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 November 2, 1997

                          Commission File No. 0-12781


                                  CULP, INC.

            (Exact name of registrant as specified in its charter)

 
            NORTH CAROLINA                              56-1001967
  (State or other jurisdiction of          (I.R.S. Employer Identification No.)
 incorporation or other organization)

 
   101 S. Main St., High Point, North Carolina          27261-2686
   (Address of principal executive offices)             (zip code)

                                (910) 889-5161
             (Registrant's telephone number, including area code)



Indicate  by check  mark  whether  the  registrant  (1) has filed all  reports
required  to be filed by Section  13 of the  Securities  Exchange  Act of 1934
during  the  preceding  12  months  and (2) has  been  subject  to the  filing
requirements for at least the past 90 days.

                                YES X    NO   


          Common shares outstanding at November 2, 1997:  12,683,103
                                Par Value: $.05




                          INDEX TO FORM 10-Q
                             November 2, 1997
 
Part I -  Financial Information.                                         Page
- --------------------------------------------                            ------
 
Item 1.    Consolidated Financial Statements:
 
Statements of Income--Three and Six Months Ended                         I-1
November 2, 1997 and October 27, 1996

Balance Sheets-November 2, 1997, October 27, 1996, and April 27, 1997    I-2

Statements of Cash Flows---Six Months Ended November 2, 1997             I-3
and October 27, 1996

Statements of Shareholders' Equity                                       I-4

Notes to 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 Operation

Part II - Other Information
- -------------------------------------
Item 1.   Legal Proceedings                                              II-1

Item 2.   Change 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-7

Signatures                                                               II-8


 
 


                                   CULP, INC.
                         CONSOLIDATED INCOME STATEMENTS
 FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 2, 1997 AND OCTOBER 27, 1996

                (Amounts in Thousands, Except for Per Share Data)

THREE MONTHS ENDED (UNAUDITED) ---------------------------------------------------------------------- Amounts Percent of Sales -------------------------- -------------------------- November 2, October 27, % Over 1997 1996 (Under) 1998 1997 ------------ ------------ ------------ ------------ ------------ Net sales $ 122,926 105,204 16.8 % 100.0 % 100.0 % Cost of sales 100,191 86,082 16.4 % 81.5 % 81.8 % ------------ ------------ ------------ ------------ ------------ Gross profit 22,735 19,122 18.9 % 18.5 % 18.2 % Selling, general and administrative expenses 13,632 11,704 16.5 % 11.1 % 11.1 % ------------ ------------ ------------ ------------ ------------ Income from operations 9,103 7,418 22.7 % 7.4 % 7.1 % Interest expense 1,820 1,242 46.5 % 1.5 % 1.2 % Interest income (72) (60) 20.0 % (0.1) % (0.1) % Other expense (income), net 425 301 41.2 % 0.3 % 0.3 % ------------ ------------ ------------ ------------ ------------ Income before income taxes 6,930 5,935 16.8 % 5.6 % 5.6 % Income taxes * 2,425 2,225 9.0 % 35.0 % 37.5 % ------------ ------------ ------------ ------------ ------------ Net income $ 4,505 3,710 21.4 % 3.7 % 3.5 % ============ ============ ============ ============ ============ Average shares outstanding 12,668 11,312 12.0 % Net income per share $0.36 $0.33 9.1 % Dividends per share $0.0350 $0.0325 7.7 %
SIX MONTHS ENDED (UNAUDITED) ---------------------------------------------------------------------- Amounts Percent of Sales -------------------------- -------------------------- November 2, October 27, % Over 1997 1996 (Under) 1998 1997 ------------ ------------ ------------ ------------ ------------ Net sales $ 222,424 195,733 13.6 % 100.0 % 100.0 % Cost of sales 182,956 160,691 13.9 % 82.3 % 82.1 % ------------ ------------ ------------ ------------ ------------ Gross profit 39,468 35,042 12.6 % 17.7 % 17.9 % Selling, general and administrative expenses 24,548 22,568 8.8 % 11.0 % 11.5 % ------------ ------------ ------------ ------------ ------------ Income from operations 14,920 12,474 19.6 % 6.7 % 6.4 % Interest expense 3,100 2,424 27.9 % 1.4 % 1.2 % Interest income (162) (117) 38.5 % (0.1) % (0.1) % Other expense (income), net 667 696 (4.2) % 0.3 % 0.4 % ------------ ------------ ------------ ------------ ------------ Income before income taxes 11,315 9,471 19.5 % 5.1 % 4.8 % Income taxes * 3,960 3,551 11.5 % 35.0 % 37.5 % ------------ ------------ ------------ ------------ ------------ Net income $ 7,355 5,920 24.2 % 3.3 % 3.0 % ============ ============ ============ ============ ============ Average shares outstanding 12,649 11,304 11.9 % Net income per share $0.58 $0.52 11.5 % Dividends per share $0.0700 $0.0650 7.7 % * Percent of sales column is calculated as a % of income before income taxes.
CULP, INC. CONSOLIDATED BALANCE SHEETS NOVEMBER 2, 1997, OCTOBER 27, 1996 AND APRIL 27, 1997 (Unaudited, Amounts in Thousands)
Amounts Increase ---------------------------- November 2, October 27, (Decrease) * April 27, ------------------------ 1997 1996 Dollars Percent 1997 -------------- ----------- ----------- --------- -------- Current assets Cash and cash investments $ 1,209 744 465 62.5 % 830 Accounts receivable 74,314 52,202 22,112 42.4 % 56,691 Inventories 70,192 52,300 17,892 34.2 % 53,463 Other current assets 6,136 3,697 2,439 66.0 % 5,450 -------------- ----------- ----------- --------- -------- Total current assets 151,851 108,943 42,908 39.4 % 116,434 Restricted investments 8,258 5,379 2,879 53.5 % 11,018 Property, plant & equipment, net 107,377 80,316 27,061 33.7 % 91,231 Goodwill 49,778 22,568 27,210 120.6 % 22,262 Other assets 3,715 2,321 1,394 60.1 % 3,007 -------------- ----------- ----------- --------- -------- Total assets $ 320,979 219,527 101,452 46.2 % 243,952 ============== =========== =========== ========= ======== Current Liabilities Current maturities of long-term dept $ 100 7,100 (7,000) (98.6)% 100 Accounts payable 36,709 26,936 9,773 36.3 % 29,903 Accrued expenses 15,175 16,841 (1,666) (9.9) % 15,074 Income taxes payable 1,034 836 198 23.7 % 1,580 -------------- ----------- ----------- --------- -------- Total current liabilities 53,018 51,713 1,305 2.5 % 46,657 Long-term debt 139,991 72,891 67,100 92.1 % 76,541 Deferred income taxes 9,965 8,088 1,877 23.2 % 9,965 -------------- ----------- ----------- --------- -------- Total liabilities 202,974 132,692 70,282 53.0 % 133,163 Shareholders' equity 118,005 86,835 31,170 35.9 % 110,789 -------------- ----------- ----------- --------- -------- Total liabilities and shareholders' equity $ 320,979 219,527 101,452 46.2 % 243,952 ============== =========== =========== ========= ======== Shares outstanding 12,687 11,339 1,348 11.9 % 12,609 ============== =========== =========== ========= ========
* Derived from audited financial statements. CULP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 2, 1997 AND OCTOBER 27, 1996 (Unaudited, Amounts in Thousands)
SIX MONTHS ENDED -------------------------- Amounts ------------------------- November 2, October 27, 1997 1996 ----------- ------------ Cash flows from operating activities: Net income $ 7,355 5,920 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 6,869 6,321 Amortization of intangible assets 533 444 Provision for deferred income taxes 0 0 Changes in assets and liabilities, net of the effects business acquired: Accounts receivable (17,623) (164) Inventories (11,813) (4,905) Other current assets (686) 470 Other assets (188) (22) Accounts payable 10,668 3,220 Accrued expenses 295 4,277 Income taxes payable (546) 639 ----------- ----------- Net cash provided by (used in)operating activities (5,136) 16,200 ----------- ------------ Cash flows from investing activities: Capital expenditures (19,216) (9,676) Purchases of restricted investments (8,662) (107) Purchase of investments to fund deferred compensation liability (581) 0 Sale of restricted investments 11,422 2 Business acquired (36,628) 0 ----------- ------------ Net cash used in investing activities (53,665) (9,781) ----------- ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt 63,500 1,000 Principal payments on long-term debt (50) (3,050) Change in accounts payable-capital expenditures (3,862) (3,592) Dividends paid (889) (735) Proceeds from common stock issued 481 204 ----------- ------------ Net cash provided by (used in) financing activities 59,180 (6,173) ----------- ------------ Increase in cash and cash investments 379 246 Cash and cash investments at beginning of period 830 498 ----------- ------------ Cash and cash investments at end of period $ 1,209 744 =========== ============
Culp, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except per share data)
Capital Contributed Total Common Stock in Excess Retained Shareholders' Shares Amount of Par Value Earnings Equity - ----------------------------------------------------------------------------------------------------- Balance, April 28, 1996 11,290,300 $ 565 $ 16,878 64,003 $ 81,446 Proceeds from public offering of 1,200,000 shares 1,200,000 60 16,235 16,295 Cash dividends (1,513) (1,513) ($0.13 per share) Net income 13,770 13,770 Common stock issued in connection with stock option plan 118,459 5 786 791 - ----------------------------------------------------------------------------------------------------- Balance, April 27, 1997 12,608,759 630 33,899 76,260 110,789 Cash dividends ($0.07 per share) (889) (889) Net income 7,355 7,355 Common stock issued in connection with stock option plans 78,344 4 746 750 - ----------------------------------------------------------------------------------------------------- Balance, November 2, 1997 12,687,103 $ 634 $ 34,645 82,726 $ 118,005 =====================================================================================================
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which the management of the company considers necessary for a fair statement of results for the interim periods. Certain amounts for fiscal year 1997 have been reclassified to conform with the fiscal year 1998 presentation. Such reclassifications had no effect on net income as previously reported. All such adjustments are of a normal recurring nature. The results of operations for the three months and six months ended November 2, 1997 are not necessarily indicative of the results to be expected for the full year. ================================================================================ 2. Accounts Receivable A summary of accounts receivable follows (dollars in thousands): - -------------------------------------------------------------------------------- November 2, 1997 April 27, 1997 - -------------------------------------------------------------------------------- Customers $ 76,270 $ 58,568 Allowance for doubtful accounts (1,297) (1,500) Reserve for returns and allowances ( 659) (377) - -------------------------------------------------------------------------------- $ 74,314 $ 56,691 ================================================================================ 3. Inventories Inventories are carried at the lower of cost or market. Cost is determined for substantially all inventories using the LIFO (last-in, first-out) method. A summary of inventories follows (dollars in thousands): - -------------------------------------------------------------------------------- November 2, 1997 April 27, 1997 - -------------------------------------------------------------------------------- Raw materials $ 42,298 $ 32,025 Work-in-process 3,665 4,627 Finished goods 28,256 20,212 - -------------------------------------------------------------------------------- Total inventories valued at FIFO cost 74,219 56,864 Adjustments of certain inventories to the LIFO cost method (4,027) (3,401) - -------------------------------------------------------------------------------- $ 70,192 $ 53,463 ================================================================================ 4. Restricted Investments Restricted investments were purchased with proceeds from industrial revenue bond issues and are invested pending application of such proceeds to project costs or repayment of the bonds. The investments are stated at cost which approximates market value. 5. Accounts Payable A summary of accounts payable follows (dollars in thousands): - -------------------------------------------------------------------------------- November 2, 1997 April 27, 1997 - -------------------------------------------------------------------------------- Accounts payable-trade $ 34,824 $ 24,156 Accounts payable-capital expenditures 1,885 5,747 - -------------------------------------------------------------------------------- $ 36,709 $ 29,903 ================================================================================ 6. Accrued Expenses A summary of accrued expenses follows (dollars in thousands): - ------------------------------------------------------------------------------- November 2, 1997 April 27, 1997 - ------------------------------------------------------------------------------- Compensation and benefits $ 10,564 $ 10,217 Other 4,611 4,857 - ------------------------------------------------------------------------------- $ 15,175 $ 15,074 =============================================================================== 7. Long-term Debt A summary of long-term debt follows (dollars in thousands): - -------------------------------------------------------------------------------- November 2, 1997 April 27, 1997 - -------------------------------------------------------------------------------- Industrial revenue bonds and other obligations $ 40,091 $ 31,641 Revolving credit facility 90,000 41,000 Revolving line of credit 4,000 4,000 Seller note payable 6,000 -0- - -------------------------------------------------------------------------------- $ 140,091 $ 76,641 Less current maturities (100) (100) - -------------------------------------------------------------------------------- $ 139,991 $ 76,541 ================================================================================ On April 23, 1997, the company entered into a revolving credit agreement (the "Credit Agreement") providing for a five-year unsecured multi-currency revolving credit facility with a syndicate of banks in the United States and Europe. The Credit Agreement provides for a revolving loan commitment of $125,000,000 which declines $5,000,000 at each of four annual dates beginning in April 1998. The agreement requires payment of a quarterly facility fee in advance. The company has a $4,000,000 revolving line of credit which expires on November 30, 1998 and will automatically be extended for an additional three-month period on each, February 28, May 31, August 31, and November 30, unless the bank notifies the company that the line of credit will not be extended. On July 17, 1997, the company obtained $8,500,000 of new industrial revenue bond (IRB) financing related to the expansion of its plant and equipment at its Lumberton, North Carolina facility. The final maturity of this IRB is the year 2014. The remaining IRBs are substantially due in one-time payments at various dates from 2008 to 2013 and are collateralized by restricted investments of $8,258,000 and letters of credit for $41,341,000 at November 2, 1997. The company's loan agreements require, among other things, that the company maintain compliance with certain positive and negative financial covenants. At November 2, 1997, the company was in compliance with these required financial covenants. At November 2, 1997, the company had three interest rate swap agreements with a bank in order to reduce its exposure to floating interest rates on a portion of its variable rate borrowings. The following table summarizes certain data regarding the interest rate swaps. notational amounts interest rate expiration date $15,000,000 7.3% April 2000 $ 5,000,000 6.9% June 2002 $ 5,000,000 6.6% July 2002 The company believes it could terminate these agreements as of November 2, 1997 for approximately $457,000. Net amounts paid under these agreements increased interest expense by approximately $120,000 in 1998 and $142,000 in 1997. Management believes the risk of incurring losses resulting from the inability of the bank to fulfill its obligation under the interest rate swap agreements to be remote and that any losses incurred would be immaterial. 8. Cash Flow Information Payments for interest and income taxes during the period were (dollars in thousands) - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- . Interest $ 3,115 $ 2,411 Income taxes 4,488 2,913 ================================================================================ 9. Foreign Exchange Forward Contracts The company generally enters into foreign exchange forward and option contracts as a hedge against its exposure to currency fluctuations on firm commitments to purchase certain machinery and equipment and raw materials. Machinery and equipment and raw material purchases hedged by foreign exchange forward contracts are valued by using the exchange rate of the applicable foreign exchange forward contract. The contracts outstanding at November 2, 1997 mature at various dates in fiscal 1998. 10. Acquisition On August 5, 1997, the company completed the purchase of the business and certain assets relating to the upholstery fabric businesses operating as Phillips Weaving Mills, Phillips Velvet Mills, Phillips Printing and Phillips Mills. Based on the terms of the asset purchase agreement, the transaction is valued at approximately $37 million, which included cash, seller debt retired, a note payable to seller and the acquisition costs. The consideration for the acquisition also included stock options and an agreement for contingent payments to the selling companies within three years following closing that could range from $0 to $5,500,000, depending upon the future sales performance of the Phillips jacquard fabric product line. The transaction has an effective date of August 4, 1997. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair market values at the date of acquisition. The cost in excess of net assets of business acquired will be amortized on a straight-line basis over 40 years. The preliminary estimated fair values of assets and liabilities acquired are summarized below: Inventories $ 4,916 Property, plant and equipment 3,799 Cost in excess of net assets of business acquired 28,732 Accrued expenses (467) --------------- $ 37,000 =============== 11. Subsequent Event On October 14, 1997, Culp agreed to acquire the business and substantially all the asets relating to the yarn manufacturing business operating as Artee Industries, Incorporated. Based on the value of the definitive asset purchase agreement, the transaction value at closing is estimated to be $17.4 million (including issuance of Culp common stock, cash, a note and assumption of certain liabilities). Terms of the purchase also provide the opportunity for additional consideration of up to $7.2 million contingent upon the profitability of Artee during Culp's fiscal year ending May 2, 1999. The acquisition will be accounted for as a purchase, and the results of Artee will therefore be included in Culp's results from the closing date. Closing of the transaction is expected on May 4, 1998, or possibly earlier, if certain profitability levels are reached. Closing is contingent upon customary conditions, including the satisfactory completion of Culp's due diligence and Artee's compliance with a minimum net worth requirement. 12. New Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings per Share" effective for financial statements issued for interim and annual periods ending after December 15, 1997. The new standard specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly-held common stock, and early adoption of the standard is prohibited. The company believes the adoption of this accounting standard will not have a material impact on earnings per share. CULP, INC. SALES BY PRODUCT CATEGORY/BUSINESS UNIT FOR THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 2, 1997 AND OCTOBER 27, 1996 (Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED) ------------------------------------------------------------ Amounts Percent of Total Sales -------------------- ----------------------- November 2, October 27, % Over Product Category/Business Unit 1997 1996 (Under) 1998 1997 - ------------------------------ --------- --------- ------------ ---------- ---------- Upholstery Fabrics Culp Textures $ 24,454 24,001 1.9 % 19.9 % 22.8 % Rossville/Chromatex 21,602 21,722 (0.6) % 17.6 % 20.6 % --------- --------- ------------ ---------- ---------- 46,056 45,723 0.7 % 37.5 % 43.5 % Velvets/Prints 43,928 40,233 9.2 % 35.7 % 38.2 % Phillips 10,725 0 100.0 % 8.7 % 0.0 % --------- --------- ------------ ---------- ---------- 100,709 85,956 17.2 % 81.9 % 81.7 % Mattress Ticking Culp Home Fashions 22,217 19,248 15.4 % 18.1 % 18.3 % --------- --------- ------------ ---------- ---------- * $ 122,926 105,204 16.8 % 100.0 % 100.0 % ========= ========= ============ ========== ==========
SIX MONTHS ENDED (UNAUDITED) ------------------------------------------------------------ Amounts Percent of Total Sales -------------------- ----------------------- November 2, October 27, % Over Product Category/Business Unit 1997 1996 (Under) 1998 1997 - ------------------------------ --------- --------- ------------ ---------- ---------- Upholstery Fabrics Culp Textures $ 46,147 44,802 3.0 % 20.7 % 22.9 % Rossville/Chromatex 39,723 39,887 (0.4)% 17.9 % 20.4 % --------- --------- ------------ ---------- ---------- 85,870 84,689 1.4 % 38.6 % 43.3 % Velvets/ Prints 82,325 75,100 9.6 % 37.0 % 38.4 % Phillips 10,725 0 100.0 % 4.8 % 0.0 % --------- --------- ------------ ---------- ---------- 178,920 159,789 12.0 % 80.4 % 81.6 % Matress Ticking Culp Home Fashions 43,504 35,944 21.0 % 19.6 % 18.4 % --------- --------- ------------ ---------- ---------- * $ 222,424 195,733 13.6 % 100.0 % 100.0 % ========= ========= ============ ========== ==========
*U.S. sales were $87,622 and $79,304 for the three months of fiscal 1998 and fiscal 1997, respectively; and $162,029 and $149,860 for the six months of fiscal 1998 and fiscal 1997, respectively. The percentage increase in U.S. sales was 10 % for the three months and an increase of 8 % for the six months. CULP, INC. INTERNATIONAL SALES BY GEOGRAPHIC AREA FOR THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 2, 1997 AND OCTOBER 27, 1996 (Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED) ------------------------------------------------------------------ Amounts Percent of Total Sales ------------------------- ------------------------- November 2, October 27, % Over Geographic Area 1997 1996 (Under) 1998 1997 - ---------------------------- ------------ ----------- ------------ ----------- ---------- North America (Excluding USA) $ 8,162 8,016 1.8 % 23.1 % 30.9 % Europe 6,624 5,716 15.9 % 18.8 % 22.1 % Middle East 7,439 5,079 46.5 % 21.1 % 19.6 % Far East & Asia 9,720 5,019 93.7 % 27.5 % 19.4 % South America 1,216 632 92.4 % 3.4 % 2.4 % All other areas 2,143 1,438 49.0 % 6.1 % 5.6 % ------------ ----------- ------------ ----------- ---------- $ 35,304 25,900 36.3 % 100.0 % 100.0 % ============ =========== ============ =========== ==========
SIX MONTHS ENDED (UNAUDITED) ------------------------------------------------------------------ Amounts Percent of Total Sales ------------------------- ------------------------- November 2, October 27, % Over Geographic Area 1997 1996 (Under) 1998 1997 - ---------------------------- ------------ ----------- ------------ ----------- ---------- North America (Excluding USA) $ 15,206 14,073 8.1 % 25.2 % 30.7 % Europe 11,125 10,483 6.1 % 18.4 % 22.9 % Middle East 14,003 9,156 52.9 % 23.2 % 20.0 % Far East & Asia 15,662 8,815 77.7 % 25.9 % 19.2 % South America 1,462 999 46.3 % 2.4 % 2.2 % All other areas 2,937 2,347 25.1 % 4.9 % 5.1 % ------------ ----------- ------------ ----------- ---------- $ 60,395 45,873 31.7 % 100.0 % 100.0 % ============ =========== ============ =========== ==========
International sales, and the percentage of total sales, for each of the last six fiscal years follows: fiscal 1992-$ 34,094 (18%); fiscal 1993-$ 40,729 (20%); fiscal 1994-$ 44,038 (18%); fiscal 1995-$ 57,971 (19%); fiscal 1996-$ 77,397 (22%); and fiscal 1997-$ 101,571 (25%). International sales for the second quarter represented 29% and 25% for 1998 and 1997, respectively. Year-to-date international sales represented 27% and 23% of total sales for 1998 and 1997, respectively. Certain amounts for fiscal year 1997 have been reclassified to conform with the fiscal year 1998 presentation. Additionally, certain amounts were reclassified from the fiscal year 1998 first quarter presentation. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations should be read in conjunction with the Financial Statements and Notes and other exhibits included elsewhere in this report. Overview For the three months ended November 2, 1997, net sales rose 17% to $122.9 million compared with $105.2 million in the year-earlier period. Net income for the quarter totaled $4.5 million, or $0.36 per share, compared with $3.7 million, or $0.33 per share, for the second quarter of fiscal 1997. The increase in sales reflected incremental sales from the acquisition of assets related to Phillips Mills, significantly higher shipments of mattress ticking and, to a lesser degree, a gain in overall sales of upholstery fabrics to both U.S.-based and international manufacturers. The growth in demand in some product categories and to U.S. manufacturers of residential furniture as a group began slowing during the second half of fiscal 1997. That pattern has continued thus far into fiscal 1998. Business with U.S.-based customers increased 10% from a year ago while sales to customers outside the United States rose 36% for the quarter. International sales are continuing to account for an increasing percentage of the company's total sales. Demand for the company's products is dependent on the various factors which affect consumer purchases of upholstered furniture and bedding, including housing starts and sales of existing homes, the level of consumer confidence, prevailing interest rates for home mortgages and the availability of consumer credit. Three and Six Months Ended November 2, 1997 Compared With Three Months and Six Months Ended October 27, 1996 Net Sales. Net sales for the second quarter increased by $17.7 million, or 17%, compared with the year-earlier period. The Company's sales of upholstery fabrics increased $14.7 million, or 17% in the second quarter compared with the prior year. For the first six months, net sales increased by $26.7 million, or 14%, compared with the year-earlier period. Upholstery fabrics sales increased $19.1 million, or 12% in the first six months compared with the same period of last year. The principal factor contributing to the increased sales for the second quarter and first six months was the contribution of $10.7 million in sales from the assets purchased from Phillips Mills effective August 4, 1997. Sales from the Velvets/Prints business unit were up for the quarter and year to-date periods from the prior year. This unit has continued to benefit from increased international sales, but the strength in the U.S. dollar relative to other international currencies has placed pressure on pricing thus far this fiscal year. Sales from the Culp Textures business unit were up slightly for the quarter, but shipments by the Rossville/Chromatex unit were slightly lower. Sales from the Culp Home Fashions unit, which principally consist of mattress ticking and bedding products, rose 15.4% from last year's second quarter and 21.0% from last year's first half. The overall growth of business within the United States was not as strong as a year ago, reflecting a trend that initially became apparent during the second half of fiscal 1997. Sales to U.S-based customers rose 10% for the second quarter and 8% for the first six months in comparison to the same periods of 1997. However, excluding the incremental sales from Phillips, sales to U.S.-based customers decreased slightly for the quarter and increased 2% for the first half compared to last year. International sales, consisting primarily of upholstery fabrics increased to $35.3 million for the quarter, up 36.3% from a year ago, and reached $60.4 million for the first six months, up 31.7% from last year. International shipments accounted for 29% and 27% of total sales for the quarter and six months, respectively. Gross Profit and Cost of Sales. Gross profit for the second quarter increased by $3.6 million and amounted to 18.5% of net sales compared with 18.2% a year ago. For the first six months, gross profit increased by $22.3 million and amounted to 17.7% of net sales compared with 17.9% a year ago. The company's gross profit benefited significantly during the second quarter and first six months from its international sales growth and the operation of its jacquard greige goods facility in Canada. Factors which adversely affected gross profit during the second quarter and first half were slower growth in demand from U.S. manufacturers of residential furniture, start-up costs related to the expansion of flock coating and fabric printing in the Velvets/Prints business unit and the integration of the Phillips velvet products into existing Culp facilities. The company believes the majority of the start-up and transition issues are now resolved. Selling, general and administrative expenses. Selling, general and administrative expenses were unchanged as a percentage of net sales at 11.1% for the quarter and down for the first half to 11.0% from 11.5% a year ago. The company is continuing to incur higher expenses related to expanded resources for designing new fabrics and increased selling commissions associated with international sales. The inclusion of the expenses from Phillips Mills also affected this comparison. These factors were offset in part by steps to contain operating expenses and by lower accruals as a percentage of net sales for incentive-based compensation plans. Interest Expense. Net interest expense for the second quarter of $1.7 million was up from $1.2 million and for the first six months of $2.9 million was up from $2.3 million a year ago due principally to borrowings related to the acquisition of Phillips Mills that was completed on August 4, 1997. Other Expense. Other expense increased $124,000 for the second quarter compared with a year ago, principally due to incremental amortization of goodwill associated with the acquisition of Phillips Mills. Earnings Per Share. Earnings per share for the second quarter of fiscal 1998 totaled $0.36 compared with $0.33 a year ago. For the first half, ernings per share were $0.58 compared with $0.52 last year. The weighted average number of outstanding shares increased 12.0% from a year ago, principally due to the Company's stock offering completed in February 1997. Liquidity and Capital Resources Liquidity. Cash and cash investments were $1.2 million as of November 2, 1997 compared with $830,000 at the end of fiscal 1997. Funded debt (long-term debt, including current maturities, less restricted investments) increased to $131.8 million at the close of the second quarter, up from $74.6 million as of October 27, 1996 and $65.6 million at the end of fiscal 1997. Borrowings related to the acquisition of Phillips Mills were the primary reason for the higher debt. As a percentage of total capital (funded debt plus total shareholders' equity), the company's borrowings amounted to 52.8% as of November 2, 1997 compared with 46.2% as of October 27, 1996 and 37.2% at the end of fiscal 1997. The company's working capital as of November 2, 1997 was $98.8 million compared with $69.8 million at the close of fiscal 1997. Cash of $5.1 million was used to fund operating activities, principally increases in inventories and accounts receivable, during the first six months. Capital expenditures during the first half totaled $19.2 million. Financing activities, principally long-term borrowings, provided $59.2 million in cash to fund operating activities, the acquisition of Phillips Mills and capital investments. Financing Arrangements. As of November 2, 1997, the company had outstanding balances of $90 million under a $125 million syndicated five-year, unsecured, multi-currency revolving credit facility. The Company also has a total of $40 million in outstanding industrial revenue bonds ("IRBs") which have been used to finance capital expenditures. The IRBs are collateralized by restricted investments of $8.3 million as of November 2, 1997 and letters of credit for the outstanding balance of the IRBs and certain interest payments due thereunder. Because of federal tax laws, additional IRB financing will not be available to the Company until the amount of its outstanding IRBs is substantially reduced. The company's loan agreements require, among other things, that the company maintain certain financial ratios. As of November 2, 1997, the company was in compliance with the required financial covenants. As of November 2, 1997, 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 machinery, equipment and certain raw materials when those commitments are denominated in foreign currencies. Capital Expenditures. The company maintains a significant program of capital expenditures designed to increase capacity as needed, enhance manufacturing efficiencies through modernization and increase the company's vertical integration. The company currently plans to spend approximately $36 million in fiscal 1998. The company believes that cash flows from operations and funds available under existing credit facilities will be sufficient to fund capital expenditures and working capital requirements for the foreseeable future. Phillips Mills Acquisition On August 5, 1997, Culp completed the acquisition of the business and certain assets relating to the upholstery fabric businesses operating as Phillips Weaving Mills, Phillips Velvet Mills, Phillips Printing and Phillips Mills. These operating units were purchased from Phillips Industries, Inc., a privately owned corporation based in High Point, North Carolina. Based on the terms of the definitive asset purchase agreement, the transaction is valued for accounting and reporting purposes at approximately $37 million (including cash, retirement of debt and a non-compete agreement) under generally accepted accounting principles. Terms of the purchase also include additional compensation contingent upon attaining specified future growth objectives and an option for 100,000 shares of Culp's common stock. Funds for the cash portion of the transaction were provided from the company's revolving credit facility. Pending Acquisition of Artee Industries On October 14, 1997, Culp agreed to acquire the business and substantially all the assets relating to the yarn manufacturing business operating as Artee Industries, Incorporated. Based on the definitive asset purchase agreement, the transaction value at closing is estimated to be $17.4 million (including issuance of Culp common stock, cash, a note and assumption of certain liabilities). Terms of the purchase also provide the opportunity for additional consideration of up to $7.2 million contingent upon the profitability of Artee during Culp's fiscal year ending May 2, 1999. The acquisition will be accounted for as a purchase, and the results of Artee will therefore be included in Culp's results from the closing date. Closing of the transaction is scheduled to occur no later than May 4, 1998, but may occur earlier if certain profitability levels are reached by Artee. Closing is contingent upon various conditions, including the satisfactory completion of Culp's due diligence and Artee's compliance with a minimum net worth requirement. Inflation Although the company's costs of raw materials have been relatively stable thus far in fiscal 1998, these expenses are generally higher than a year ago. Other operating expenses, such as labor, utilities and manufacturing supplies, have also increased. Competitive conditions have not allowed the company to offset the impact of these increases fully through higher prices, thereby putting pressure on profit margins. The net impact on margins will continued to be influenced by raw material prices, other operating costs and competitive conditions. Seasonality The company's business is slightly seasonal, with increased sales during the company's second and fourth fiscal quarters. This seasonality results from one-week closings of the company's manufacturing facilities, and the facilities of most of its customers in the United States, during the first and third quarters for the holiday weeks including July 4th and Christmas. Forward-Looking Information The company's report on Form 10-Q may contain statements that could be deemed forward-looking statements that are inherently subject to risks and uncertainties. Factors that could influence the matters discussed in the forward-looking statements include the level of housing starts and sales of existing homes, consumer confidence and trends in disposable income. Decreases in these economic indicators could have a negative effect on the company's business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could adversely affect the company. Because of the increasing percentage of the company's sales that is derived from shipments to customers outside the United States, the relative value of the U.S. dollar relative to other currencies can affect the competitiveness of the company's products in international markets. II-1 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 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 16, 1997. Of the 12,643,728 shares of common stock outstanding on the record date, 11,641,246 shares were present in person or by proxy. At the Annual Meeting, shareholders voted on: ratifying the appointment of KPMG Peat Marwick LLP as the independent auditors of the company for the current fiscal year, and; the election of three directors: Robert G. Culp, III, Earl M. Honeycutt, and Patrick H. Norton to serve until the 2000 Annual Meeting; approving the company's 1997 Performance-Based Option Plan; A. Proposal to ratify the election of KPMG Peat Marwick LLP as independent auditors of the company for fiscal year 1998: For 11,616,703 Against 1,837 Abstain 22,706 Broker Non-Votes -0- B. Proposal for Election of Directors: Robert G. Culp, III Patrick H. Norton For 11,378,075 For 11,377,875 Against -0- Against -0- Abstain 263,171 Abstain 263,371 Broker Non-Votes -0- Broker Non-Votes -0- Earl M. Honeycutt For 11,385,375 Against -0- Abstain 255,871 Broker Non-Votes -0- C. Proposal to Approve the Company's 1997 Performance-Based Option Plan For 11,206,096 Against 402,376 Abstain 32,773 Broker Non-Votes -0- Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report or incorporated by reference. Management contracts, compensatory plans, and arrangements are marked with an asterisk (*). 3(i) Articles of Incorporation of the Company, as amended, were filed as Exhibit 3(i) to the Company's Form 10-Q for the quarter ended January 29, 1995, filed March 15, 1995, and are incorporated herein by reference. 3(ii) Restated and Amended Bylaws of the Company, as amended, were filed as Exhibit 3(b) to the Company's Form 10-K for the year ended April 28, 1991, filed July 25, 1991, and are incorporated herein by reference. 10(a) Loan Agreement dated December 1, 1988 with Chesterfield County, South Carolina relating to Series 1988 Industrial Revenue Bonds in the principal amount of $3,377,000 was filed as Exhibit 10(n) to the Company's Form 10-K for the year ended April 29, 1989, and is incorporated herein by reference. 10(b) Loan Agreement dated November 1, 1988 with the Alamance County Industrial Facilities and Pollution Control Financing Authority relating to Series A and B Industrial Revenue Refunding Bonds in the principal amount of $7,900,000, was filed as exhibit 10(o) to the Company's Form 10-K for the year ended April 29, 1990, and is incorporated herein by reference. 10(c) Loan Agreement dated January, 1990 with the Guilford County Industrial Facilities and Pollution Control Financing Authority, North Carolina, relating to Series 1989 Industrial Revenue Bonds in the principal amount of $4,500,000, was filed as Exhibit 10(d) to the Company's Form 10-K for the year ended April 19, 1990, filed on July 15, 1990, and is incorporated herein by reference. 10(d) Loan Agreement dated as of December 1, 1993 between Anderson County, South Carolina and the Company relating to $6,580,000 Anderson County, South Carolina Industrial Revenue Bonds (Culp, Inc. Project) Series 1993, was filed as Exhibit 10(o) to the Company's Form 10-Q for the quarter ended January 30, 1994, filed March 16, 1994, and is incorporated herein by reference. 10(e) Severance Protection Agreement, dated September 21, 1989, was filed as Exhibit 10(f) to the Company's Form 10-K for the year ended April 29, 1990, filed on July 25 1990, and is incorporated herein by reference. (*) 10(f) Lease Agreement, dated January 19, 1990, with Phillips Interests, Inc. was filed as Exhibit 10(g) to the Company's Form 10-K for the year ended April 29, 1990, filed on July 25, 1990, and is incorporated herein by reference. 10(g) Management Incentive Plan of the Company, dated August 1986 and amended July 1989, filed as Exhibit 10(o) to the Company's Form 10-K for the year ended May 3, 1992, filed on August 4, 1992, and is incorporated herein by reference. (*) 10(h) Lease Agreement, dated September 6, 1988, with Partnership 74 was filed as Exhibit 10(h) to the Company's Form 10-K for the year ended April 28, 1991, filed on July 25, 1990, and is incorporated herein by reference. 10(i) Amendment and Restatement of the 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 28, 1996, filed on July 26, 1995, and is incorporated herein by reference. 10(s) Performance-Based Stock Option Plan, dated June 21, 1994, was filed as Exhibit 10(bb) to the Company's Form 10-K for the year ended April 28, 1996, filed on July 26, 1995, and is incorporated herein by reference. (*) 10(t) Interest Rate Swap Agreement between Company and First Union National Bank of North Carolina, dated May 31, 1995 was filed as exhibit 10(w) to the Company's Form 10-Q for the quarter ended July 30, 1995, filed on September 12, 1995, and is incorporated herein by reference. 10(u) Interest Rate Swap Agreement between Company and First Union National Bank of North Carolina, dated July 7, 1995 was filed as exhibit 10(x) to the Company's Form 10-Q for the quarter ended July 30, 1995, filed on September 12, 1995, and is incorporated herein by reference. 10(v) Second Amendment of Lease Agreement dated June 15, 1994 with Partnership 74 Associates was filed as Exhibit 10(v) to the Company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(w) Lease Agreement dated November 1, 1993 by and between the Company and Chromatex, Inc. was filed as Exhibit 10(w) to the Company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(x) Lease Agreement dated November 1, 1993 by and between the Company and Chromatex Properties, Inc. was filed as Exhibit 10(x) to the Company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(y) Amendment to Lease Agreement dated May 1, 1994 by and between the Company and Chromatex Properties, Inc. was filed as Exhibit 10(y) to the Company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(z) Canada-Quebec Subsidiary Agreement on Industrial Development (1991), dated January 4, 1995, was filed as Exhibit 10(z) to the Company's Form 10-Q for the quarter ended October 29, 1995, filed on December 12, 1995, and is incorporated herein by reference. 10(aa) Loan Agreement between Chesterfield County, South Carolina and the Company dated as of April 1, 1996 relating to Tax Exempt Adjustable Mode Industrial Development Bonds (Culp, Inc. Project) Series 1996 in the aggregate principal amount of $6,000,000 was filed as Exhibit 10(aa) to the Company's Form 10-K for the year ended April 28, 1996, and is incorporated herein by reference. 10(bb) Loan Agreement between the Alamance County Industrial Facilities and Pollution Control Financing Authority, North Carolina and the Company, dated December 1, 1996, relating to Tax Exempt Adjustable Mode Industrial Development Revenue Bonds, (Culp, Inc. Project Series 1996) in the aggregate amount of $6,000,000 was filed as Exhibit 10(cc) to the Company's Form 10-Q for the quarter ended January 26, 1997, and is incorporated herein by reference. 10(cc) Loan Agreement between Luzerne County, Pennsylvania and the Company, dated as of December 1, 1996, relating to Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Culp, Inc. Project) Series 1996 in the aggregate principal amount of $3,500,000 was filed as Exhibit 10(dd) to the Company's Form 10-Q for the quarter ended January 26, 1997, and is incorporated herein by reference. 10(dd) Second Amendment to Lease Agreement between Chromatex Properties, Inc. and the Company, dated April 17, 1997 was filed as Exhibit 10(dd) to the Company's Form 10-K for the year ended April 27, 1997, and is incorporated herein by reference. 10(ee) Lease Agreement between Joseph E. Proctor (doing business as JEPCO) and the Company, dated April 21, 1997 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. 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. 27 Financial Data Schedule (b) Reports on Form 8-K: The following report on Form 8-K was filed during the period covered by this report: (1) Form 8-K dated August 12, 1997, included under Item 5, Other Events, disclosure of the company's press release for quarterly earnings and the company's Financial Information Release relating to the financial infor- mation for the first quarter ended August 3, 1997. (2) Form 8-K dated October 15, 1997, included under Item 5, Other Events, disclosure of the company's press release and financial information release, both dated October 15, 1997, relating to the acquisition of Artee Industries, Inc. 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 17, 1997 By: s/s Franklin N. Saxon Franklin N. Saxon Sr. Vice President and Chief Financial Officer (Authorized to sign on behalf of the registrant and also signing as principal accounting officer) Date: December 17, 1997 By s/s Stephen T. Hancock Stephen T. Hancock General Accounting Manager (Chief Accounting Officer)




