's chenille
capacity will be consolidated at Artee;
d) increased capacity for chenille yarns will provide advantages to Culp in
lower costs, improved customer service and design flexibility.
3. EXPAND AND ENHANCE CULP'S YARN DEVELOPMENT CAPABILITIES
a) control of spun yarn capacity will complement Culp's overall initiative
to develop and market more innovative, value-added fabrics. Internal
capacity will facilitate working with furniture manufacturers to develop
distinctive patterns, textures and designs;
b) Culp plans to expand its yarn development staff. Development of new
yarns will mesh with the work within each of the design groups for our
business units;
c) enhanced yarn development program should match well with Culp's broad
manufacturing resources. New capabilities at Artee should complement
previous vertical integration steps including extrusion of filament and
staple fiber, OE spinning of rayon, spinning of novelty yarns and yarn
dyeing capabilities.
Page 5 of 6
4. ACHIEVE INCREASING LEVEL OF OUTSIDE YARN SALES
a) Artee will operate as an independent business unit, supplying both Culp
and other fabric manufacturers of upholstery and apparel. The management
team that has successfully operated Artee will remain in place and has a
strategic imperative to grow outside yarn sales;
b) increased focus on developing innovative yarns should enhance value of
Artee to its customer base, particularly in high quality, specialty yarns;
c) investment in increased capacity will enhance customer service and
support a sound base of outside customers.
J. What is Artee's current financial performance ?
Artee has historically generated EBITDA margins of between 6 % and 9 % of
sales. Results in 1997 have been significantly below that level of
profitability (currently near break-even) due to several non-recurring
factors. Culp and Artee believe that operating results will gradually
improve over the next twelve months as these one-time factors are overcome.
The non-recurring items that have affected Artee's 1997 results are:
1. a total plant relocation during the first 6 months of 1997 from
Rossville, GA to Cherryville, NC with none of the employees moving to the
new facility; productivity is only now approaching 65-70 % of the former
plant's production levels; Artee expects to reach 100 % by the end of April
1998;
2. a partial plant relocation of the OE spinning operation also during the
first 6 months of calendar 1997 from Shelby, NC to Cherryville, NC to
provide manufacturing floor space for the chenille expansion at Shelby, NC;
many employees did move to the new facility because it was only about 20
miles away; productivity is about 80-85 % of the new plant's production
capacity; Artee expects to reach 100 % early in calendar 1998;
3. a sales decline in the long staple WrapSpun TM carpet yarns as different
yarn systems are being used in the carpet industry; profitability of these
yarns had been falling over the last two years; Artee has initiated a
strategy to replace the majority of this production with WrapSpun TM yarns
for the upholstery industry , which are in greater demand and carry higher
margins. Artee anticipates it will probably take 6 to 12 months to fully
replace the WrapSpun TM carpet yarn business with its new WrapSpun
upholstery products;
4. start-up costs of the chenille expansion project. Artee began this
project in early 1997 and is now about a quarter of the way through the
project and is just recently realizing near-standard production levels from
the machinery installed. Artee plans to completely install all of the new
machinery by the end of April 1998.
Culp believes that sound strategic actions are currently in place that are
expected to yield gradually improving results .
(WrapSpun is a trademark of Artee Industries, Inc.)
Page 6 of 6