 
                            ASSET PURCHASE AGREEMENT


     THIS ASSET  PURCHASE  AGREEMENT  (the  "Agreement"),  dated as of August 4,
1997,  is between  CULP,  INC.,  a North  Carolina  corporation  ("Buyer");  and
PHILLIPS WEAVING MILLS, INC., a North Carolina corporation ("Weaving"), PHILLIPS
PRINTING MILLS, INC., a North Carolina corporation ("Printing"), PHILLIPS VELVET
MILLS, INC., a North Carolina  corporation  ("Velvet"),  PHILLIPS MILLS, INC., a
North  Carolina  corporation  ("Mills," and together with Weaving,  Printing and
Velvet,  the  "Phillips  Mills" or  "Sellers,"  or  individually,  a  "Seller"),
PHILLIPS  PROPERTY  COMPANY,  LLC, a North Carolina  limited  liability  company
("Properties"); and PHILLIPS INDUSTRIES, INC., a North Carolina corporation, the
controlling  shareholder  (or member) of each of the Sellers and Properties (the
"Shareholder") (together with the Sellers, the "Seller Parties" or individually,
a "Seller  Party"),  and S. DAVIS PHILLIPS (for the limited  purposes  stated in
Sections 5.7, 5.12 and 7.2(e) hereof).


                              Background Statement

     The  Phillips  Mills  operate  certain  upholstery  fabrics   manufacturing
businesses (each a "Business" and collectively the "Businesses"). Sellers desire
to sell and the Buyer desires to purchase certain assets used in connection with
the  Businesses.  Buyer also will lease certain real estate from  Properties and
Weaving  and  assume  certain  equipment  leases  used in the  operation  of the
Businesses.  Based upon the representations and warranties made by each party to
the other in this  Agreement,  the parties have agreed to consummate the sale of
the Businesses on the terms contained herein.


                             Statement of Agreement

     In consideration of the premises and the mutual covenants herein contained,
the parties  hereto,  for  themselves,  their  successors and assigns,  agree as
follows:






                                                      ARTICLE I
                                         SALE OF ASSETS AND TERMS OF PAYMENT
         I.1.       The Sale.

     (a) Upon the terms and subject to the conditions of this Agreement,  on the
Closing  Date (as defined in Section  2.1)  Sellers will sell and deliver to the
Buyer,  and the Buyer will purchase and accept from  Sellers,  the assets of the
Phillips  Mills,  whether  personal,  tangible or intangible  (but excluding the
Excluded Assets as defined herein), (all such assets being referred to herein as
the "Assets"), including, without limitation:

     (i) The Phillips Mills' tangible personal  property,  including  machinery,
equipment, supplies and inventories, vehicles, furniture, furnishings, fixtures,
and spare parts,  including  without  limitation the property listed on Schedule
1.1(i) hereto;

     (ii) The Phillips  Mills'  rights  under the  contracts,  purchase  orders,
options, leases and other agreements outstanding on the Closing Date and entered
into or received in the ordinary  course of business or used in the operation of
a Business (the  "Contracts"),  including without  limitation the Contracts that
are listed on Schedule 1.1(ii) hereto (the "Material Contracts");

     (iii) The Phillips Mills' right,  title and interest in and to all permits,
licenses and other governmental authorizations, copyrights, patents, trademarks,
trade  names  (including  without  limitation  the  rights  to the  trade  names
"Phillips  Weaving Mills,"  "Phillips  Mills,"  "Phillips  Printing  Mills," and
"Phillips   Velvet  Mills,"  and  any  combination  or  shortened  form  thereof
(collectively,  the "Trade Names")),  processes,  computer  programs and program
rights, trade secrets, customer lists, and other intangible rights and interests
owned by the Phillips Mills and used in connection with the Businesses;

     (iv) Certain  factoring volume and borrowing  obligations set forth in, and
limited to,  Section  12.3 of the  Securities  Exchange  Agreement  between BB&T
Corporation  (formerly Southern National Corporation) and Phillips Factors, Inc.
(collectively, the "Factoring Agreements");

     (v)  Leases  and  leasehold  interests  for  the  following  premises  (the
"Assigned  Leases," and  together  with the leases  entered  pursuant to Section
6.3(f), the "Leases"):

     (1) Market Square showroom (excluding the office space occupied by S. Davis
Phillips and the  showroom  closet space  adjoining  such office  space) in High
Point, North Carolina; and

     (2) Mississippi Furniture Market showroom in Tupelo, Mississippi;

     (vi) All prepaid  expenses,  surety  bonds,  surety  deposits  and security
deposits  posted by or on behalf of the Phillips  Mills in  connection  with the
operation of the  Businesses,  a recent  listing of which is attached  hereto as
Schedule 1.1(vi) hereto;

     (vii) All books,  records,  correspondence,  customer lists,  vendor lists,
product  literature,  designs,  development  records and files,  computer files,
technical reports and all other business  documents relating to the operation of
the Businesses, excluding minute and stock books;

     (viii) All of Sellers'  telephone numbers and telephone  directory listings
and advertisements;

     (ix) All claims,  causes of action and suits that  Sellers have or may have
against third parties in connection  with the Assets (but excluding the accounts
receivable  of the  Businesses  arising  from sale of goods prior to the Closing
Date and claims related thereto); and

     (x) The going concern value of the Businesses.

     (b) Excluded Assets.  Notwithstanding  the foregoing,  the Assets shall not
include the following specific  properties,  assets,  and rights,  (all of which
being referred to herein as the "Excluded Assets"):

     (i) cash and cash equivalents;

     (ii)  accounts  receivable  generated  from the  operations of the Business
prior to the Closing Date;

     (iii) all Real Estate  owned by Seller  Parties  (including  all  leasehold
improvements on such Real Estate subject to the Leases), except to the extent of
the leasehold interests specified in Section 1.1(a);

     (iv) all amounts  owed to S. Davis  Phillips by any Seller or to any Seller
by S. Davis Phillips;

     (v) all club  memberships  owned by the Seller Parties  (including  country
club memberships and membership in the Educational Foundation, Inc.);

     (vi) athletic tickets and the rights to purchase such tickets;

     (vii)  office  furnishings  in the  office  suite of  Market  Square  Tower
currently  occupied  by S. Davis  Phillips,  including  furniture,  accessories,
decorations and leasehold improvements;

     (viii)insurance policies owned by the Sellers;

     (ix)  intercompany  receivables  or  payables  from any Seller to any other
Seller;

     (x) the lease for the automobile currently used by S. Davis Phillips;

     (xi) the rights of the Sellers  under the  Availability  Agreement  between
Atlantic Aero, Inc. and Phillips Mills, Inc.; and

     (xii)  any  factoring  agreements  between  any of the  Phillips  Mills and
Phillips Factors Corporation.

     . I.2. Purchase Price

     (a)  Upon  the  terms  and  subject  to the  conditions  contained  in this
Agreement,  and in  consideration  of the sale of the  Assets,  the  Buyer  will
deliver to Sellers on the Closing Date (in accordance with delivery instructions
provided  by Sellers to the Buyer) the  following  (collectively  the  "Purchase
Price"): the amount of $27,827,800, which amount shall be adjusted at Closing as
follows:  (i)-increased  by the  amount  by which the  amount  paid by Buyers to
Sellers on account of the  Discharged  Debt (as  defined in  Section-1.4(b))  at
Closing is less than  $2,800,000  or  (ii)-decreased  by the amount by which the
amount paid by Buyers to Sellers on account of the  Discharged  Debt (as defined
in Section 1.4(b)) at Closing is greater than $2,800,000.

     (b) Contingent Additional Payments.

     (i) On the third  anniversary  of the  Closing,  if Net  Sales (as  defined
herein) of  Phillips  Weaving  Products  (as  defined  herein) for the 21 months
beginning August-4, 1997 and ended May 2, 1999 (the "Measurement Period") equals
or  exceeds  $71,000,000,  Buyer  shall  pay to  Sellers  the  following  amount
("Additional Contingent Payment"):

     (1)  $1,250,000  if Net  Sales of  Phillips  Weaving  Products  during  the
Measurement Period is at least $71,000,000 but less than $72,000,000;

     (2)  $2,500,000  if Net  Sales of  Phillips  Weaving  Products  during  the
Measurement Period is at least $72,000,000 but less than $73,000,000;

     (3)  $3,750,000  if Net  Sales of  Phillips  Weaving  Products  during  the
Measurement Period is at least $73,000,000 but less than $74,000,000;

     (4)  $5,000,000  if Net  Sales of  Phillips  Weaving  Products  during  the
Measurement Period is at least $74,000,000 but less than $78,000,000; or

     (5)  $5,500,000  if Net  Sales of  Phillips  Weaving  Products  during  the
Measurement Period is $78,000,000 or greater.

     (ii) Books and Records.  Throughout  the period  commencing  on the Closing
Date and continuing  thereafter  through May 2, 1999, Buyer shall maintain books
and records of its operations to the extent  necessary for ensuring the accurate
calculation of Net Sales of Phillips Weaving  Products,  and Buyer shall perform
all such  calculations  in accordance  with the books and records so maintained.
Net Sales are to be  determined by Buyer using Buyer's  current  accounting  and
recordkeeping  methods,  which shall be substantially  the same as those methods
used by Buyer in its current  business for  comparable  transactions.  After the
Closing Date, Buyer will provide Sellers monthly financial reports setting forth
sufficient  information  to permit  the  calculation  of Net  Sales of  Phillips
Weaving Products.

     (iii) Operation of the Business. Buyer hereby covenants that throughout the
period from the Closing Date until May 2, 1999,  Buyer will  continue to own and
operate the Business relating to the assets producing  Phillips Weaving Products
acquired pursuant to this Agreement. Notwithstanding the foregoing, it is agreed
by the parties that the Buyer will have sole  discretion  and authority over the
management of the business and assets being purchased pursuant to this Agreement
from and  after the  Closing  Date,  including,  without  limitation,  decisions
regarding  hiring or  termination  of employees,  product mix,  selling  prices,
promotional programs and activities, deployment of assets, capital expenditures,
supervision  of  employees  (including  management  employees),   assignment  of
personnel  (including  managers,   supervisors,   design  personnel,  production
personnel,  and others),  and production  schedules.  The parties understand and
acknowledge that: (i)-Buyer is a public company and must be managed and operated
in the best  interests of its  shareholders  by Buyer's  management and board of
directors;  and  (ii)-decisions  may  have  to be made  before  and  during  the
Measurement  Period  that  would  be in the  best  interests  of  Buyer  and its
shareholders  but  contrary  to the best  interests  of the  Seller  Parties  as
beneficiaries of the contingent  payments.  With these  considerations  in mind,
Buyer  agrees  (x)-to  act in good faith to  enhance  the sales of the  Business
related to the assets producing Phillips Weaving Products during the Measurement
Period and support the growth of such  Business;  (y)-not to make  decisions  or
take actions before or during the  Measurement  Period that would be punitive to
the  Business  related to the assets  producing  Phillips  Weaving  Products  or
designed  to reduce Net Sales of  Phillips  Weaving  Products  in order to avoid
making  Additional  Contingent  Payments;  and  (z)-not to take any  action,  or
refrain from taking any action, in either case for the sole purpose and with the
intent of disadvantaging Seller Parties.

     (iv)  Definition  of Net Sales.  For purposes of this  Section-1.2(b),  Net
Sales shall be determined  in  accordance  with  generally  accepted  accounting
principles  (i.e.,  gross  sales  minus the  following:  returns  (i.e.,  credit
memoranda issued for returned goods);  allowances (i.e., credit memoranda issued
when goods are not returned);  sales rebates to customers (i.e., amounts rebated
to customers based on volume levels); quality settlements (i.e., amounts paid to
customers  in  excess  of fabric  cost);  cash  discounts  (for  payment  within
specified terms);  export sales commissions to foreign agents or facilities (but
excluding  commissions to foreign sales  representatives);  and export letter of
credit  discount fees (but excluding the cost of issuance of such export letters
of credit)).

     (v) Definition of Phillips Weaving  Products.  For purposes of this Section
1.2(b),  "Phillips  Weaving  Products"  shall  refer to all goods  designed  for
Weaving  by  Weaving  designers   (including  without   limitation   independent
contractor designers or other nonemployee designers of Weaving engaged to design
products for Weaving).

     (vi) Calculation of Net Sales and Any Additional Contingent Payment.

     (1) In connection  with the  calculation  of Net Sales of Phillips  Weaving
Products  during  the  Measurement  Period  and  the  making  of any  Additional
Contingent  Payment in accordance with this Section 1.2(b),  Buyer shall deliver
to the  Seller  Parties  within  30 days of the  end of each of  Buyer's  fiscal
quarters  during  the  Measurement  Period a  schedule,  prepared  by Buyer  and
reviewed  by KPMG Peat  Marwick LLP  ("KPMG")  (or such other  certified  public
accounting firm ("CPA") as Buyer is then using) setting forth the computation of
Net Sales as of the end of such fiscal  quarter and the amount of any Additional
Contingent  Payment,  along with  copies of such backup  documentation  and such
financial information and access to personnel of KPMG (or such other CPA firm as
Buyer is then using) and chief  financial  officer of Buyer as is  reasonable to
inform the Seller Parties of the  information  and  calculations  used in making
such  computation.  Buyer's  computation of any such payment shall be conclusive
and binding upon the parties  hereto  unless,  within thirty (30) days following
the Seller Parties'  receipt of each quarterly  schedule from Buyer,  the Seller
Parties notify Buyer in writing (for purposes of this Section 1.2(b)(vi)(1), the
"Seller's Notice") that it disagrees with Buyer's  computation of such Net Sales
or the amount of any Additional  Contingent Payment.  Such Seller's Notice shall
include a schedule,  prepared by the Seller  Parties and  reviewed by Craven and
Blue,  CPA) (or such other CPA firm as Seller  Parties are then  using)  setting
forth the Seller Parties'  computation of such Net Sales and any other objection
to the Buyer's  schedule and the amount of any  Additional  Contingent  Payment,
along with copies of such backup  documentation  and such financial  information
(other  than that  previously  supplied  by Buyer to the Seller  Parties)  as is
reasonable to inform Buyer of the  information and  calculations  used in making
the Seller Parties' computation.

     (2) The Seller Parties' computation of such Net Sales and the amount of any
Additional  Contingent  Payment shall be conclusive and binding upon the parties
hereto unless, within thirty (30) days following Buyer's receipt of the Seller's
Notice,  Buyer notifies the Seller Parties in writing that it disagrees with the
Seller  Parties'  computation  of such Net Sales or the amount of any Additional
Contingent  Payment.  Upon any such  disagreement,  Buyer and the Seller Parties
shall submit such disagreement to binding arbitration as provided herein.  Buyer
and Seller Parties shall appoint a mutually acceptable arbitrator from a list of
arbitrators  recognized  by the  American  Arbitration  Association  ("AAA")  to
resolve the disagreement. If Buyer and Seller Parties cannot agree on a mutually
acceptable arbitrator, each shall appoint an arbitrator of choice from a list of
arbitrators  recognized by the AAA and the appointed arbitrators shall appoint a
third arbitrator from the list, and the three arbitrators shall hear the parties
and  settle the  disagreement.  The  proceedings  shall be  conducted  under and
governed by the Commercial Rules of the American Arbitration Association,  as in
effect from time to time.  All  arbitration  hearings  shall be conducted in the
State of North Carolina.  The arbitrators  shall have no power to award punitive
or exemplary damages, to ignore or vary the terms of this Agreement and shall be
bound to apply  controlling  law.  The  computation  of such Net  Sales  and any
Additional   Contingent   Payment  and   resolution   of  such  matters  by  the
arbitrator(s) shall be conclusive and binding upon Buyer and the Seller Parties.
The Seller  Parties  and the Buyer  shall each bear  one-half of the cost of the
arbitrators engaged to resolve a dispute under this Section.

     . All expenses of the Phillips  Mills with respect to the  operation of the
Businesses  shall be prorated on a daily basis  between  Buyer and Sellers as of
the Closing Date.  Sellers  shall be  responsible  for all expenses,  charges or
bills attributable to the period prior to the Closing Date, and Sellers agree to
pay in full  within 15 days after the  Closing  Date their pro rata share of all
such expenses that have been billed as of the Closing Date;  provided,  however,
that Sellers' prorated portion of all such expenses, charges or bills which have
accrued  but have not yet been  billed  shall be paid in full by  Sellers by the
later of (a) 60 days after  Closing Date or (b) 30 days after the receipt of the
bill for such charges. Sellers shall have sole responsibility for the payment of
all sales taxes, excise taxes,  payroll taxes,  withholding taxes or other taxes
or  payments to  government  entities  collected  or payable by Sellers or their
agents in connection  with the  management or operation of the Businesses for or
during the period prior to the Closing Date.

     Without limiting the generality of the foregoing, the following items shall
be prorated as of the Closing Date:

     (a) Water and utility charges and sanitary sewer taxes, if any;

     (b) Charges under service,  management, lease or other agreements affecting
the Assets or the Businesses which remain in effect after the Closing Date; and

     (c) Other operating expenses not covered by any of the above subsections.

     . I.4. Assignment and Assumption of Obligations and Liabilities

     (a) As of and after the Closing Date,  subject to Section 1.5,  Buyer shall
assume and pay, discharge and perform, and Sellers shall assign to Buyer all the
obligations  and  liabilities of the Sellers under the Contracts,  the Factoring
Agreements and the Assigned Leases, but only to the extent that such liabilities
and obligations accrue with respect to a time or period after the Closing Date.

     (b) Buyer will not assume  Sellers'  bank debt and  equipment  notes as set
forth on Schedule 1.4(b) hereto (the  "Discharged  Debt"),  but will make a cash
payment to or as directed by Sellers at the  Closing in an amount  necessary  to
pay  the  outstanding   principal  balance  plus  accrued  interest  under  such
Discharged  Debt as of the Closing Date (but excluding any prepayment  premiums,
penalties, late fees or other charges), and the Sellers agree immediately (i)-to
apply such funds to pay off such liabilities,  (ii)-to, at its own expense,  pay
such  prepayment  premiums,  penalties,  late  fees or other  charges  as may be
necessary to discharge such Discharged  Liabilities in full and (iii)-obtain the
release of any and all liens on any of the Assets  securing such  liabilities as
of the Closing Date.

     (c) Except as explicitly set forth in this  Agreement,  Buyer shall neither
assume nor become  liable for the  payment or  performance  of any  obligations,
claims, liabilities,  contracts,  commitments or undertakings of Seller Parties,
whether accrued or unaccrued, known or unknown, fixed or contingent, reported or
unreported,  including  but not limited to  environmental  liabilities,  workers
compensation claims, medical or disability claims or other benefits, and product
liability for products  manufactured  or sold before the Closing Date (except to
the extent provided in Section 7.2(c)).

     . If any of the  Contracts  or  Assigned  Leases or any other  property  or
rights  included  in the Assets are not  assignable  or  transferable  either by
virtue of the provisions  thereof or under applicable law without the consent of
some other party or parties, the Seller Parties shall use all reasonable efforts
to obtain such  consents  prior to the Closing Date and shall notify Buyer on or
prior to the Closing Date of any  consents not so obtained.  If any such consent
cannot be obtained with respect to any Assigned Lease or Material Contract prior
to  Closing,  Buyer may (a) in the  exercise of its sole  discretion  waive such
requirement as a condition to Closing,  and in such event,  this Agreement,  and
the related  instruments  of transfer  shall not  constitute  an  assignment  or
transfer  thereof  and Buyer  shall not assume  the  Sellers'  obligations  with
respect  thereto or  (b)-terminate  this Agreement  pursuant to Section  8.1(d).
Following the Closing, Seller Parties shall use all reasonable efforts to obtain
any consents not previously  obtained as soon as possible after the Closing Date
or otherwise obtain for Buyer the practical  benefit of such property or rights,
but Seller  Parties shall be under no obligation to make payments to obtain such
consents or otherwise purchase the benefit of such property or rights for Buyer.

     . The Purchase  Price will be allocated to the Assets as may be  reasonably
determined by the Buyer.


                                   ARTICLE II
                                   THE CLOSING


     II.1.  Time and Place of Closing.  The closing (the  "Closing") of the sale
and purchase of the Assets shall take place on August-4,  1997 at the offices of
Robinson,  Bradshaw & Hinson,  P.A.  beginning at 9:00,  A.M., local time, or on
such other date or at such other time or place as shall be mutually satisfactory
to the parties hereto (the "Closing Date").

     . At the Closing, Sellers will deliver to Buyer the following:

     (a) Bills of sale,  assignments,  the Assigned Leases and other instruments
of  transfer  and  conveyance  reasonably  required by Buyer,  transferring  and
assigning to Buyer the Assets.

     (b)  Evidence  satisfactory  to Buyer and its counsel that the liens on the
Assets to be released at Closing as reflected on Schedule  2.2(b)  hereto,  have
been released as of the Closing Date.

     (c) The opinions,  certificates,  consents and other documents contemplated
by Section-6.3 hereof.

     (d) All other documents,  certificates,  instruments and writings  required
hereunder to be delivered by Seller  Parties,  or as may reasonably be requested
by Buyer at or prior to the Closing Date pursuant to this Agreement.

     . At the Closing, Buyer will deliver to Sellers the following:

     (a) Payment of $27,827,800, as adjusted pursuant to Section-1.2(a) (by wire
transfer or other immediately available funds).

     (b) The Option Agreement.

     (c) The opinions,  certificates and other documents contemplated by Section
6.2 hereof.

     (d) All other documents,  certificates,  instruments and writings  required
hereunder to be delivered by Buyer,  or as may reasonably be requested by Seller
Parties at or prior to the Closing Date pursuant to this Agreement.


                                   ARTICLE III
                    REPRESENTATIONS AND WARRANTIES OF SELLERS

     Each of the Seller Parties  jointly and severally  represent and warrant to
Buyer as follows:

     . Each of the Sellers is a corporation  or limited  liability  company duly
organized,  validly existing and in good standing under the laws of its state of
organization.  Each Seller has the full power and  authority  to own,  lease and
operate the Assets and carry on its  Business as such  operations  are now being
conducted.  Except as set forth on  Schedule  3.1  attached  hereto,  all of the
issued  and  outstanding  capital  stock of each of the  Sellers  has been  duly
authorized  and  validly  issued  and is  fully  paid and  nonassessable  and is
entirely owned by the Shareholder.  There are no outstanding options,  warrants,
convertible rights,  calls, puts or other rights or commitments of any character
to acquire the capital  stock of the Sellers,  no contracts  or  commitments  to
issue any such  options,  warrants,  convertible  rights,  calls,  puts or other
rights or similar agreements affecting the shares of stock of the Sellers.  Each
Seller  is duly  qualified  to do  business  and in good  standing  as a foreign
corporation or limited liability company, as applicable, in the states set forth
on Schedule  3.1 attached  hereto,  which are all the states in which either the
ownership or use of its properties, or the nature of the activities conducted by
it,  requires  such  qualification.  The Phillips  Mills do not  presently  own,
directly or indirectly,  any shares of capital stock of or other equity interest
in any  corporation,  partnership  or other  entity nor are the  Phillips  Mills
otherwise  under any  obligation  to purchase or subscribe  for any interest in,
make any loan or advance to, or otherwise in any manner make any  investment in,
any corporation, partnership or other entity.

     . Each Seller, Properties and the Shareholder has the full corporate power,
authority and legal right to execute and deliver this Agreement and to carry out
the transactions and perform its obligations  contemplated hereby. The execution
and  delivery  of  this  Agreement  and  the  consummation  of the  transactions
contemplated  hereby  have been duly and  validly  authorized  by all  necessary
corporate  action on the part of each Seller Party and no other  proceedings  on
the part of any Seller Party are  necessary to authorize  this  Agreement.  This
Agreement has been duly and validly  executed and delivered by each Seller Party
and  constitutes  a legal,  valid and binding  obligation  of each Seller Party,
enforceable against each of them in accordance with its terms.

     . No permit,  consent,  approval or authorization  of, or declaration to or
filing with, any governmental or regulatory  authority is required in connection
with any aspect of the execution,  delivery and  performance of this  Agreement,
except for compliance with the Hart-Scott-Rodino  Antitrust  Improvements Act of
1976 ("HSR Act").  The execution,  delivery and performance of this Agreement by
each Seller  Party will not (a) conflict  with any  provision of the Articles of
Incorporation  or bylaws of each of the Phillips Mills or the  Shareholder,  (b)
conflict  with any  provision  of the  Articles  of  Organization  or  Operating
Agreement of  Properties,  (c) except as set forth on Schedule 3.3,  result in a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms,  conditions or provisions of any note,  bond,  mortgage,
indenture,  Contract,  Assigned  Lease or other debt  instrument  or  obligation
relating to any Business or to which any Seller Party is a party or to which any
of  the  Assets  may  be  subject,  except  for  such  defaults  (or  rights  of
termination,  cancellation or  acceleration)  as to which  requisite  waivers or
consents have been obtained, or (d) violate any law, statute,  rule, regulation,
order,  writ,  injunction or decree of any federal,  state or local governmental
authority or agency.

     . Each Seller has furnished to Buyer audited financial statements as of and
for the twelve month  periods  ending on or about  December  31, 1994,  1995 and
1996, and unaudited  balance sheets and statements of income for each of the six
months ended June-28, 1997. The foregoing statements are hereinafter referred to
as the "Financial  Statements." The Financial  Statements (a) fairly present the
results of operations and financial  position of the Sellers for the periods and
as of the dates set forth,  in accordance  with  generally  accepted  accounting
principles  consistently  applied,  except for normal adjustments in the case of
unaudited  financial  statements,  and (b) are  consistent  with the  books  and
records of the Sellers.

     . Except as set forth in  Schedule-
- -3.5  hereto,  no Seller has any material
obligation or liability (whether absolute,  contingent or otherwise,  including,
without   limitation,   product  liability  and  warranty   obligations)  except
liabilities,  obligations  or  contingencies  (i)  which are  fully  accrued  or
reserved against in the Financial  Statements or (ii) which were incurred in the
ordinary course of business since the date of the Financial Statements.

     . Except as set forth in Schedule 3.6 and except as otherwise  contemplated
by this  Agreement,  since December 31, 1996 there has not been (a) any material
adverse  change in any Business or the results of its  operation,  properties or
prospects;  (b) any damage,  destruction  or casualty loss,  whether  covered by
insurance or not, materially and adversely affecting the Assets or any Business;
(c)-(i)-any material increase in the rate or terms of compensation payable to or
to become payable to any Seller's employees (the "Employees"),  except increases
occurring in accordance with such Seller's  customary  practices  (including the
general  increase  in  employee  pay rates in January  1997) or as  required  by
existing  employment  agreements or (ii)-any material  modifications in employee
benefits to the Employees;  (d)-entry into,  termination of (except by reason of
the  occurrence  of a  contractually  specified  termination  date) or  material
amendment to any  contract or  commitment  or license or permit  material to any
Business,  except in the ordinary course of business or as contemplated  herein;
(e) any creation of or  assumption  of any  mortgage,  pledge,  or other lien or
encumbrance upon any of the assets of the Sellers, including the Assets; (f)-any
sale,  assignment,  lease,  transfer or other  disposition of any of the Assets,
except in the ordinary  course of business;  (g) any  imposition or incurring of
any obligation or liability, fixed or contingent,  except in the ordinary course
of business; (h) except as otherwise provided in this subsection, entry into any
agreement  with respect to the  operation of any Business  pursuant to which the
aggregate annual financial  obligation of the Buyer may exceed $10,000, or which
is not  terminable  by Buyer  without  penalty  upon thirty (30) days' notice or
less;  (i)-any  commitment to make any purchase for, or sale of, any inventories
relating to the  operation of any  Business,  except in the  ordinary  course of
business;  (j)-any commitment in excess of $10,000 for any capital  expenditure;
(k)-any change in the accounting  practices of any Seller or the manner in which
it maintains its books of account and records;  (l)-any loss or  termination  of
any  account  with a  customer  that  constitutes  one of  the  fifteen  largest
customers of the Businesses;  or (m) any transaction  otherwise  relating to any
Business not in the ordinary course of business.

     . All Contracts existing as of the date hereof and that involve liabilities
and  obligations of any Business of more than $4,000  annually or a term of more
than two years after the Closing Date are listed on Schedule 1.1(ii).  Except as
set forth on Schedule  3.7, all of the Contracts (as defined in Section 1.1) may
be assigned by Sellers to Buyer  without the consent of any other party,  or, if
required,  such  consent  will be obtained by Sellers,  subject to Section  1.5,
prior  to the  Closing.  Each  Seller  has  complied  in all  respects  with the
provisions of such  Contracts and is not now and at the Closing Date will not be
in default under any of them. To the best of each Seller's  knowledge,  there is
not any breach or anticipated breach by any other party to such Contracts and no
Seller  has  received  any  notice of any  alleged  breach or  claimed  right of
termination.  Each of such  Contracts  will be in full  force and  effect at the
Closing Date with no modification of its respective  terms,  unless by its terms
it expires prior thereto. No Seller has any contracts, oral or written, with any
sales  representatives.  No  Seller  has any  written  contract  with any of its
employees, except for designer contracts with Stan Cathell and Merebeth Rampula,
copies of which have been  furnished  to Buyer.  Sellers  have  delivered to the
Buyer a correct and complete copy of, or a written summary of the material terms
of, each Material Contract, as amended to the date hereof.

     . Except as set forth in Schedule 3.8, there are no legal,  administrative,
arbitration or other proceedings or governmental  investigations  pending or, to
each Seller's knowledge,  threatened against any Seller Party in connection with
the  operation  of any  Business.  There is no court  order,  judgment or decree
adversely affecting any Business.

     . Except as disclosed on Schedule-3.9  hereto,  no Seller is a party to any
collective  bargaining  agreement or any other union labor agreement covering or
relating to any of the Employees (as defined below),  and has not recognized and
has  not  received  a  demand  for  recognition  of  any  collective  bargaining
representative  with respect  thereto.  There are no strikes,  labor disputes or
work stoppages in effect or, to the knowledge of any Seller,  threatened against
any Seller. No Seller has committed any unfair labor practice.  No Seller or any
Seller's officers, directors, members, managers or employees with responsibility
for employment matters has any knowledge of any organizational  effort presently
being made or  threatened  by or on behalf of any labor  union  with  respect to
employees of any Seller.

     . III.10. Employee Benefit Plans; ERISA

     (a)  Schedule  3.10  lists  all  employee  pension  and  welfare  plans  or
arrangements, including, without limitation, pension or profit sharing or thrift
plans,  company  contributions to medical benefit,  death benefit and disability
programs,  and  vacation,  severance and sick leave  policies  applicable to the
employees  of  the  Businesses  (the  "Employees").   Except  as  set  forth  on
Schedule-3.10,  with  respect to all  "employee  benefit  plans" (as  defined in
Section-3(3) of the Employee  Retirement Income Security Act ("ERISA")) to which
any Seller  contributes on behalf of Employees  (capitalized  terms used in this
Section 3.10 and not otherwise defined herein shall have the meanings  specified
in ERISA):

     (i) all such plans  comply in all  material  respects  with ERISA and other
applicable laws and regulations;

     (ii) all  contributions  which  were due and  payable  by any  Seller on or
before the date hereof to such plans have been made;

     (iii) none of the plans  subject to Title-IV of ERISA has been  terminated,
no proceeding to terminate any of such plans has been instituted,  and there has
been no complete or partial  withdrawal,  cessation  of facility  operations  or
occurrence  of any other event that would result in the  imposition of liability
on any Seller under Title-IV of ERISA;

     (iv) The market value of assets under each such employee benefit plan which
is an Employee Pension Benefit Plan (other than any Multiemployer Plan) (as such
terms are defined in ERISA)  equals or exceeds  the present  value of all vested
and nonvested  liabilities  thereunder  determined  in  accordance  with Pension
Benefit  Guaranty  Corporation   ("PBGC")  methods,   factors,  and  assumptions
applicable  to an Employee  Pension  Benefit  Plan  terminating  on the date for
determination; and

     (v) The Sellers have delivered to the Buyer correct and complete  copies of
the plan documents and summary plan descriptions,  the most recent determination
letter  received from the Internal  Revenue  Service,  the most recent Form 5500
Annual Report, and all related trust agreements,  insurance contracts, and other
funding agreements which implement each such Employee Benefit Plan.

     (b) With respect to each  employee  benefit plan that any of the Sellers or
any entity under common control with any Seller maintains or ever has maintained
or to which  any of them  contributes,  ever has  contributed,  or ever has been
required to contribute:

     (i) No such employee benefit plan which is an Employee Pension Benefit Plan
(other than any Multiemployer Plan) has been completely or partially  terminated
or been the subject of a Reportable  Event as to which notices would be required
to be filed  with the PBGC.  No  proceeding  by the PBGC to  terminate  any such
Employee  Pension  Benefit  Plan  (other than any  Multiemployer  Plan) has been
instituted or threatened.

     (ii) There have been no  Prohibited  Transactions  with respect to any such
employee  benefit  plan.  No fiduciary has any liability for breach of fiduciary
duty or any other failure to act or comply in connection with the administration
or investment of the assets of any such employee benefit plan. No action,  suit,
proceeding,  hearing, or investigation with respect to the administration or the
investment of the assets of any such  employee  benefit plan (other than routine
claims for benefits) is pending or threatened.

     (iii) No Seller has  incurred,  or has any reason to expect that any Seller
will incur,  any  liability  to the PBGC (other than PBGC  premium  payments) or
otherwise under Title IV of ERISA (including any withdrawal  liability) or under
the Internal  Revenue Code with respect to any such employee  benefit plan which
is an Employee Pension Benefit Plan.

     (c)  No  Seller  or  any  entity  under  common  control  with  any  Seller
contributes to, ever has contributed to, or ever has been required to contribute
to any Multiemployer Plan or has any liability (including  withdrawal liability)
under any Multiemployer Plan.

     (d) No Seller or any entity under common control with any Seller  maintains
or ever has maintained or contributes,  ever has  contributed,  or ever has been
required to  contribute  to any  Employee  Welfare  Benefit  Plan (as defined in
ERISA)  providing  medical,  health,  or life  insurance  or other  welfare-type
benefits for presently or future retired or terminated employees, their spouses,
or their  dependents,  other than in accordance with Internal  Revenue Code Sec.
4980B.

     (e) Prior to and as of the  Closing  Date,  Sellers  sponsor  the  Phillips
Mills,  Inc. Group Benefit Plan ("Sellers'  Health Care Plan").  Sellers' Health
Care Plan is a self-insured  medical  reimbursement  plan  established to assist
Sellers in providing  medical  benefits  ("Benefits") to Sellers'  employees and
their  dependents,  who meet the eligibility  provisions of Sellers' Health Care
Plan  ("Participants").  Except for the Incurred  But Unpaid  Health Care Claims
referred to in Section 5.6(b) of this Agreement, as of the Closing Date, Sellers
have paid, or provided for the payment of, all health care expenses  incurred by
Sellers'  employees  and their  dependents  that are covered  under the Sellers'
Health Care Plan in accordance with its terms.

     (f) As of the  Closing  Date  two  (2)  individuals,  who  were  previously
employed by Sellers,  are  participating  in Sellers' Health Care Plan under the
COBRA  continuation  coverage  requirements  of Internal  Revenue  Code  ("IRC")
s-4980B  and  ERISA  S-601 et seq.,  ("COBRA  Participants").  Except  for COBRA
Participants,  as of the Closing Date,  the only  individuals  participating  in
Sellers' Health Care Plan are the individuals  currently employed by Sellers and
their  dependents,  who meet the eligibility  provisions of Sellers' Health Care
Plan.

     (g) The Sellers have complied in all respects with the  provisions of ERISA
S-601 et seq., IRCS-4980B, or Proposed Treasury  Regulation S-1.162-26 ("COBRA
Laws")  that  govern  or apply to  Sellers'  Health  Care  Plan or to any  other
employee benefit plan sponsored by the Sellers at any time.

     . Each Seller has timely filed or will timely file all  federal,  state and
local tax returns and reports  required to be filed for any period ending onI or
before the Closing Date, or if applicable,  any period that includes the Closing
Date.  All such tax returns are or will be correct and  complete in all material
respects. Each Seller has properly calculated and has timely paid or will timely
pay or cause to be paid all  income  taxes  and  other  taxes of any kind of any
taxing  authority  (whether  or not shown on any tax  return)  due to any taxing
authority  ("Taxes")  with respect to all such  periods.  No Seller has received
written notice that the Internal  Revenue Service or any other taxing  authority
has asserted against such Seller any deficiency or claim for additional Taxes in
connection therewith.  No Seller has been granted or has given any waiver of any
statute of  limitations  with  respect to, or any  extension of a period for the
assessment  or filing of, any Tax.  All  deposits  required by law to be made by
each Seller with respect to employees'  withholding  taxes have been made.  Each
Seller has withheld and paid all Taxes  required to have been  withheld and paid
in  connection  with the  amounts  paid or owing  to any  employee,  independent
contractor,  creditor,  stockholder or other third party. There are no tax liens
on any assets of any Seller,  except  liens for Taxes not yet due.  There are no
claims  pending  against any Seller for past due Taxes,  and no Seller Party has
knowledge of any such  threatened  claim or the basis for any such claim.  There
are not now any matters under discussion with any federal, state, local or other
authority with respect to any additional Taxes relating to the Sellers.

     . Schedule  3.12 lists all material  licenses,  permits and  authorizations
that are held by any  Seller  as of the date  hereof  and are  required  for the
conduct of the Businesses,  as presently conducted. All such licenses,  permits,
and authorizations are in full force and effect,  with no material violations of
any of them having occurred or, to each Selling Party's knowledge,  been alleged
to have occurred,  and with no proceedings  pending or, to each Selling  Party's
knowledge,  threatened,  that would have the effect of  revoking  or  materially
limiting or affecting  the transfer or renewal of any such  licenses or permits.
Except as set forth in Schedule  3.12 or otherwise  disclosed in this  Agreement
(a) such  licenses and  authorizations  are not subject to any  restrictions  or
conditions  that would limit  operation of any Business as presently  conducted;
(b) there are no  applications  by any Seller in connection with any Business or
material  complaints  by others  pending or threatened in writing as of the date
hereof  before any  governmental  agency  relating to any  Business,  other than
proceedings that affect the industry generally.

     . Each Seller,  in the operation of its Business:

     (i)-possesses   all   of  the   business   licenses,   permits   (including
environmental permits) and authorizations (collectively,  "Authorizations") that
are necessary for legally  conducting its Business as presently  conducted,  and
has made such filings as may be required by local, state or federal governments;
(ii)-is in compliance with all applicable laws, rules and regulations, including
those  relating to the  employment  of labor  (including  OSHA),  wages,  hours,
collective  bargaining,  immigration,  discrimination  and the payment of social
security  and similar  taxes and (iii)-is not liable for any arrears of wages or
any penalties for failure to comply with any of the foregoing.

     . The Sellers have, and on the Closing Date will have, all right,  title or
interest,  as applicable,  to each class of Assets, free and clear of all liens,
pledges, security interests, charges, claims, restrictions or other encumbrances
and defects of title of any nature whatsoever except as listed on Schedule 3.14.
The Assets constitute all of the assets used in connection with the operation of
the Businesses other than the Excluded Assets.

     .  Schedule  3.15 lists all bank  accounts  and safe  deposit  boxes of the
Sellers  used in  connection  with the  Businesses,  all powers of  attorney  in
connection with such accounts,  and the names of all persons  authorized to draw
thereon or to have access thereto.

     . Except as noted thereon, Schedule 3.16 lists the names and current salary
rates of all the  Employees  as of the date hereof.  Each  Business has complied
with all applicable  laws and  regulations  relating to the employment of labor,
including those related to wages,  hours,  collective  bargaining,  immigration,
discrimination,  and the payment of Social Security or similar taxes.  There are
no unfair labor practice claims or charges pending involving any Seller relating
to the operation of the Businesses.

     Schedule 3.17 lists all of the Sellers'  insurance policies relating to the
Assets or the  Businesses  in effect as of the date hereof,  and  indicates  the
insurer's name, policy number,  expiration date and amount and type of coverage.
With respect to each such  insurance  policy:  (A) Sellers have provided  Buyers
with a copy of each such policy;  (B) Sellers will pay all premiums with respect
to such policies and discharge all obligations required to keep such policies in
effect  through  the Closing  Date;  (C) no Seller or, to the  knowledge  of any
Seller,  any other party to the policy is in breach or default  (including  with
respect to the payment of premiums or the giving of  notices),  and no event has
occurred which, with notice or the lapse of time, would constitute such a breach
or default,  or permit  termination,  modification,  or acceleration,  under the
policy; and (D) no party to the policy has repudiated any provision thereof.

     . The Sellers own or lease all buildings,  machinery,  equipment, and other
tangible  assets  necessary  for the  conduct  of the  Businesses  as  presently
conducted  and as  presently  proposed  by  Sellers to be  conducted.  Each such
tangible asset is in good operating condition and repair (subject to normal wear
and tear and  items  immaterial  to the  operation  of the  Businesses),  and is
suitable  for the  purposes  for which it  presently  is used and  presently  is
proposed by Sellers to be used.

     . Each of the Leases is legal,  valid,  binding,  enforceable,  and in full
force  and  effect,  except  as  may  be  limited  by  bankruptcy,   insolvency,
reorganization  and  similar  laws  affecting  creditors  generally  and  by the
availability of equitable remedies.  Neither any Seller nor, to the knowledge of
any Seller,  any other party is in default,  violation  or breach in any respect
under any  Assigned  Lease,  and no event has occurred  and is  continuing  that
constitutes or, with notice or the passage of time or both,  would  constitute a
default,  violation or breach by any Seller, or to the knowledge of Seller,  any
other party in any  respect  under any  Assigned  Lease.  Each Lease  grants the
tenant  under  the lease  the  exclusive  right to use and  occupy  the  demised
premises  thereunder.  Each  Seller  has good and valid  title to the  leasehold
estate under its Lease free and clear of all liens, claims and encumbrances.

     . No Seller Party has received any notice of or has  knowledge of any facts
giving  reason to believe any major  customer  account,  defined for purposes of
this  Section  as any  customer  that  constitutes  one of the  fifteen  largest
customers of the Businesses  taken as a whole, is being canceled,  terminated or
is being considered or threatened for  cancellation,  termination or nonrenewal,
whether  as a result  of the  transactions  contemplated  by this  Agreement  or
otherwise.

     . III.21. [Intentionally Omitted]

     . All trademarks,  trade names,  copyrights or patents owned or used by any
Seller  in  connection  with  the  Businesses,   together  with  any  applicable
registrations, are disclosed in Schedule 3.22. Except as shown in such Schedule,
all such  trademarks,  trade names,  copyrights or patents,  and any  applicable
registrations are owned by the Sellers and are not the subject of any proceeding
challenging  their use, or seeking to deny, modify or revoke any registration or
application  therefor  or renewal  thereof.  Each  Seller is entitled to use all
trade names, trademarks,  patents, designs, production processes, copyrights and
licenses and all other  intellectual  property  rights used by it in  connection
with its Business,  and no Seller has granted any right, title or interest in or
to any such intellectual  property. No Seller has, to the best of its knowledge,
interfered  with,  infringed  upon,  misappropriated,  or  otherwise  come  into
conflict with any patents,  trademarks, or intellectual property rights of third
parties,  and no Seller has received any charge,  complaint,  claim,  demand, or
notice  alleging  any  such  interference,  infringement,   misappropriation  or
violation  (including  any claim that such Seller must  license or refrain  from
using any patent,  copyright,  trademark or intellectual  property rights of any
third party) and which is unresolved.

     . Except as specified on Schedule 3.23:s

     (a) No Hazardous  Materials (as defined in this Section-3.23) are stored or
otherwise  located on real property owned,  leased or otherwise  operated by any
Seller (the "Real  Property"),  and no part of the Real Property,  including the
soil and groundwater located thereon and thereunder,  is presently  contaminated
by any such  substance;  no  Hazardous  Materials  have been  released,  stored,
treated or disposed  of on, in or about the Real  Property;  and no  improvement
located on the Real  Property  contains  any asbestos or  substances  containing
asbestos;

     (b) No portion of the Real  Property has ever been used as or for a mine, a
landfill,  a dump or other disposal facility,  a gasoline service station,  or a
petroleum products storage facility;

     (c) There are no  underground  storage tanks situated on the Real Property,
nor have any been removed from the Real Property;

     (d) All activities,  and operations of the Businesses meet, and have in the
past met, the requirements of all applicable  Environmental  Laws (as defined in
this Section-3.23);

     (e) In connection with or arising out of the operation of its Business,  no
Seller has ever sent any  Hazardous  Materials to a site which,  pursuant to any
Environmental  Law, (1) has been placed on the "National  Priorities  List," the
CERCLIS  list,  or any other  similar  federal or state list,  or  (2)-which  is
subject to a claim, an administrative order or other request to take any type of
response action or to pay for the costs of response action at such a site;

     (f) In connection with or arising out of the operation of its Business, (i)
no Seller is involved in any suit or proceeding,  and no Seller has received any
notice or information  request from any governmental agency or other party, with
respect to any Hazardous Material or any violation of any Environmental Law, and
(ii) no Seller  has  received  any notice of any claim from any person or entity
relating  to personal  injury,  death or  property  damage from  exposure to any
Hazardous Material or violation of any Environmental Law; and

     (g) In  connection  with or arising out of the  operation of its  Business,
each Seller has timely filed all reports  required to be filed, has acquired all
necessary  certificates,  approvals  and permits (none of which shall be lost or
adversely affected as a result of the transaction  contemplated herein), and has
generated  and   maintained  in  all  material   respects  all  required   data,
documentation and records under all applicable Environmental Laws.

     As used herein, "Hazardous Materials" means any substances or materials (i)
which  are  defined  as  hazardous  wastes,  hazardous  substances,  pollutants,
contaminants or toxic  substances  under any  Environmental  Law; (ii) which are
toxic, explosive,  corrosive,  flammable,  infectious,  radioactive,  mutagenic,
dangerous  or  otherwise   hazardous;   (iii)  the  presence  of  which  require
investigation  or remediation  under any  Environmental  Law or common law; (iv)
which constitute a danger,  a nuisance,  a trespass or a health or safety hazard
to persons or property;  (v) which  include,  without  limiting  the  foregoing,
underground  storage tanks,  whether empty,  filled or partially filled with any
substance;  and/or (vi) which are or contain,  without  limiting the  foregoing,
asbestos,   polychlorinated   biphenyls,   urea  formaldehyde  foam  insulation,
petroleum hydrocarbons,  petroleum derived substances or waste, crude oil or any
fraction  thereof,  nuclear  fuel,  natural  gas  or  synthetic  gas  (excluding
petroleum or natural gas products for on-site use properly  stored in accordance
with  all  Environmental  Laws  in gas  pipelines  serving  the  Real  Property,
vehicles, machinery or above ground storage tanks).

     As used herein,  "Environmental Laws" shall mean any and all federal, state
and local laws, statutes,  ordinances, rules, regulations,  permits, directives,
licenses, approvals, guidances, interpretations, and orders, and all other legal
requirements  relating to the  protection  of human  health or the  environment,
including,  but not  limited to,  requirements  pertaining  to the  manufacture,
processing,  distribution,  use, treatment,  storage, disposal,  transportation,
handling,  reporting,  licensing,  permitting,  investigation  or remediation of
materials that are or may constitute a threat to the environment.  Environmental
Laws include,  without  limitation,  the Comprehensive  Environmental  Response,
Compensation,  and Liability Act (42 U.S.C.  S-9601,  et. seq.) ("CERCLA"),  the
Hazardous Material Transportation Act (49 U.S.C. S-1801, et. seq.), the Resource
Conservation and Recovery Act (42 U.S.C. S-6901, et. seq.) ("RCRA"), the Federal
Water Pollution Control Act (33 U.S.C.  S-1251, et. seq.), the Clean Air Act (42
U.S.C.  S-7401, et. seq.), the Toxic Substances  Control Act (15 U.S.C.  S-2601,
et.  seq.),  the Safe  Drinking  Water Act (42  U.S.C.  S-300,  et.  seq.),  the
Environmental  Protection Agency's  regulations  relating to underground storage
tanks (40 C.F.R. Parts 280 and 281), and the Occupational  Safety and Health Act
(29 U.S.C.  S-651,  et. seq.) ("OSHA"),  as such laws and regulations  have been
amended or supplemented,  and applicable state and local statutes, and the rules
and regulations promulgated under such federal, state and local laws.

     Seller  Parties have  previously  delivered to Buyer copies of all reports,
files, surveys, records, licenses, certificates,  orders and all other documents
in its possession of any type relating to the matters  described in this Section
3.23.

     . Each  product  shipped  by any  Seller  has been in  conformity  with all
applicable contractual  commitments and all express and implied warranties,  and
no Seller has any liability (and to the best  knowledge of Sellers,  there is no
basis  for  any   present  or  future   action,   suit,   proceeding,   hearing,
investigation,  charge,  complaint,  claim, or demand against any of them giving
rise to any  liability)  for  replacement  or repair thereof or other damages in
connection therewith. No product manufactured, sold, leased, or delivered by any
Seller is subject  to any  guaranty,  warranty,  or other  indemnity  beyond the
applicable  standard  terms and  conditions  of sale or lease.  The Sellers have
provided to the Buyer copies of the  standard  terms and  conditions  of sale or
lease for each Seller.

     . No Seller has any liability (and, to the best knowledge of Sellers, there
is no basis  for any  present  or  future  action,  suit,  proceeding,  hearing,
investigation,  charge,  complaint,  claim, or demand against any of them giving
rise to any liability) arising out of any injury to individuals or property as a
result of the ownership,  possession, or use of any product manufactured,  sold,
leased, or delivered by any Seller ("Product  Liability"),  except for potential
claims which are fully covered by insurance.

     . The representations and warranties  contained in this Article III and all
other  information  or documents  (including  the  Schedules to this  Agreement)
delivered  by any Seller Party or  Properties  to Buyer in  connection  with the
transaction  described  herein do not contain any untrue statement of a material
fact  or omit to  state  any  material  fact  necessary  in  order  to make  the
statements and information contained therein not misleading.


                                   ARTICLE IV
                     REPRESENTATIONS AND WARRANTIES OF BUYER

     Buyer  represents  and  warrants  to  Sellers  as  follows: 
 .
Buyer  is a corporation duly organized, validly existing and in good standing 
under the laws of the State of North Carolina and has the requisite power and 
authority to own, lease and  operate  its  properties  and to carry on its  
business  as now being conducted.

     . Buyer has the full corporate power,  authority and legal right to execute
and deliver this  Agreement  and to  consummate  the  transactions  contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions  contemplated  hereby have been duly and validly  authorized by all
necessary  corporate action on the part of Buyer and no other proceedings on the
part of Buyer are necessary to authorize this Agreement. This Agreement has been
duly and validly executed and delivered by Buyer and constitutes a legal,  valid
and binding  obligation of Buyer,  enforceable  against Buyer in accordance with
its terms.

     . No permit,  consent,  approval or authorization  of, or declaration to or
filing with, any governmental or regulatory  authority is required in connection
with any aspect of the execution,  delivery and  performance of this  Agreement,
except for compliance with the Hart-Scott-Rodino  Antitrust  Improvements Act of
1976 ("HSR  Act").  Neither the  execution,  delivery  and  performance  of this
Agreement  by Buyer  will (a)  conflict  with or  result  in any  breach  of any
provision of the Articles of  Incorporation  or bylaws of Buyer, (b) result in a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms,  conditions or provisions of any note,  bond,  mortgage,
indenture,  agreement, lease or other instrument or obligation to which Buyer is
a party or by which any of its assets may be bound, except for such defaults (or
rights of  termination,  cancellation  or  acceleration)  as to which  requisite
waivers or consents have been obtained,  or (c)-violate any law, statute,  rule,
regulation,  order,  writ,  injunction or decree of any federal,  state or local
governmental authority or agency.

     . Buyer knows of no facts that would,  under present law,  disqualify Buyer
as a transferee of the licenses,  permits and authorizations  listed in Schedule
3.12 or as owner and operator of the Business.  Should Buyer become aware of any
such facts,  it will promptly notify Sellers in writing thereof and use its best
efforts to prevent any such disqualification.

     . There are no legal,  administrative,  arbitration or other proceedings or
governmental  investigations  pending or, to the knowledge of Buyer,  threatened
against  Buyer or any of its  subsidiaries  that would give any third  party the
right to enjoin or rescind the transactions contemplated hereunder.


                                    ARTICLE V
                            COVENANTS OF THE PARTIES

     V.1. Conduct of Business. Except as contemplated by this Agreement,  during
the period from the date of this Agreement to the Closing Date, each Seller will
conduct  its  Business in a manner  consistent  with prior  practice  and in the
ordinary and usual course.  Without  limiting the  generality of the  foregoing,
except as otherwise  expressly  provided in or  contemplated  by this Agreement,
prior to the Closing Date, without the prior written consent of Buyer, no Seller
or Properties  will, and the Shareholder  will not cause or permit any Seller or
Properties to:

     (a)  enter  into  any  material  contract  or  commitment  relating  to the
operation of its Business except in the ordinary course of business;

     (b) amend, modify or waive any material provision of any Contract;

     (c) fail to maintain and keep its  properties and equipment in good repair,
working order and condition, except for ordinary wear and tear;

     (d) fail to keep in full force and effect  insurance  comparable  in amount
and scope of coverage to that now maintained by such Seller;

     (e) fail to perform such Seller's  obligations under all Contracts to which
it is a party;

     (f) fail to use its best  efforts to maintain  and  preserve  its  business
organizations,  retain its present  employees and maintain its relationship with
suppliers, customers and others having business dealings with such Seller;

     (g) fail to  maintain  its books of  account  and  records in the usual and
regular manner and not make any changes in its accounting practices;

     (h) fail to comply with all material laws and regulations  applicable to it
and to the conduct of its Business;

     (i)  amend  its  Articles  of  Incorporation  or  Bylaws,  or  Articles  of
Organization or Operating Agreement, as applicable;

     (j) take,  or agree in writing or otherwise to take,  any action that would
make  any of the  representations  of the  Seller  Parties  set  forth  in  this
Agreement  untrue or incorrect in any material respect or would result in any of
the conditions set forth in this Agreement not being satisfied;

     (k) create or assume any mortgage,  pledge, lien, or other encumbrance with
respect to the Assets, whether now owned or hereafter acquired; or

     (l) sell,  assign,  lease,  transfer,  or  otherwise  dispose of any of the
Assets,  except for sales of finished goods  inventory in the ordinary course of
business.

     (m) take any action, or fail to take action,  that would cause Net Sales of
Phillips  Weaving  Products  to be  recorded  for  accounting  purposes  in  the
Measurement Period rather than in any period prior to the Measurement Period for
the purpose of increasing  the  likelihood  of receiving,  or the amount of any,
Additional Contingent Payment pursuant to Section 1.2(b) of this Agreement.

     . During the period from the date hereof  until the Closing  Date,  Sellers
shall furnish to Buyer monthly unaudited  financial  statements  relating to the
Businesses, to the extent prepared by the Sellers in accordance with their usual
business  practices.  As soon as such  statements are prepared,  but in no event
later than July-31,  1997,  Sellers  shall  deliver to Buyer an audited  balance
sheet of the Businesses as of June-28,  1997 and an audited income  statement of
the Businesses for the six months ended June-28, 1997.

     . V.3. Access to Information; Confidentiality

     (a) Between the date of this  Agreement and the Closing  Date,  each Seller
Party will (i) give Buyer and its authorized  representatives full access to the
Assets and to all books,  records,  offices and other  facilities and properties
relating to the Businesses,  (ii) permit Buyer to make such inspections  thereof
as  Buyer  may  reasonably  request  (including,  without  limitation,  Phase  I
examinations incident to environmental  audits), and (iii) cause its officers or
other  appropriate  officials to furnish Buyer with such financial and operating
data and other information with respect to the Businesses as Buyer may from time
to time reasonably request.  Without limiting the foregoing,  in connection with
the preparation of the audited financial  statements  referred to in Section 5.2
above,  the Seller  Parties will take all steps  necessary to complete  internal
financial  statements for the period ending June 28, 1997 on or before  July-21,
1997,  and will deliver  such  internal  financial  statements  and  information
previously  requested by KPMG,  as well as  representation  letters in customary
form, and provide access to work papers and other necessary  information to KPMG
on or before July-21,  1997, such that the audit of the June-28,  1997 financial
statements  can begin on or before  July-21,  1997.  Seller Parties will provide
full cooperation to KPMG during the period from July-21,  1997 to July-31,  1997
to assist KPMG in its audit of the June-28, 1997 financial statements.

     (b) After the Closing Date,  the Buyer shall have no further  obligation to
keep  confidential  the  information  provided to it about the  Businesses or to
refrain  from  making  public  disclosures  about  the  Businesses  or about the
transactions contemplated hereunder,  provided, however, that Buyer will consult
with Seller  about  public  disclosures  to be made about this  Agreement or the
transactions  contemplated  hereunder  after  the date  hereof  but prior to the
Closing Date.

     (c) After the Closing Date,  each Seller Party will hold,  and will use its
best efforts to cause its  officers,  directors,  employees,  lenders,  counsel,
accountants,  representatives,  agents,  consultants  and  advisors to hold,  in
strict  confidence all  confidential  information of the Businesses,  including,
without limitation,  customer lists, details of client or consultant  contracts,
pricing policies,  operational methods,  marketing plans or strategies,  product
development  techniques  or plans,  business  acquisition  plans,  new personnel
acquisition  plans,  methods of manufacture,  technical  processes,  designs and
design projects, inventions and research projects of any Business learned by any
employee  of the  Seller  Parties  heretofore  or  hereafter,  unless  the  same
information  (a)-is currently  publicly  available or becomes publicly available
through  no fault of the  Seller  Parties  or their  agents,  advisors  or other
representatives  or another  person that the Seller Parties know, or have reason
to  know,  is  subject  to  confidentiality  obligations  with  respect  to such
information  or  (b)-such  information  is  required  by  applicable  law  to be
disclosed,  but then only to the extent  disclosure is required and after giving
the Buyer such notice of such obligation so that it may seek a protective  order
or other  similar  or  appropriate  relief,  and the Seller  Parties  shall also
undertake  in  good  faith  to  have  such  confidential   information   treated
confidentially consistent with the terms of this Agreement.

     . On the Closing  Date or as soon as  practicable  thereafter,  each of the
Phillips  Mills shall change its  corporate  name to a new name,  which does not
include the words making up its existing  name (or any existing  trade names) or
the acronym or  abbreviation  or any  variations,  translations  or combinations
thereof or similar  names and  otherwise  is not likely to be confused  with its
present names so as to make any of the Phillips  Mills' present names  available
to Buyer.  From and after the Closing,  none of the Phillips Mills shall use the
words making up its existing  name (or any existing  trade names) or the acronym
or  abbreviation or any  variations,  translations  or  combinations  thereof or
similar  names in  connection  with any business;  provided,  however,  that the
Seller  Parties may use the name  "Phillips" in any business that is not related
in any respect to the industry and product lines of the Businesses.

     .  Buyer  and the  Seller  Parties  will  make or cause to be made all such
filings and submissions under applicable laws and regulations as may be required
for the  consummation  of the  transactions  contemplated  hereunder,  including
without  limitation any filings required under the HSR Act. Buyer and the Seller
Parties will  cooperate and coordinate  with one another in connection  with any
such filings or submissions.

     . V.6. Employees and Employee Benefits
 
     (a) For  purposes of employee  benefits  under  Sellers'  employee  benefit
plans, all of the Employees who accept employment with Buyer shall be considered
terminated  employees and shall have no further  rights accrue to them under any
Seller's  employee  benefit plans after the Closing Date,  except as provided in
Sections  5.6(b),  (c),  (d) and (e)  below.  While  Buyer  intends  to hire the
employees  of the  Sellers as of the Closing  Date,  it is agreed by the parties
that Buyer is not obligated to hire any of the employees of the Seller  Parties.
The  employees  hired by the Buyer will be given  credit for prior  service with
Sellers for purposes of eligibility to participate in the Buyer's health benefit
plan and 401(k)  profit-sharing  plan,  but will not receive  credit for service
with Sellers for any other purpose  (including,  but not limited to, vacation or
severance policies).

     (b)  Notwithstanding  anything herein to the contrary,  Seller Parties will
pay, or Seller  Parties  will  maintain an  insurance  policy that will pay, the
following  unpaid claims for medical  expenses  incurred by  Participants  under
Sellers'  Health Care Plan that exist at the Closing Date  ("Incurred But Unpaid
Claims"):  (i) any unpaid  claim for the  payment of  Benefits  for health  care
expenses  incurred by a Participant which was submitted for payment prior to the
Closing Date;  and, (ii) any unpaid claim for the payment of Benefits for health
care  expenses  incurred by a  Participant  on or before the Closing  Date.  All
Incurred But Unpaid  Claims will be paid in  accordance  with the  provisions of
Sellers' Health Care Plan. Subject to the next sentence, all Incurred But Unpaid
Claims will be paid within sixty (60) days  following  Seller  Parties'  receipt
thereof.  If the amount of Benefit  payable  under any Incurred But Unpaid Claim
cannot be determined  within sixty days of the Sellers'  receipt of the Incurred
But Unpaid Claim, Seller will not be required to pay such Claim until the amount
payable is determined, as long as prior to the expiration of such sixty (60) day
period,  Seller  notifies the Participant who submitted such Incurred But Unpaid
Claim that Benefits will not be paid until the amount of the Benefit  payable is
determined.  It is agreed that the Culp, Inc. Health Care Plan ("Buyer's  Health
Care Plan") and Buyer are not  obligated to pay any Incurred But Unpaid  Claims,
and if Buyer incurs any  liability  with respect to Incurred But Unpaid  Claims,
Buyer shall be  indemnified,  pursuant to Section  7.2.  Any Incurred But Unpaid
Claim existing under  Sellers'  Health Care Plan at the Closing Date,  which are
submitted  by  Participants  to Buyer or to the  third  party  administrator  of
Buyer's  Health  Care Plan shall be  forwarded  to the  following  person at the
following address:

                                                S. Davis Phillips
                                                P.O. Box 1350
                                                High Point, N.C.  27261-1350


     (c) If a covered  employee or qualified  beneficiary  under Sellers' Health
Care Plan incurred a qualifying  event prior to the Closing Date,  Sellers shall
maintain responsibility for notifying those individuals of their rights to COBRA
continuation  coverage  under Sellers'  Health Care Plan in accordance  with the
COBRA laws.  Neither  Buyer,  nor Buyer's  Health Care Plan,  as a successor  to
Sellers'  Health Care Plan, is responsible  for providing any notice about COBRA
to any covered employee or qualified beneficiary under Sellers' Health Care Plan
who incurred a qualifying event prior to the Closing Date.

     (d) Seller and Sellers' Health Care Plan shall be responsible for providing
COBRA continuation  coverage to the COBRA Participants for the period prescribed
under the COBRA Laws.  Furthermore,  Sellers and Sellers' Health Care Plan shall
be  responsible  for providing  COBRA  continuation  coverage,  if any, for such
period to any covered  employee or qualified  beneficiary  under Sellers' Health
Care Plan who incurred a  qualifying  event prior to the Closing  Date.  Neither
Buyer, nor Buyer's Health Care Plan, as a successor plan to Sellers' Health Care
Plan, shall be responsible for providing any COBRA continuation  coverage to the
COBRA  Participants or to any covered  employee or qualified  beneficiary  under
Sellers'  Health Care Plan who incurred a qualifying  event prior to the Closing
Date.

     (e) Buyer shall offer health  insurance  coverage under Buyer's Health Care
Plan to Sellers'  employees  hired by Buyer on the Closing Date as long as those
employees  are eligible to  participate  in Sellers'  Health Care Plan as of the
Closing Date.  Buyer's  Health Care Plan shall not exclude from  coverage,  as a
preexisting  condition,  any  existing  health  care  condition  of  any  of the
aforementioned employees for which Benefits were paid under Sellers' Health Care
Plan.


 .        V.7.       Noncompetition

     (a) For a period  following  the  Closing  Date  and  ending  on the  fifth
anniversary of the Closing Date, neither S. Davis Phillips nor any Seller Party,
nor any  subsidiary or entity  controlled by (directly or  indirectly)  or under
common control with any Seller Party, shall directly or indirectly engage in the
business of manufacturing or marketing  upholstery fabrics anywhere in the State
of Georgia, the State of Pennsylvania, the State of North Carolina, the State of
South Carolina, the State of Tennessee,  the State of Mississippi,  the State of
California,  the  State of  Illinois,  the State of  Michigan,  the State of New
Jersey,  or any other State in the United  States,  Mexico,  Canada,  Australia,
Europe,  Asia, the Middle East,  Africa,  South America or any other location in
the world, or directly or indirectly acquire any ownership interest in an entity
that engages in such business in any such location provided,  however,  that the
ownership  of less than five  percent (5%) of the  outstanding  securities  of a
class  of  securities  that  is  registered  by the  issuer  thereof  under  the
Securities  Exchange  Act of 1934 or  traded on any  internationally  recognized
securities  market shall not  constitute a violation of the  provisions  of this
Section  5.7.  Each Seller  Party and S. Davis  Phillips  will also refrain from
using any of the Trade  Names in  connection  with  manufacturing  or  marketing
upholstery fabrics at any time after the Closing Date. The Seller Parties and S.
Davis Phillips acknowledge and agree that this provision is reasonable and valid
in  geographic  scope and  duration  and in all other  respects.  If any  Seller
Parties or S. Davis Phillips shall breach,  or threaten to breach,  this Section
5.7, the Buyer shall, after giving notice to such party breaching or threatening
to breach, and, if such breach is subject to cure within 10 days, such party has
not cured such breach within 10 days,  have (i)-the right to have the provisions
of this Section specifically enforced by a court of competent  jurisdiction,  it
being agreed that a breach or threatened  breach of this Section 5.7 would cause
irreparable  injury to the Buyer and that  money  damages  would not  provide an
adequate  remedy to the Buyer;  or (ii)-the  right to require the Seller Parties
and S. Davis Phillips to account for and pay over to the Buyer all compensation,
profits, monies,  accruals,  increments or other benefits derived or received by
the  Seller  Parties  or S. Davis  Phillips  as the  result of any  transactions
constituting  a breach of this Section 5.7; and each such right and remedy shall
be independent of the others and severally enforceable,  and each of which is in
addition to, and not in lieu of, any other rights and remedies  available to the
Buyer under law or in equity.  If any court determines that this Section 5.7, or
any part thereof,  is unenforceable  because of the duration or geographic scope
of such  provision,  such court  shall have the power to reduce the  duration or
scope of such  provision,  as the case may be, and, in its  reduced  form,  such
provision shall then be enforceable.

     (b) The Purchase  Price paid to the Sellers  pursuant to Section 1.2 hereof
shall serve as  consideration  to support the obligations of the Sellers and the
Shareholders  under this Section 5.7. In  consideration of the obligations of S.
Davis  Phillips  under this  Section  5.7,  the Buyer  will  deliver to S. Davis
Phillips the following:  (i) five annual payments of $1,200,000 each,  beginning
on the first anniversary of the Closing Date and ending on the fifth anniversary
of the Closing  Date (with such  payments to continue to be paid for the benefit
of S. Davis  Phillips in the case of disability of S. Davis  Phillips and to the
estate of S. Davis Phillips in the case of the death of S. Davis Phillips);  and
(ii) non-qualified  stock options,  exercisable for a term of six (6) years from
the Closing Date (the "Options"),  to purchase 100,000 shares of common stock of
the Buyer (the  "Shares")  at the closing  price of such common stock on the New
York Stock Exchange on the date next preceding the Closing Date. The Options and
the  Shares  shall be  unregistered  and  subject to all  transfer  restrictions
imposed by federal and state  securities  laws,  such options to be provided and
certain piggyback  registration  rights with respect to the Shares to be granted
pursuant to an option agreement  substantially in the form of Exhibit A attached
hereto (the "Option Agreement").

     . V.8. Closing Inventory

     (a) Buyer shall have the right to conduct a physical count of the inventory
included in the Assets (the  "Inventory"),  which  count shall be  observed,  at
Sellers'  discretion,  by Sellers and Sellers' accountant (with Buyer to pay the
reasonable expenses of Sellers'  accountant for such observation),  and shall as
promptly as practicable  thereafter,  and in no event more than thirty (30) days
after  the  Closing  Date,  prepare  and  deliver  to  Sellers a  schedule  (the
"Inventory  Report") setting forth quantity and value of each particular type of
Inventory  as of the Closing  Date.  The  valuation  of the  inventory  shall be
determined in accordance with Sellers' past practices and on a basis  materially
consistent with the  determination  of inventory values in the December 31, 1996
Financial  Statements.  Buyer  shall  deliver to  Sellers,  simultaneously  with
delivery of the Inventory  Report,  such work papers and other supporting detail
as Sellers and Sellers'  accountant  shall  reasonably  request.  The sum of the
values of all inventory  reflected in the Inventory  Report shall constitute the
"Closing Inventory Value."

     (b)  Following  delivery of the  Inventory  Report,  Sellers  and  Sellers'
accountants shall have five (5) business days in which to review and examine the
Inventory  Report.  If  Sellers  do not give Buyer  notice of any  dispute  with
respect to the accuracy of the  Inventory  Report  within such  period,  Sellers
shall be deemed to have accepted the Inventory  Report.  If Sellers  dispute the
accuracy of the  Inventory  Report and provide  timely notice of such dispute to
Buyer,  Buyer and Sellers or each of their  accountants  shall meet to reconcile
any such  dispute.  If such  dispute  has not been  reconciled  within  ten (10)
business days  following  delivery of written  notice of dispute from Sellers to
Buyer,  Sellers and Buyer shall refer such  dispute to a  nationally  recognized
accounting firm mutually  acceptable to Buyer and Sellers,  whose decision shall
be binding on all parties. Sellers and Buyer each shall pay one-half of the fees
and expenses of the third party accountant.

     (c) If the Closing  Inventory Value as finally  determined is less than the
aggregate  value of  inventories  reflected  in all Sellers'  December-31,  1996
Financial  Statements,  less any reserves  included  therein  (the  "Pre-closing
Inventory  Value"),  the Seller Parties shall pay within fifteen (15) days after
notification  from  Buyer  an  amount  equal  to  the  difference   between  the
Pre-closing Inventory Value and the Closing Inventory Value.

     . The Buyer  hereby  agrees that if it abandons  the use of the trade names
transferred  to it under  Section  1.1(a)(iii)  hereof,  Buyer shall  notify the
Shareholder  of such  abandonment,  but will have no  liability  whatsoever  for
failure to so notify.  In the event of such  abandonment,  the Shareholder  will
have the right to request that it be allowed to use such abandoned  names in the
future,  subject to Buyer's  approval of the  proposed  use of such names,  such
approval not to be unreasonably withheld.

     . The Seller  Parties and Buyer hereby agree that each,  at its own expense
(subject to the  provisions  of Section 9.2 hereof),  shall use its best efforts
and shall cooperate fully with the other in preparing,  filing, prosecuting, and
taking any other actions with respect to any applications,  requests, or actions
that are or may be  reasonable  and  necessary  to  obtain  the  consent  of any
governmental   instrumentality   or  any  third  party  or  to  accomplish   the
transactions contemplated by this Agreement.

     . The  Shareholder  covenants that it shall cause Sellers and Properties to
take all  corporate  action  necessary  to  consummate  this  Agreement  and the
transactions contemplated hereby.

     . S. Davis Phillips,  Properties and the other Seller Parties  covenant and
agree that they presently do not have and at any time following the Closing they
will not have, directly or indirectly,  any agreement or understanding,  whether
written or verbal,  with any employee of the  Businesses  to make any payment or
provide  anything of value to any such employee or any member of such employee's
family  that is in any manner  related  to the sales  volume or  performance  of
Phillips Weaving Products during the Measurement Period; provided, however, that
the Buyer agrees that it will pay ten percent (10%) of any Additional Contingent
Payment  payable to Sellers in accordance with Section 1.2(b) hereof (in lieu of
and instead of paying such 10% portion of the Additional  Contingent  Payment to
Sellers)  to the six  individuals  named  below in the same  proportions  as the
salaries of such  individuals  on the date after the  Closing  Date bear to each
other, such payment to be made by the Buyer to such individuals on the same date
that the  Additional  Contingent  Payment,  if any, is due to Sellers,  and such
payment to be made only if the minimum  threshold  amounts  that entitle the six
individuals to receive a bonus under the Buyer's  Management  Incentive Plan are
met by the Businesses  (as  determined by Buyer) for both the nine-month  period
ending May-3,  1998 and the  twelve-month  period ending  May-2,  1999.  The six
individuals  that may receive  payments  under this  paragraph  are Larry Lewis,
Lawry Bump, Pete Thompson, Susan DeLong, Dave Stewart and William Asbill.


                                   ARTICLE VI
                               CLOSING CONDITIONS

     VI.1.  Conditions to Each Party's  Obligations  to Effect the  Transactions
Contemplated  Hereby. 

     The  respective  obligations  of each  party  to  effect  the  transactions
contemplated  hereby  shall be  subject  to the  fulfillment  at or prior to the
Closing Date (subject to Article VIII hereof) of the following conditions:

     (a) No Seller  Party nor Buyer shall be subject on the Closing  Date to any
order, decree or injunction of a court of competent jurisdiction that enjoins or
prohibits the consummation of this Agreement,  nor shall there be pending a suit
or  proceeding  by any  governmental  authority  that seeks  injunctive or other
relief in connection with the transactions contemplated hereby.

     (b) The waiting period under the HSR Act, and all extensions thereof, shall
have expired or been terminated by the appropriate regulatory authorities.

     . The obligations of Seller Parties to effect the transactions contemplated
hereby shall be further subject to by the fulfillment at or prior to the Closing
Date  (subject to Article VIII hereof) of the following  conditions,  any one or
more of which may be waived by Seller Parties:

     (a) All representations and warranties of Buyer contained in this Agreement
shall be true and correct in all  material  respects as of such  Closing Date as
though  made as of such  date,  except  insofar  as any such  representation  or
warranty  expressly  by its terms  relates to any  specified  earlier date only.
Buyer shall have  performed  and  complied  in all  material  respects  with all
covenants and agreements  contained in this  Agreement  required to be performed
and complied with by it at or prior to the Closing Date,  and Sellers shall have
received a certificate to the matters set forth in this  subparagraph (a) signed
on behalf of Buyer by its duly authorized officer.

     (b) All  documents  required  to have  been  delivered  by Buyer to  Seller
Parties,  and all actions  required to have been taken by Buyer,  at or prior to
the Closing Date, shall have been delivered or taken.

     (c) If reasonably  requested by Seller  Parties,  Seller Parties shall have
received an opinion  from  Buyer's  legal  counsel,  dated the Closing  Date and
reasonably satisfactory in form and substance to Seller Parties.

     (d) Seller Parties shall have received from Buyer copies,  certified by the
Secretary or an Assistant Secretary, of resolutions of the Board of Directors of
Buyer authorizing the execution,  delivery and performance of this Agreement and
all  instruments  and documents to be delivered in  connection  herewith and the
transactions contemplated hereby by Buyer.

     . The  obligations of Buyer to effect any transaction  contemplated  hereby
shall be further  subject to the  fulfillment  at or prior to the  Closing  Date
(subject to Article VIII hereof) of the following conditions, any one or more of
which may be waived by Buyer:

     (a)  All  representations  and  warranties  of any of  the  Seller  Parties
contained in this Agreement  shall be true and correct in all material  respects
as of the  Closing  Date as though made as of such date,  except  insofar as any
such  representation or warranty expressly by its terms relates to any specified
earlier date only.  Each Seller Party and  Properties  shall have  performed and
complied in all material respects with all covenants and agreements contained in
this  Agreement  required to be performed and complied with by it at or prior to
the Closing Date, and Buyer shall have received a certificate to the matters set
forth  in  this  subparagraph-(a)  signed  on  behalf  of  each  Seller  and the
Shareholder by its duly authorized officer.

     (b) All required  consents from third parties and governmental  authorities
to permit the  transfer of the Assets,  the  assumption  of the  Contracts,  the
assignment of and entry into the Leases, the Factoring Agreements, the discharge
of the  Discharged  Debt and the operation of the  Businesses by the Buyer shall
have been obtained.

     (c) All  documents  required to have been  delivered by any Seller Party or
Properties to Buyer,  and all actions  required to have been taken by any Seller
Party or Properties,  at or prior to the Closing Date, shall have been delivered
or taken.

     (d) Buyer  shall have  received  an opinion  from  Sellers'  legal  counsel
reasonably  satisfactory to the Buyer,  dated as of the Closing Date and opining
to the matters listed on Exhibit B attached hereto.

     (e) Buyer shall have received from Seller  Parties and  Properties  copies,
certified by the Secretary or an Assistant Secretary of each Seller,  Properties
and  the  Shareholder,  of  resolutions  adopted  on  behalf  of  each  of  them
authorizing  the execution,  delivery and  performance of this Agreement and all
instruments  and  documents  to be  delivered  in  connection  herewith  and the
transactions contemplated hereby.

     (f) Buyer  shall  have  negotiated  and  entered  into  Leases in the forms
attached hereto as Exhibit C and the license in the form of Exhibit D.

     (g)  Sellers  shall  have  delivered  to Buyer  the June 28,  1997  audited
financial  statements  required  by  Section  5.2  hereof,  and such  financiaIl
statements shall contain no material  adjustments  from the unaudited  financial
statements  previously  provided and shall otherwise be satisfactory to Buyer in
its reasonable discretion.


                                   ARTICLE VII
                  SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION

     VII.1.  Survival of Representations.  All  representations,  warranties and
agreements  made by the  parties to this  Agreement  or  pursuant  hereto  shall
survive  the  Closing,  but all claims  made by virtue of such  representations,
warranties and agreements  shall be made under,  and subject to the  limitations
set forth in, this Article VII.

 .        VII.2.     Seller Parties' Agreement to Indemnify

               (a) Subject to the  conditions  and  provisions set forth herein,
          each of the Seller Parties (the  "Indemnifying  Parties") will jointly
          and  severally   defend,   indemnify  and  hold  harmless  Buyer,  its
          directors,    officers,    employees,   agents,   subsidiaries,    and
          shareholders, and each of their heirs, successors and assigns, against
          and in respect of:

               (i) Any and all loss,  damage or  deficiency  resulting  from any
          misrepresentation,  breach of warranty,  or other  violation of any of
          the  covenants,   warranties  or  representations  contained  in  this
          Agreement or any documents  delivered by any Seller Party  pursuant to
          Article-VI  (except the audited  financial  statements  as of June 28,
          1997 delivered  pursuant to Section 6.3(g) hereof),  or nonfulfillment
          of any agreement,  on the part of any Seller Party or Properties under
          this Agreement or any documents delivered by any Seller Party pursuant
          to Article VI (except the audited financial  statements as of June 28,
          1997  delivered  pursuant  to  Section  6.3(g)  hereof),  or from  any
          misrepresentation  in  or  omission  from  any  certificate  or  other
          instrument furnished to Buyer hereunder; provided, however, that Buyer
          has  no  indemnification  rights  with  respect  to  breaches  of  the
          representations  and  warranties  contained in Sections 3.24 and 3.25,
          except as provided in Sections 7.2(c) and (d);

               (ii) Any and all liabilities or obligations of Buyer with respect
          to or arising out of the  ownership  or operation of the Assets or the
          Businesses  on  or  prior  to  the  Closing  Date,   whether  accrued,
          unaccrued,  known, unknown, fixed, contingent,  absolute or otherwise,
          other  than  those  expressly  assumed  by Buyer  hereunder  and those
          covered under Section 7.2(a)(iii);

               (iii)  all  claims  (including   without  limitation  claims  for
          personal  injury or death,  claims for property  damages and all other
          private  party  claims  and  claims  by  governmental  authorities  or
          entities  of  any  type),  damages,  pending  or  threatened  actions,
          administrative  proceedings (whether formal or informal  proceedings),
          investigation  costs,  monitoring costs,  assessment  costs,  response
          costs, remedial costs, removal costs, restoration costs,  governmental
          requirements,  judgments,  losses of or damages to natural  resources,
          penalties,  liens, fines, settlements,  punitive damages, interest and
          other losses,  costs and  liabilities of any kind  (including  without
          limitation  attorneys' fees and court costs, and consultant and expert
          witness  fees) arising in any manner out of or by reason of (1)-breach
          of the warranties and  representations in Section 3.23 above,  (2)-any
          violation or alleged  violation of any Environmental Law by any Seller
          Party  or with  respect  to the Real  Property  that  occurs  prior to
          Closing  and/or  results from any Seller  Party's  acts or  omissions,
          (3)-any contamination or threatened or suspected  contamination of the
          Real Property (or any part thereof  including  without  limitation the
          soil and  groundwater  thereunder)  by Hazardous  Materials that first
          prior to Closing (except for Hazardous  Materials  brought to the Real
          Property  or  released  at or on the Real  Property  by Buyer or by an
          agent or invitee of Buyer) and/or  results from any Seller  Party's or
          Properties'  acts or omissions,  and/or (4) any presence,  generation,
          treatment, storage, disposal, transport, release, suspected release or
          threatened release of Hazardous Materials on or from the Real Property
          (or any  part  thereof  including  without  limitation  the  soil  and
          groundwater  thereunder)  that  first  prior to  Closing  (except  for
          Hazardous  Materials brought to the Real Property or released at or on
          the Real  Property by Buyer or by an agent or invitee of Buyer) and/or
          results  from any Seller  Party's or  Properties'  acts or  omissions.
          Notwithstanding  any other provisions  hereof: (a) Buyer shall have no
          right to undertake any intrusive  sampling of any real property leased
          to Buyer  pursuant to the Leases (the "Leased  Properties")  except as
          may be finally  ordered  by a court of  competent  jurisdiction  or an
          authorized  governmental  agency; (b) Buyer shall give Shareholder and
          the lessor of any Leased  Property notice of any inquiry,  demand,  or
          other  communication  or notice  received by Buyer with respect to any
          matter  relating to  violation of  Environmental  Laws with respect to
          such  Leased  Property,  or  relating  to  any  alleged  or  potential
          violation of any Environmental Law by any Seller Party,  Properties or
          such  lessor  of  Leased  Properties,  and  Seller  Parties  shall  be
          responsible  for responding to and resolving  such inquiry,  demand or
          other  communication  or notice (and if such inquiry,  demand or other
          communication  or notice  shall  become a Claim as  defined in Section
          7.2(b)(i),  Section 7.2(b) shall be applicable with respect  thereto);
          and (c) Buyer shall not initiate any claims  against any Seller Party,
          Properties  or lessor of any Leased  Property  with respect to matters
          disclosed  in  Schedule  3.23,  except to the  extent  that a Claim as
          provided in Section  7.2(b)(i) with respect  thereto has been asserted
          against Buyer, in which event Section 7.2(b) shall apply.

               (iv)  Any  and  all  claims,  losses,   liabilities  or  expenses
          resulting  from  noncompliance  with any bulk sale laws resulting from
          the transactions contemplated by this Agreement; and

               (v)  Any   and   all   claims,   costs,   damages,   liabilities,
          deficiencies,  losses or  expenses  suffered  or  incurred by any such
          party  (whether as a result of third party  claims  (whether  valid or
          not), demands, suits, causes of action,  proceedings,  investigations,
          judgments, assessments,  liabilities or otherwise), including costs of
          investigation  and defense and attorneys'  fees assessed,  incurred or
          sustained by or against any of them, with respect to or arising out of
          any of the foregoing.

     No  indemnification  shall be  required  to be made under this  Section 7.2
until the  aggregate  amount  of  Buyer's  damages  exceeds  $100,000  ("Buyer's
Threshold"),  and if Buyer's  damages  exceed such amount then the  Indemnifying
Parties shall indemnify the Buyer for the full amount of Buyer's damages only to
the extent in excess of the  initial  $100,000.  It is further  agreed  that the
liability of the Indemnifying Parties pursuant to this indemnification provision
shall be limited to Claims (as defined below) asserted by Buyer within two years
("Buyer's Time Limit") after the Closing Date, and the total amounts  payable by
the  Indemnifying  Parties  pursuant to this Section  7.2(a) shall be limited to
$5,000,000  ("Buyer's  Maximum");   provided,   however,  that  neither  Buyer's
Threshold,  Buyer's  Time  Limit  nor  Buyer's  Maximum  shall  apply to  claims
(i)-arising  under  Section  7.2(a)(iii)  (or  Section  7.2(a)(v)  to the extent
related  to a claim  under  Section  7.2(a)(iii)),  (ii)-relating  to  Taxes  or
(iii)-arising from a breach of the representations  and warranties  contained in
Section  3.14;  neither  Buyer's  Threshold  nor Buyer's  Maximum shall apply to
claims arising under Section 5.8; and the Buyer's  Threshold  shall not apply to
claims arising under Section 5.6(b) or Section 7.2(c).
 
         (b)        Claims.

               (i) Except as  otherwise  provided in Section  7.2(c),  within 30
          days  after  receiving  written  notice  thereof,  Buyer will give the
          Indemnifying  Parties  notice  of any  claims,  demands,  assessments,
          suits,  judgments,  proceedings or other actions (for purposes of this
          Section and  Section-7.3,  any  "Claims")  asserted  against (by third
          parties,  governmental  entities,  or  otherwise) or incurred by Buyer
          with respect to which Buyer intends to claim  indemnification from the
          Indemnifying  Parties pursuant to Section 7.2(a), and the Indemnifying
          Parties will  undertake the response or defense  thereof by counsel of
          their own  choosing,  provided  that such counsel  shall be reasonably
          acceptable  to Buyer.  Buyer  may,  by  counsel,  participate  in such
          proceedings,    negotiations   or   defense   at   its   own   expense
          (notwithstanding  Section  7.2(a)(v)),  but the  Indemnifying  Parties
          shall retain control over such proceedings,  negotiation or litigation
          except as hereinafter set forth.  In all such cases,  Buyer shall give
          reasonable  assistance to the Indemnifying  Parties,  including making
          Buyer's employees available without charge as reasonably requested.

               (ii) In the event that within 45 days (or such lesser time as may
          be required by law to respond to a Claim) after written  notice of any
          such Claim,  the  Indemnifying  Parties  fail to notify Buyer of their
          intention to respond or defend, Buyer will have the right to undertake
          the defense, compromise or settlement of such Claim for the account of
          the  Indemnifying  Parties,  subject to the right of the  Indemnifying
          Parties to assume the defense,  compromise or settlement of such Claim
          at any time prior to final  settlement,  compromise  or  determination
          thereof.

     (c) Product  Warranty  Claims.  If,  within one year  following the Closing
Date, any person who purchased  merchandise from any Seller prior to the Closing
Date shall

               (i) claim that such  merchandise  shipped by such Seller prior to
          the Closing Date was defective,  nonconforming  or otherwise failed to
          meet  specifications,  or  failed to comply  with  warranties  of such
          Seller, or 

               (ii)  otherwise  assert  any  claim  relating  to a breach of the
          representations and warranties in Section 3.24 (collectively, "Product
          Warranty  Claims"),  Buyer shall be  entitled  to settle such  Product
          Warranty  Claims  on  terms  as it may  determine  in  its  reasonable
          discretion,  acting  in good  faith  and  materially  consistent  with
          Sellers'  past  practices  with regard to such  settlements  ("Product
          Warranty  Settlements");  provided,  however,  that  Buyer  shall give
          Sellers and Sellers'  accountant notice not less than ten (10) days in
          advance  of any  proposed  Product  Warranty  Settlement  in excess of
          $5,000. Seller Parties agree to make payment within 15 days of the end
          of each of the first four  three-month  periods  following the Closing
          Date of an amount equal to the net loss of Buyer on account of Product
          Warranty  Settlements  made by  Buyer  during  each  such  three-month
          period.  Buyer will  notify  Sellers of the amount of such net loss on
          the  account of such  Product  Warranty  Settlements  within each such
          three-month  period as soon as practicable  after the end of each such
          three-month  period.  Seller  Parties  shall  have no  liability  with
          respect to any Product Liability Claims unless, and only to the extent
          that,  the net  loss to  Buyer  on  account  of the  Product  Warranty
          Settlements paid by Buyer shall exceed $75,000, and Sellers shall have
          no liability or  responsibility to Buyer hereunder with respect to any
          Product  Warranty Claims made more than one year following the Closing
          Date.  For this  purpose,  the net loss to Buyer on account of Product
          Warranty  Settlements  shall  equal  the  amounts  paid by Buyer  with
          respect to such  Settlements  less the amounts received or expected to
          be  received  on resale (as seconds or  otherwise)  or other  rebates,
          credits  or amounts  that Buyer may  receive as a result of paying any
          such  Settlement.  Buyer  shall  act in good  faith to  maximize  such
          amounts received on resale or other rebates, credits and amounts. Upon
          request of Sellers,  Buyers will  provide  information  to Sellers and
          their  accountant to  demonstrate  Buyer's  calculation of the amounts
          owed to Buyer  pursuant to this Section  7.2(c).  If,  within five (5)
          days after  notification  thereof,  Sellers  and  Sellers'  accountant
          dispute the amount owed to Buyer as  calculated by Buyer or the amount
          of any proposed Product Warranty  Settlement in excess of $5,000,  the
          dispute will be submitted to binding  arbitration as provided  herein.
          Buyer  and  Seller   Parties  shall  appoint  a  mutually   acceptable
          arbitrator  from a list  of  arbitrators  recognized  by the  American
          Arbitration Association ("AAA") to resolve the disagreement.  If Buyer
          and Seller Parties cannot agree on a mutually  acceptable  arbitrator,
          each shall appoint an arbitrator of choice from a list of  arbitrators
          recognized  by the AAA and the appointed  arbitrators  shall appoint a
          third arbitrator from the list, and the three  arbitrators  shall hear
          the  parties and settle the  disagreement.  The  proceedings  shall be
          conducted  under and governed by the Commercial  Rules of the American
          Arbitration  Association,   as  in  effect  from  time  to  time.  All
          arbitration  hearings  shall  be  conducted  in  the  State  of  North
          Carolina.  The arbitrator(s)  shall have no power to award punitive or
          exemplary  damages,  to ignore or vary the terms of this Agreement and
          shall be bound to apply  controlling law.  Determination of the amount
          owed or the Product Warranty Settlement and the resolution of any such
          dispute by the arbitrator(s)  will be binding.  The Seller Parties and
          Buyer  shall  each  bear  one-half  of the  cost of the  arbitrator(s)
          engaged to resolve a dispute under this Section 7.2(c).

               (d) Product Liability Claims.  With respect to claims that relate
          to product liability or a breach of the representations and warranties
          contained in Section  3.25  ("Product  Liability  Claims" and "Product
          Liability  Settlements"),  to the extent that Product Liability Claims
          or Product Liability  Settlements are covered by insurance  maintained
          by Seller Parties,  Buyer agrees to process and defend such claims for
          the benefit of Sellers,  subject to Seller Parties' or their insurer's
          prompt reimbursement of Buyers upon demand for all costs,  liabilities
          and expenses to third parties  incurred by Buyer  (subject to approval
          by Seller if more than $2,500 for any individual  item,  such approval
          not to be unreasonably  withheld) in connection with Product Liability
          Claims or Product Liability Settlements  (including without limitation
          those  items  specified  in Section  7.2(a)(v)  that are  related to a
          Product  Liability Claim or a Product  Liability  Settlement).  To the
          extent not fully covered by insurance  maintained  by Seller  Parties,
          Seller  Parties will  indemnify  Buyer  against all Product  Liability
          Claims as if such Claims are governed by Section 7.2(a) and subject to
          the limitations therein.

               (e)  Guarantee by S. Davis  Phillips.  S.-Davis  Phillips  hereby
          unconditionally and irrevocably  guarantees any and all obligations of
          the Seller  Parties to the Buyer  under this  Section  7.2.  This is a
          guarantee of payment,  and S. Davis Phillips agrees that if the Seller
          Parties do not make payment of their  obligations  to Buyer under this
          Section  7.2 when due, S. Davis  Phillips  will pay on demand all such
          obligations  without Buyer first having to proceed  against any Seller
          Party.

               VII.3.  Buyer's  Agreement  to  Indemnify.  (a)  Subject  to  the
          conditions  and  provisions  set  forth  herein,  Buyer  will  defend,
          indemnify  and hold  harmless  the Seller  Parties,  their  directors,
          officers,  members, managers,  employees,  agents,  shareholders,  and
          their successors and assigns, against and in respect of:

               (i) Any and all loss,  damage or  deficiency  resulting  from any
          misrepresentation,  breach of warranty,  or other  violation of any of
          the  covenants,   warranties  or  representations  contained  in  this
          Agreement or any documents  delivered by Buyer pursuant to Article VI,
          or nonfulfillment of any agreement or any documents delivered by Buyer
          pursuant to Article VI, on the part of Buyer under this  Agreement  or
          from any  misrepresentation  in or omission  from any  certificate  or
          other instrument furnished to Seller Parties hereunder;

               (ii) Any and all liabilities and obligations  assumed by Buyer as
          provided herein as well as those  liabilities and obligations of Buyer
          (or any of its  Successors)  that arise  after the  Closing  Date with
          respect to the operation of the Businesses after that date; and

               (iii)  Any  and  all   claims,   costs,   damages,   liabilities,
          deficiencies,  losses or  expenses  suffered  or  incurred by any such
          party  (whether as a result of third party  claims  (whether  valid or
          not), demands, suits, causes of action,  proceedings,  investigations,
          judgments, assessments,  liabilities or otherwise), including costs of
          investigation  and defense and attorneys'  fees assessed,  incurred or
          sustained by or against any of them, with respect to or arising out of
          any of the foregoing.

         (b)        Claims.

               (i)  Within  30 days  after  receiving  written  notice  thereof,
          Sellers  will give Buyer  notice of any Claims  asserted  against  (by
          third  parties,  governmental  entities,  or otherwise) or incurred by
          Seller  Parties with respect to which Seller  Parties  intend to claim
          indemnification  from Buyer,  and Buyer will undertake the response or
          defense  thereof by counsel of its own  choosing,  provided  that such
          counsel  shall be  reasonably  acceptable  to Seller  Parties.  Seller
          Parties may, by counsel, participate in such proceedings, negotiations
          or defense at their own expense (notwithstanding Section 7.3(a)(iii)),
          but Buyer shall retain control over such  proceedings,  negotiation or
          litigation except as hereinafter set forth. In all such cases,  Seller
          Parties shall give reasonable  assistance to Buyer,  including  making
          Seller  Parties'  employees  available  without  charge as  reasonably
          requested.

               (ii) In the event that within 20 days after written notice of any
          such Claim,  Buyer fails to notify Seller  Parties of its intention to
          respond or defend, Seller Parties will have the right to undertake the
          defense,  compromise  or  settlement  of such Claim for the account of
          Buyer, subject to the right of Buyer to assume the defense, compromise
          or  settlement  of such Claim at any time  prior to final  settlement,
          compromise or determination thereof.

               No  indemnification  shall  be  required  to be made  under  this
          Section  7.3 until the  aggregate  amount of Seller  Parties'  damages
          exceeds  $100,000  ("Sellers'  Threshold"),  and  if  Seller  Parties'
          damages exceed such amount then Buyer shall  indemnify  Seller Parties
          for the full amount of Buyer's damages only to the extent in excess of
          the initial  $100,000.  It is further agreed that the liability of the
          Buyer pursuant to this  indemnification  provision shall be limited to
          Claims (as defined above)  asserted by Seller Parties within two years
          after the Closing Date;  provided,  however,  that Sellers'  Threshold
          shall not apply to any obligations or liabilities expressly assumed by
          Buyer pursuant to Section 1.4.


                                  ARTICLE VIII
                                   TERMINATION

         VIII.1.    Termination.  This Agreement may be terminated:

               (a) at any time by mutual consent of Shareholder and Buyer;

               (b) by either party, if Closing  hereunder has not taken place on
          or  before   August  31,  1997  for   reasons   other  than  delay  or
          nonperformance on the part of the party seeking such termination.

               (c) by Seller  Parties if all the  conditions  in Section 6.1 and
          6.2 have not been satisfied or waived by the Closing Date; and

               (d) by Buyer if all the  conditions  set forth in Section 6.1 and
          6.3 have not been satisfied or waived by the Closing Date.

               . VIII.2. Procedure and Effect of Termination or Failure to Close
          (a)In the event of termination  of this  Agreement and  abandonment of
          the  transactions  contemplated  hereby  by any or all of the  parties
          pursuant to Section 8.1,  prompt written notice thereof shall be given
          to the  other  parties  and this  Agreement  shall  terminate  and the
          transactions  contemplated hereby shall be abandoned,  without further
          action by any of the parties  hereto.  If this Agreement is terminated
          as provided herein:

               (i)  None  of the  parties  hereto  nor  any of  their  partners,
          directors,  officers,  members,  managers,  shareholders,   employees,
          agents,  or affiliates shall have any liability or further  obligation
          to the  other  party  or any of  its  partners,  directors,  officers,
          members,  managers,  shareholders,  employees,  agents,  or affiliates
          pursuant  to this  Agreement  with  respect to which  termination  has
          occurred,  except as stated in Article VII or in Section 8.2(b) and in
          Sections 9.1 and 9.2 hereof; and

               (ii) All filings,  applications and other submissions relating to
          the  transfer  of the  Assets  shall,  to the extent  practicable,  be
          withdrawn from the agency or other person to which made.

               (b)  Notwithstanding  anything to the contrary  contained in this
          Agreement, including, without limitation, Article-VII, in the event of
          termination  of this  Agreement,  or if  pursuant to the terms of this
          Agreement  (i) Sellers shall be obligated to sell the Assets and Buyer
          shall be  obligated  to  purchase  the  Assets,  (ii)  Buyer or Seller
          Parties and Properties,  as the case may be, shall have duly satisfied
          each of the  conditions set forth in Article VI hereof to be satisfied
          by it or them (or in the case of any condition that is to be satisfied
          at the Closing,  shall have  demonstrated a willingness and ability to
          satisfy such  condition  if the Closing  were to take place),  and the
          conditions  set forth in Section  6.1 have been  satisfied,  and (iii)
          Sellers or Buyer, as the case may be, shall  nevertheless fail to sell
          or  purchase  the  Assets,  then and in that  event,  Buyer and Seller
          Parties,  as the case may be,  shall be entitled to seek any remedy to
          which  they may be  entitled  at law or in  equity  in the  event of a
          material  violation  or breach  of any  agreement,  representation  or
          warranty  contained in this Agreement  (which  remedies shall include,
          without limitation,  with respect to both Buyer and Seller Parties, an
          injunction  or  injunctions  to  prevent  breaches  of,  or to  obtain
          specific performance of any obligation hereunder, without limiting any
          monetary damages to which Buyer or Seller Parties, as the case may be,
          shall be entitled).


                                   ARTICLE IX
                            MISCELLANEOUS PROVISIONS

               IX.1. Commissions. Seller Parties, on the one hand, and Buyer, on
          the other  hand,  each  represent  and  warrant  to the other  that no
          broker,  finder or other  person is  entitled to any  brokerage  fees,
          commissions  or  finder's  fees in  connection  with the  transactions
          contemplated  hereby by reason of any action taken by the party making
          such  representation.  Seller  Parties  and  Buyer  each  will  pay or
          otherwise  discharge,  and will  indemnify and hold the other harmless
          from and against,  any and all claims or liabilities for all brokerage
          fees,  commissions  and finder's fees incurred by reason of any action
          taken by such party.

               .  Whether  or  not  the  transactions  contemplated  hereby  are
          consummated,  except  as  otherwise  provided  herein,  all  costs and
          expenses   incurred  in  connection   with  this   Agreement  and  the
          transactions  contemplated  hereby will be paid by the party incurring
          such  costs and  expenses,  provided,  however,  that Buyer on the one
          hand, and the Seller Parties collectively on the other hand, will each
          bear one-half of the filing fee incurred in complying with the HSR Act
          and the rules and  regulations  promulgated  thereunder by the Federal
          Trade  Commission.  With regard to costs associated with  transferring
          the Assets to Buyer  pursuant to this  Agreement,  Seller Parties will
          pay any sales or use taxes and transfer  taxes or fees, and Buyer will
          pay any recording fees.

               . Subject to the terms and conditions of this Agreement,  each of
          the parties hereto will use all  reasonable  efforts to take, or cause
          to be taken,  all actions,  and to do, or cause to be done, all things
          necessary,  proper or advisable under  applicable laws and regulations
          to consummate  and make  effective the sale of the Assets  pursuant to
          this  Agreement.  From time to time after the  Closing  Date,  without
          further consideration, each Seller Party will, at its expense, execute
          and deliver, or cause to be executed and delivered,  such documents to
          Buyer as Buyer may  reasonably  request  in order to more  effectively
          vest in Buyer  good title to the  Assets.  From time to time after the
          Closing Date,  without further  consideration,  Buyer will, at Buyer's
          expense,  execute  and deliver  such  documents  to Seller  Parties as
          Seller  Parties may  reasonably  request in order more  effectively to
          consummate  the  sale  and  lease  of  the  Assets  pursuant  to  this
          Agreement.

               . This Agreement may be amended, modified or supplemented only by
          written agreement of Seller Parties and Buyer.

               . Except as otherwise provided in this Agreement,  any failure of
          any of the  parties  to comply  with any  obligation,  representation,
          warranty, covenant, agreement or condition herein may be waived by the
          party  entitled to the benefits  thereof only by a written  instrument
          signed by the party  granting such waiver,  but such waiver or failure
          to insist upon strict compliance with such obligation, representation,
          warranty,  covenant,  agreement  or  condition  shall not operate as a
          waiver  of, or  estoppel  with  respect  to, any  subsequent  or other
          failure.  Whenever this Agreement requires or permits consent by or on
          behalf of any party hereto,  such consent shall be given in writing in
          a manner  consistent with the  requirements for a waiver of compliance
          as set forth in this Section 9.5.

               . All  notices  and other  communications  hereunder  shall be in
          writing  and  shall  be  deemed  given  when  delivered  by hand or by
          facsimile  transmission  or mailed by  registered  or  certified  mail
          (return receipt  requested),  postage  prepaid,  to the parties at the
          following  addresses (or at such other address for a party as shall be
          specified by like notice; provided that notices of a change of address
          shall be effective only upon receipt thereof):

         (a)        If to Buyer, to:

                    Culp, Inc.
                    P.O. Box 2686
                    101 South Main Street
                    High Point, North Carolina  27261-2686
                    Attention:  Franklin N. Saxon
                    Facsimile:  (910) 887-7089

                    Copies to:

                    Robinson, Bradshaw-& Hinson, P.A.
                    1900 Independence Center
                    101 North Tryon Street
                    Charlotte, North Carolina  28246
                    Attention:  Henry H. Ralston
                    Facsimile:  (704) 478-4000

         (b)        If to Seller Parties, Properties or S. Davis
                    Phillips, to:

                    Phillips Industries, Inc.
                    Post Office Box 1350
                    High Point, North Carolina  27261
                    Attention:  S. Davis Phillips
                    Facsimile:  (910) 882-3131

                    Copies to:

                    Womble Carlyle Sandridge & Rice
                    1600 BB&T Financial Center
                    P.O. Drawer 84
                    Winston-Salem, North Carolina  27102
                    Attention:  William A. Davis, II
                    Facsimile:  (910) 733-8364

               . The parties agree that,  following the Closing Date, Buyer will
          provide  the  Phillips  Mills  with  certain  transitional  accounting
          services  for the  months  of August  and  September  1997,  and Buyer
          anticipates  hiring a  temporary  employee  in  connection  with  such
          services.  Buyer's  employees will supervise and assist, at no cost to
          the  Phillips  Mills,  such  temporary   employee  in  providing  such
          transitional  services,  but the costs of such temporary employee will
          be borne by the Seller Parties and paid promptly upon Buyer's demand.

               . The parties agree that Buyer may, at its election,  satisfy and
          set-off  any  payments  due Buyer from any Seller  Parties  under this
          Agreement  against  any  payments  due from Buyer to any Seller  Party
          (other than payments due to S. Davis  Phillips  under Section  5.7(b))
          under this Agreement.

               .  This  Agreement  and all of the  provisions  hereof  shall  be
          binding upon and inure to the benefit of the parties  hereto and their
          respective successors and permitted assigns;  provided,  however, that
          this Agreement may not be assigned by any party without the consent of
          the other  parties,  except  that  Buyer may  assign  its  rights  and
          obligations under this Agreement to a wholly-owned subsidiary of Buyer
          provided  that Buyer  guarantees  the payment and  performance  of the
          obligations of such subsidiary hereunder.

               . The execution, interpretation and performance of this Agreement
          shall be governed by the internal  laws and judicial  decisions of the
          State of North Carolina.

               . This  Agreement  may be executed  in one or more  counterparts,
          each of which shall be deemed an original,  but all of which  together
          shall constitute one and the same instrument.

               . The article and section  headings  contained in this  Agreement
          are solely for the purpose of reference, are not part of the agreement
          of the  parties  and  shall  not in any  way  affect  the  meaning  or
          interpretation of this Agreement.

               . This Agreement, including the Exhibits and Schedules hereto and
          the documents delivered pursuant to this Agreement,  embody the entire
          agreement and  understanding  of the parties  hereto in respect of the
          subject  matter  hereof.  The  Exhibits  and  Schedules  hereto are an
          integral  part of this  Agreement  and are  incorporated  by reference
          herein.   This   Agreement   supersedes   all  prior   agreements  and
          understandings,  whether  written,  oral,  or  otherwise,  between the
          parties  with  respect  to  the  transactions   contemplated  by  this
          Agreement.







                [Remainder of this page intentionally left blank]


               IN WITNESS WHEREOF, the Seller Parties and Buyer have caused this
          Agreement to be signed by their respective duly authorized officers as
          of the date first above written.


                                       SELLERS:

                                       PHILLIPS WEAVING MILLS, INC.


                                       By:      ________________________________
                                       Name:    ___________________________
                                       Title:   __________________________



                                              PHILLIPS PRINTING MILLS, INC.


                                       By:  ________________________________
                                       Name:___________________________
                                       Title:__________________________



                                              PHILLIPS VELVET MILLS, INC.


                                        By:  ________________________________
                                        Name:___________________________
                                        Title:__________________________



                                              PHILLIPS MILLS, INC.


                                        By: ________________________________
                                        Name:___________________________
                                        Title:__________________________



                             (signatures continued)



                                       1


                                       PROPERTIES:

                                       PHILLIPS PROPERTY COMPANY, LLC


                                       By:      ________________________________
                                       Name:___________________________
                                       Title:__________________________



                                              SHAREHOLDER:

                                              PHILLIPS INDUSTRIES, INC.


                                        By:     ________________________________
                                        Name:___________________________
                                        Title:__________________________


                                          ________________________________(SEAL)
                                            S. DAVIS PHILLIPS



                                              BUYER:

                                              CULP, INC.


                                      By:      ________________________________
                                                Name:  Franklin N. Saxon
                                                Title:  Senior Vice President
                                                     and Chief Financial Officer




                                       2



                                                  TABLE OF CONTENTS


                                                      ARTICLE I

                                         SALE OF ASSETS AND TERMS OF PAYMENT

1.1.       The Sale...........................................................1
1.2.       Purchase Price.....................................................4
1.3.       Proration of Expenses..............................................8
1.4.       Assignment and Assumption of Obligations and Liabilities...........9
1.5.       Procedures for Assets Not Transferable.............................9
1.6.       Allocations.......................................................10
   
                                                     ARTICLE II
        
                                                     THE CLOSING

2.1.       Time and Place of Closing.........................................10
2.2.       Deliveries by Sellers.............................................10
2.3.       Deliveries by Buyer...............................................10

                                                     ARTICLE III

                                      REPRESENTATIONS AND WARRANTIES OF SELLERS

3.1.       Existence; Capital Stock and Ownership............................11
3.2.       Authority Relative to this Agreement..............................11
3.3.       Consent and Approvals; No Violation...............................12
3.4.       Financial Statements..............................................12
3.5.       Undisclosed Liabilities...........................................12
3.6.       Absence of Certain Changes or Events..............................12
3.7.       Certain Contracts and Arrangements................................13
3.8.       Litigation........................................................14
3.9.       Labor Matters.....................................................14
3.10.      Employee Benefit Plans; ERISA.....................................14
3.11.      Tax Matters.......................................................17
3.12.      Licenses and Authorizations.......................................17
3.13.      Compliance with Laws..............................................18
3.14.      Title to Assets...................................................18
3.15.      Bank Accounts.....................................................18
3.16.      Corporate and Personnel Data; Labor Relations.....................18
3.17.      Insurance.........................................................18
3.18.      Tangible Assets...................................................19
3.19.      Real Property.....................................................19
3.20.      Customers.........................................................19
3.21.      [Intentionally Omitted]...........................................19
3.22.      Intellectual Property.............................................19
3.23.      Environmental Matters.............................................20
3.24.      Product Warranty..................................................22
3.25.      Product Liability.................................................22
3.26.      Disclosure........................................................22

                                                     ARTICLE IV

                                       REPRESENTATIONS AND WARRANTIES OF BUYER

4.1.       Organization......................................................23
4.2.       Authority Relative to this Agreement..............................23
4.3.       Consents and Approvals; No Violation..............................23
4.4.       Qualification.....................................................23
4.5.       Litigation........................................................24

                                                      ARTICLE V

                                              COVENANTS OF THE PARTIES

5.1.       Conduct of Business...............................................24
5.2.       Financial Statements..............................................25
5.3.       Access to Information; Confidentiality............................25
5.4.       Change of Corporate Name..........................................26
5.5.       Filings...........................................................27
5.6.       Employees and Employee Benefits...................................27
5.7.       Noncompetition....................................................29
5.8.       Closing Inventory.................................................30
5.9.       Trade Names.......................................................31
5.10.      Other Actions.....................................................31
5.11.      Corporate Action..................................................31
5.12.      No Side Agreements................................................31

                                                     ARTICLE VI

                                                 CLOSING CONDITIONS

6.1.       Conditions to Each Party's Obligations to
           Effect the Transactions Contemplated Hereby.......................32
6.2.       Conditions to the Obligations of Seller Parties to
           Effect the Transactions Contemplated Hereby.......................32
6.3.       Conditions to the Obligations of Buyer to
           Effect the Transactions Contemplated Hereby.......................33

                                                     ARTICLE VII

                                    SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION

7.1.       Survival of Representations.......................................34
7.2.       Seller Parties' Agreement to Indemnify............................34
7.3.       Buyer's Agreement to Indemnify....................................40

                                                    ARTICLE VIII

                                                     TERMINATION

8.1.       Termination.......................................................42
8.2.       Procedure and Effect of Termination or Failure to Close...........42

                                                     ARTICLE IX

                                              MISCELLANEOUS PROVISIONS

9.1.       Commissions.......................................................43
9.2.       Expenses..........................................................43
9.3.       Further Assurances................................................43
9.4.       Amendment and Modification........................................44
9.5.       Waiver of Compliance; Consents....................................44
9.6.       Notices...........................................................44
9.7.       Transition Services...............................................45
9.8.       Right of Set-Off..................................................45
9.9.       Assignment........................................................45
9.10.      Governing Law; Jurisdiction.......................................46
9.11.      Counterparts......................................................46
9.12.      Interpretation....................................................46
9.13.      Entire Agreement..................................................46





                                                      EXHIBITS

A                   Option Agreement
B                   Opinion of Counsel to Sellers
C                   Leases
D                   License


                                                      SCHEDULES

1.1(i)              Tangible Personal Property
1.1(ii)             Contracts; Required Consents
1.1(vi)             Prepaid Expenses, Bond, Deposits, Etc.
1.4(b)              Discharged Debt
2.2(b)              Liens to be Released at Closing
3.1                 Capital Stock Ownership and States Where Sellers Do Business
3.3                 Contract Defaults
3.5                 Undisclosed Liabilities
3.6                 Absence of Changes
3.7                 Other Contracts; Required Consents
3.8                 Litigation
3.9                 Labor Matters
3.10                Benefit Plans
3.12                Licenses, Authorizations
3.14                Exceptions to Title
3.15                Bank Accounts
3.16                Corporate and Personnel Data
3.17                Insurance
3.22                Intellectual Property
3.23                Environmental Matters

2
C-446086v01!.02340.01192
C-446086v01!.02340.01192
                                  Exhibit A


                                OPTION AGREEMENT

               THIS  OPTION  AGREEMENT  is  entered  into  as of the  4th day of
          August,  1997 (this  "Agreement")  by and between CULP,  INC., a North
          Carolina   corporation   (the   "Company")   and  S.  Davis   Phillips
          ("Phillips").


                              Background Statement

               Pursuant  to an Asset  Purchase  Agreement  dated the date hereof
          among the Company,  Phillips Weaving Mills,  Inc.,  Phillips  Printing
          Mills,   Inc.,   Phillips   Velvet  Mills,   Inc.,   Phillips   Mills,
          Incorporated,  Phillips  Property Company,  LLC, Phillips  Industries,
          Inc. and Phillips (the "Purchase  Agreement"),  the Company has agreed
          to acquire  the Assets (as  defined in the  Purchase  Agreement),  and
          Phillips has agreed to refrain from competing  with the Company,  each
          for  the  consideration  set  forth  in the  Purchase  Agreement.  The
          consideration  for  Phillips'  agreement  not to compete  includes the
          grant of options to acquire  100,000 shares of the common stock of the
          Company,  subject  to the  terms  and  conditions  of  this  Agreement
          (capitalized terms not otherwise defined herein shall have the meaning
          assigned to such terms in the Purchase Agreement).


                             Statement of Agreement

               In  consideration  of the Company's  purchase of the Assets under
          the Purchase  Agreement,  the premises and mutual covenants  contained
          herein,  and other good and  valuable  consideration,  the receipt and
          sufficiency of which are hereby acknowledged, the parties hereby agree
          as follows:

               1. Grant of Options.  The Company hereby grants to Phillips stock
          options,  exercisable at any time for a term of six (6) years from the
          Closing  Date  (the  "Options")  to  purchase  100,000  shares  of the
          Company's common stock (the "Shares") at the exercise price of $17.625
          per share (the closing price of the Company's  common stock on the New
          York Stock Exchange on the date next preceding the Closing Date).  The
          Options will be  non-qualified  stock  options for purposes of Section
          422 of the  Internal  Revenue  Code,  and  neither the Options nor the
          Shares  have been  registered  under the  Securities  Act of 1933 (the
          "Securities Act") or any state securities law.

               2. Investment  Representations  and Warranties of Holder.  (a)-In
          connection  with the acceptance by Phillips of the Options and Shares,
          Phillips  acknowledges  that he is familiar  with the operation of the
          Company to the extent of the  information  furnished by the Company in
          its published reports (including documents filed with the SEC or other
          information  required  to be prepared  pursuant to federal  securities
          laws);  that he has had an  opportunity  to inspect the Company's most
          recent financial  information  (including annual and quarterly reports
          on Form 10-K and 10-Q,  respectively,  and any interim press releases)
          and to ask questions of management concerning the Company; and that he
          has received  adequate  information  to enable him to make an informed
          decision with respect to his ownership of the Options and Shares.

         (b)      Phillips is (check all that apply):

               _________   (i)  A  natural   person  whose  net  worth   (either
          individually or jointly with such person's  spouse) at the time of the
          Closing exceeds $1,000,000.

               _________ (ii) A natural  person who had an individual  income in
          excess of $200,000 or joint income with such person's spouse in excess
          of $300,000 in each of the last two calendar  years and who reasonably
          expects to reach the same income level in the current calendar year.

               _________ (iii) A corporation,  organization described in Section
          501(c)(3)  of  the  Internal   Revenue  Code  of  1986,   as  amended,
          Massachusetts  or similar  business trust, or partnership,  not formed
          for the specific purpose of acquiring the Shares, with total assets in
          excess of $5,000,000.

               _________  (iv) An entity in which all of the  equity  owners fit
          into at  least  one of the  categories  listed  under  paragraphs  (i)
          through (iii) above.

               (c) Phillips has sufficient knowledge and experience in investing
          in  companies  similar to the Company so as to be able to evaluate the
          risks and  merits of his  investment  in the  Company,  and he is able
          financially  to bear the risks  thereof and could  afford the complete
          loss thereof.

               (d) Phillips is a resident of, and is domiciled in, the state set
          forth in his address below.

               (e) The Options and Shares are being acquired by Phillips for his
          own  account,  for  investment,  and not with a view to or for sale in
          connection with any unregistered  distribution thereof in violation of
          the Securities Act or any state securities law.

               (f)  Phillips  understands  that the  Options and Shares have not
          been  registered  under  the  Securities  Act and  that,  unless  sold
          pursuant to an effective  registration  statement under the Securities
          Act,  (i)'the  Options  and  Shares  must be held  for any  applicable
          holding  period under Rule 144 of the  Securities Act or any successor
          rule  or  regulation,  unless  a  subsequent  disposition  thereof  is
          registered   under  the   Securities   Act  or  is  exempt  from  such
          registration,  (ii)'the  certificate(s)  representing  the Shares will
          bear a legend to such effect, and (iii)'the Company will make or cause
          to be made a notation on its transfer books to such effect.

               (g) Phillips has no contract,  arrangement or understanding  with
          any broker,  finder or similar agent with respect to the  transactions
          contemplated by this Agreement.

               (h) In addition to the  indemnification  provided in Section 8(b)
          hereof, Phillips hereby agrees and confirms that he will indemnify and
          hold  harmless the Company,  each of its officers and  directors,  and
          each person,  if any,  who controls the Company  within the meaning of
          the Securities Act, against any loss, claims, damages, or liabilities,
          joint or several (including  attorneys' fees) that may arise out of or
          are  based on any  breach of the  representations  and  warranties  of
          Phillips contained in this Agreement.

               3.  Definitions.  As used in this Agreement,  the following terms
          shall have the following meanings:

               (a) The term "Blackout  Period" means any period (A) beginning on
          the date on which the Company  notifies the Holder (as defined  below)
          that (i) management of the Company,  in its good faith  judgment,  has
          determined  that there are material  developments  with respect to the
          Company such that it would be seriously detrimental to the Company and
          its  shareholders  to utilize a  registration  statement  pursuant  to
          Section 4 below; or (ii) management of the Company,  in its good faith
          judgment, has determined that financial statements with respect to the
          Company,  which may be  required to utilize a  registration  statement
          pursuant to Section 4 below,  are  unavailable,  and (B) ending on the
          date (1) with respect to clause (i) above,  as soon as practicable but
          not more than 30 days after the date on which the Company notifies the
          Holders of management's determination;  and (2) with respect to clause
          (ii)  above,  as soon as  financial  statements  sufficient  to permit
          Company to file or permit the utilization of a registration  statement
          under the Securities Act have become available.

               (b) The term  "Holder" or  "Holders"  means the person or persons
          owning  or having  the right to  acquire  Registrable  Securities  (as
          defined below).

               (c) The  term  "Maximum  Includable  Securities"  shall  mean the
          maximum  number  of  shares  of each  type or class  of the  Company's
          securities that a managing or principal underwriter, in its good faith
          judgment,  deems  practicable to offer and sell at that time in a firm
          commitment  underwritten  offering  without  materially  and adversely
          affecting the  marketability or price of the securities of the Company
          to be  offered.  If more  than  one  type or  class  of the  Company's
          securities  are to be  included  in a  registration,  the  managing or
          principal  underwriter  of the offering  shall  designate  the maximum
          number of each such type or class of  securities  that is  included in
          the Maximum Includable Securities.

               (d) The term  "Optionee"  means Phillips or the person or persons
          having  the right,  pursuant  to Section 9 below,  to  exercise  these
          Options.

               (e) The terms "register,"  "registered," and "registration" refer
          to a  registration  effected by  preparing  and filing a  registration
          statement or similar  document in compliance  with the Securities Act,
          and the declaration or ordering of effectiveness of such  registration
          statement or document.

               (f) The  term  "Registrable  Security"  shall  refer  to  (i)-the
          Shares, and (ii)-any shares of common stock or other securities of the
          Company that may  subsequently  be issued or issuable  with respect to
          the Shares as a result of a stock split or dividend and any securities
          into which the Shares may thereafter be changed as a result of merger,
          consolidation,  recapitalization,  or otherwise.  As to any particular
          Registrable  Securities,  such securities will cease to be Registrable
          Securities when they (i) have been  distributed to the public pursuant
          to an offering  registered  under the  Securities  Act, (ii) have been
          sold to the  public  through  a broker,  dealer,  or  market-maker  in
          compliance  with  Rule 144 under the  Securities  Act or (iii)  become
          eligible for sale in accordance  with Rule 144(k) under the Securities
          Act.

         (g)      "SEC" means the Securities and Exchange Commission.

         4.       Piggy-Back Registration Rights.

               (a)  Except  as  provided  in  Section  4(d),  if at any time the
          Company  proposes to file on its behalf and/or on behalf of any of its
          securityholders  a registration  statement under the Securities Act on
          Form S-1, S-2, or S-3 (or any other  appropriate  form for the general
          registration  of securities)  with respect to any of its capital stock
          or other securities, the Company shall give each Holder written notice
          at least 20 days before the filing  with the SEC of such  registration
          statement.  If any  Holder  desires  to  have  Registrable  Securities
          registered pursuant to this Section 4, such Holder shall so advise the
          Company  in  writing  within 10 days after the date of mailing of such
          notice from the Company.  The Company shall thereupon  include in such
          filing the number of Registrable  Securities for which registration is
          so requested, subject to its right to reduce the number of Registrable
          Securities as hereinafter provided,  and shall use its best efforts to
          effect  registration  under  the  Securities  Act of such  Registrable
          Securities.  Notwithstanding  the foregoing,  the Company shall not be
          required to provide notice of filing of a  registration  statement and
          to  include  therein  any  Registrable   Securities  if  the  proposed
          registration is

               (i)  a  registration  of  stock  options,  stock  purchases,   or
          compensation or incentive  plans, or of securities  issued or issuable
          pursuant to any such plan,  or a dividend  reinvestment  plan, on Form
          S-8 or other comparable form then in effect; or

               (ii) a  registration  of  securities  proposed  to be  issued  in
          exchange for securities or assets of, or in connection  with, a merger
          or consolidation with another corporation.

               (b) In the event the offering in which any  Holder's  Registrable
          Securities  are to be  included  pursuant  to this  Section 4 is to be
          underwritten,  the Company  shall furnish the Holder or Holders with a
          written  statement of the managing or principal  underwriter as to the
          Maximum  Includable  Securities  as  soon  as  practicable  after  the
          expiration of the 10-day  period  provided for in Section 4(a). If the
          total   number  of   securities   proposed  to  be  included  in  such
          registration   statement  is  in  excess  of  the  Maximum  Includable
          Securities,  the  number  of  securities  to be  included  within  the
          coverage  of such  registration  statement  shall  be  reduced  to the
          Maximum Includable Securities as follows:

               (i) no reduction shall be made in the number of shares of capital
          stock or other  securities  to be  registered  for the  account of the
          Company or on behalf of any of its securityholders that have the right
          to require the Company to initiate a registration  of such  securities
          (the "Demand Holders"); and

               (ii) the number of Registrable  Securities  and other  securities
          that may be included in the  registration,  if any, shall be allocated
          among the  Holder or Holders  and  holders  of other  securities  (the
          "Other Holders")  requesting  inclusion on a pro rata basis,  with the
          number of each type or class of  securities  of each  Holder and Other
          Holder  thereof  included  in  the  registration  to  be  that  number
          determined by  multiplying  (A)-the total number of such type or class
          of security included in the Maximum Includable Securities less (B)-the
          number  of such type or class of  security  to be  registered  for the
          account of the Company  and any Demand  Holders,  by a  fraction,  the
          numerator  of which will be the total  number of such type or class of
          security that such Holder or Other Holder owns, and the denominator of
          which will be the total number of such type or class of security owned
          by all Holders and Other Holders that have requested inclusion of such
          type or class of security in the registration.

               (c)  The  Company  shall,  in its  sole  discretion,  select  the
          underwriter  or  underwriters,  if any, that are to undertake the sale
          and  distribution  of the  Registrable  Securities to be included in a
          registration statement filed under the provisions of this Section 4.

               (d) The  provisions  of this  Section  4 shall  not  apply to any
          Holders requesting registration pursuant to this Section 4 that are or
          may be free, at the time, to sell within the next 90-day period all of
          the Registrable Securities with respect to which such registration was
          requested  in  accordance  with  Rule  144  (or  any  similar  rule or
          regulation) under the Securities Act.

               5. Obligations of the Company.  Whenever required under Section 4
          to effect the registration of any Registrable Securities,  the Company
          shall, as expeditiously as reasonably possible:

               (a) Prepare  and file with the SEC a  registration  statement  on
          such  form as the  Company  deems  appropriate  with  respect  to such
          Registrable  Securities and use its  reasonable  best efforts to cause
          such  registration  statement  to become  effective.  With  respect to
          registration  statements filed pursuant to Section 4 hereof,  upon the
          request of the Holder or  Holders  of a  majority  of the  Registrable
          Securities  registered   thereunder,   the  Company  shall  keep  such
          registration  statement  effective for up to 180 days, or such shorter
          period as is reasonably  required to dispose of all securities covered
          by such registration statement.

               (b) Notify the Holder or Holders  promptly  after it has received
          notice  of the  time  when  such  registration  statement  has  become
          effective or any supplement to any  prospectus  forming a part of such
          registration statement has been filed.

               (c) Prepare and file with the SEC, and promptly notify the Holder
          or Holders of the filing of, such  amendments and  supplements to such
          registration statement and the prospectus used in connection with such
          registration  statement  as  may  be  necessary  to  comply  with  the
          provisions of the  Securities  Act with respect to the  disposition of
          all securities covered by such registration statement.

               (d) Advise each Holder  promptly after it has received  notice or
          obtained  knowledge  thereof of the  issuance of any stop order by the
          SEC suspending the effectiveness of any such registration statement or
          the  initiation or  threatening of any proceeding for that purpose and
          promptly  use its best  efforts to prevent  the  issuance  of any stop
          order or to obtain its withdrawal if such stop order should be issued.

               (e) Furnish to the Holder or Holders  such numbers of copies of a
          prospectus, including a preliminary prospectus, in conformity with the
          requirements  of the Securities  Act, and such other documents as they
          may  reasonably  request in order to  facilitate  the  disposition  of
          Registrable Securities owned by them.

               (f) Use its best efforts to register  and qualify the  securities
          covered by such registration  statement under such other securities or
          Blue Sky laws of such  jurisdictions as shall be reasonably  requested
          by the Holder or Holders, if required, provided that the Company shall
          not be required in connection  therewith or as a condition  thereto to
          qualify  to do  business,  to file a general  consent  to  service  of
          process,  or to become  subject to tax liability in any such states or
          jurisdictions,  or to agree to any  restrictions  as to the conduct of
          its business in the ordinary course thereof.

               (g) In the event of any underwritten public offering,  enter into
          and perform its obligations under an underwriting  agreement, in usual
          and customary  form,  with the managing  underwriter of such offering,
          together with each Holder participating in such underwritten offering,
          as provided in Section 6(c).

               (h) Prepare and promptly  file with the SEC, and promptly  notify
          such  Holders of the filing of, any  amendment or  supplement  to such
          registration  statement or  prospectus  as may be necessary to correct
          any statements or omissions if, at the time when a prospectus relating
          to such  securities is required to be delivered  under the  Securities
          Act, any event has occurred as the result of which any such prospectus
          must be amended in order that it does not make any untrue statement of
          a material fact or omit to state a material fact necessary to make the
          statements  therein,  in light of the circumstances in which they were
          made, not misleading.

               (i) In case any of such Holders or any  underwriter  for any such
          Holders  is  required  to  deliver  a  prospectus  at a time  when the
          prospectus  then in effect may no longer be used under the  Securities
          Act,  prepare  promptly  upon request such  amendment or amendments to
          such registration statement and such prospectus as may be necessary to
          permit compliance with the requirements of the Securities Act.

               (j) If any of the  Registrable  Securities are then listed on any
          securities  exchange or quoted on the NASDAQ  National  Market System,
          the Company will cause all such Registrable Securities covered by such
          registration  statement to be listed on such exchange or quoted on the
          NASDAQ National Market System.

               6. Obligations of Holders.  It shall be a condition  precedent to
          the  obligations  of the  Company to take any action  pursuant to this
          Agreement that each of the selling Holders shall:

               (a) Furnish to the Company such information regarding themselves,
          the  Registrable  Securities held by them, the intended method of sale
          or  other  disposition  of  such  securities,   the  identity  of  and
          compensation to be paid to any underwriters proposed to be employed in
          connection  with  such  sale or  other  disposition,  and  such  other
          information as may  reasonably be required to effect the  registration
          of their Registrable Securities.

               (b) Notify the Company, at any time when a prospectus relating to
          Registrable Securities covered by a registration statement is required
          to be  delivered  under the  Securities  Act, of the  happening of any
          event  with  respect to such  selling  Holder as a result of which the
          prospectus included in such registration statement, as then in effect,
          includes an untrue  statement  of a material  fact or omits to state a
          material fact  required to be stated  therein or necessary to make the
          statements  therein not  misleading in the light of the  circumstances
          then existing.

               (c) In the event of any underwritten public offering, each Holder
          participating  in such  underwriting  shall enter into and perform its
          obligations under the underwriting agreement for such offering, and if
          requested to do so by the  underwriters  managing such offering,  each
          Holder shall enter into a customary lock-up agreement.

               7.  Expenses of Piggy-Back  Registration.  The Company shall bear
          and pay all expenses  incurred in  connection  with any  registration,
          filing,  or  qualification  of Registrable  Securities with respect to
          each  of  the   registrations   pursuant  to  Section  4  (other  than
          underwriting  discounts and  commissions  with respect to  Registrable
          Securities included in such registration and any fees and costs of the
          Holders'  legal  counsel  or  other  advisors),   including   (without
          limitation) all registration, filing, and qualification fees, Blue Sky
          fees and expenses,  printers' and accounting fees, costs of listing on
          any  securities  exchange  or  authorization  for  quotation  of  such
          securities  on  NASDAQ,  costs  of  furnishing  such  copies  of  each
          preliminary  prospectus,  final prospectus,  and amendments thereto as
          each Holder may reasonably request,  and fees disbursements of counsel
          for the Company.

               8. Indemnification.  In the event any Registrable  Securities are
          included in a registration statement under this Agreement:

               (a) The Company will indemnify and hold  harmless,  to the extent
          permitted  by law,  each Holder,  the  officers and  directors of each
          Holder,  any  underwriter  (as defined in the Securities Act) for such
          Holder  and  each  person,   if  any,  who  controls  such  Holder  or
          underwriter within the meaning of the Securities Act or the Securities
          Exchange Act of 1934, as amended (the "1934 Act"), against any losses,
          claims,  damages,  or liabilities (joint or several) to which any such
          person or persons may become  subject  under the  Securities  Act, the
          1934 Act,  or other  federal  or state law,  insofar  as such  losses,
          claims,  damages, or liabilities (or actions in respect thereof) arise
          out of or are based upon any of the following  statements,  omissions,
          or violations  (collectively a "Violation"):  (i) any untrue statement
          or alleged  untrue  statement  of a  material  fact  contained  in any
          registration statement,  including any preliminary prospectus or final
          prospectus contained therein or any amendments or supplements thereto,
          or (ii) the omission or alleged  omission to state  therein a material
          fact required to be stated therein or necessary to make the statements
          therein not  misleading,  and the  Company  will  reimburse  each such
          Holder,  officer or director,  underwriter,  or controlling person for
          any legal or other  expenses  reasonably  incurred  by such  person or
          persons in connection with  investigating  or defending any such loss,
          claim,  damage,  liability,  or action;  provided,  however,  that the
          indemnity  agreement contained in this Section 8(a) shall not apply to
          amounts paid in settlement of any such loss, claim, damage, liability,
          or action if such  settlement  is effected  without the consent of the
          Company,  nor shall the  Company  be liable in any such  loss,  claim,
          damage, liability, or action to the extent that it arises out of or is
          based  upon  (i) a  Violation  that  occurs  in  reliance  upon and in
          conformity  with written  information  furnished for use in connection
          with such  registration  by such Holder,  underwriter,  or controlling
          person,  or  (ii)  the  failure  of  such  Holder,   underwriter,   or
          controlling person to deliver a copy of the registration  statement or
          the prospectus,  or any amendments or supplements  thereto,  after the
          Company has furnished  such person with a sufficient  number of copies
          of the same.

               (b) Each selling Holder will indemnify and hold harmless,  to the
          extent  permitted  by  law,  the  Company,  each of its  officers  and
          directors,  and each person,  if any, who controls the Company  within
          the  meaning of the  Securities  Act,  any  underwriter  and any other
          Holder selling securities in such registration statement or any of its
          directors  or officers or any person who controls  such other  Holder,
          against any losses, claims, damages, or liabilities (joint or several)
          to which any such  person or  persons  may become  subject,  under the
          Securities  Act, the 1934  Securities  Act, or other  federal or state
          law,  insofar as such losses,  claims,  damages,  or  liabilities  (or
          actions  in  respect  thereto)  arise  out of or are  based  upon  any
          Violation,  in each case to the extent that such  Violation  occurs in
          reliance upon and in conformity with written information  furnished by
          such Holder for use in  connection  with such  registration;  and each
          such  Holder will  reimburse  any legal or other  expenses  reasonably
          incurred by the  Company or any such  officer,  director,  controlling
          person,  underwriter or  controlling  person,  other Holder,  officer,
          director,  or controlling  person in connection with  investigating or
          defending  any  such  loss,  claim,  damage,   liability,  or  action;
          provided,  however,  that the  indemnity  agreement  contained in this
          Section 8(b) shall not apply to amounts paid in settlement of any such
          loss,  claim,  damage,  liability,  or  action if such  settlement  is
          effected without the consent of the Holder.

               (c) Promptly  after  receipt by an  indemnified  party under this
          Section 8 of notice of the  commencement of any action  (including any
          governmental  action),  such  indemnified  party  will,  if a claim in
          respect  thereof is to be made  against any  indemnifying  party under
          this Section-8,  deliver to the indemnifying party a written notice of
          the  commencement  thereof and the  indemnifying  party shall have the
          right to participate in, and, to the extent the indemnifying  party so
          desires,  jointly with any other indemnifying party similarly noticed,
          to assume the defense  thereof with counsel  mutually  satisfactory to
          the parties;  provided,  however, that an indemnified party shall have
          the right to retain its own counsel,  with the fees and expenses to be
          paid by the  indemnified  party,  except  that such fees and  expenses
          shall  be paid by the  indemnifying  party if  representation  of such
          indemnified  party by the counsel retained by the  indemnifying  party
          would be inappropriate due to actual or potential  differing interests
          between such indemnified party and any other party represented by such
          counsel in such  proceeding.  The failure to deliver written notice to
          the indemnifying party within a reasonable time of the commencement of
          any such action,  if prejudicial to its ability to defend such action,
          shall  relieve  such  indemnifying  party  of  any  liability  to  the
          indemnified party under this Section 8, but the omission so to deliver
          written  notice to the  indemnifying  party will not relieve it of any
          liability  that it may have to any  indemnified  party  otherwise than
          under this Section 8.

               (d) The  indemnification  provided  by this  Section 8 shall be a
          continuing right to indemnification and shall survive the registration
          and  sale  of any of the  Registrable  Securities  hereunder  and  the
          expiration or termination of this Agreement.

               9.  Transferability.  The  Options  may  not be  sold,  packaged,
          assigned  or  transferred  in any  manner  by the  Optionee  except as
          follows:

               (a) During the lifetime of the Optionee, (i) if and to the extent
          such  transfer   complies  with  all  applicable   federal  and  state
          securities laws, as evidenced by an opinion of counsel satisfactory to
          the Company and (ii) with the prior  written  consent of the  Company,
          which consent is not to be unreasonably withheld; and

               (b) Upon the Optionee's death, by will or the laws of descent and
          distribution.

               Without limiting the foregoing,  the Options shall be exercisable
          by the  Optionee  personally  or by  the  Optionee's  guardian,  legal
          representative, executor, administrator or legatee.

               10.  Capital  Adjustments.  The  number of Shares  covered by the
          Options and the price per share will be deemed automatically  adjusted
          equitably and  proportionately  to reflect any share  dividend,  share
          split,  or similar  recapitalization  affecting the  Company's  common
          stock. If the Company is involved in any merger,  share  exchange,  or
          similar   transaction,   the  Options  will  pertain  and  apply  with
          appropriate  adjustments to the securities and other property to which
          the holder of the number of shares  covered by the Options  would have
          been entitled.

         11.      Written Notice of Exercise and Payment of Option Price.

               (a)- These  Options may be exercised in one or more  transactions
          according to the terms hereof by written  notice to the Company by the
          Optionee stating such Optionee's intention to exercise the Options and
          specifying  the number of Shares with respect to which the Options are
          being  exercised  and the date on which the Optionee will pay for such
          Shares,  which  date  shall be the date of  exercise  and shall not be
          later than 15 business  days after the date of delivery of such notice
          to the Company.

               (b)- The Optionee  shall pay the full price of the Shares elected
          to be purchased  hereunder in cash or by certified or bank check.  The
          Company  shall issue such Shares on the exercise  date if the purchase
          price has been paid in full.

               (c)-  The  exercise  of these  Options  is  conditioned  upon the
          satisfaction by the Optionee,  in a manner  acceptable to the Company,
          of  withholding  tax or other  withholding  liabilities of the Company
          under any federal or state law resulting  from or in  connection  with
          the  exercise of these  Options or the  delivery or purchase of Shares
          hereto.

               12.  Amendment  and  Waiver.  Any  amendment  or  waiver  of  any
          provision  under this  Agreement may be effected only with the written
          consent of the  Company,  the  Optionee  (unless all Options have been
          exercised,  in which case the consent of the Optionee is not required)
          and the Holders of at least a majority of the  Registrable  Securities
          then outstanding.

               13. Rights as a Shareholder.  The Optionee will have no rights as
          a  shareholder  with  respect  to the  Shares  until  the  date of the
          issuance  of such  shares to him.  Except as  provided  in  Section 10
          above, no adjustment will be made for dividends,  other distributions,
          or other rights for which the record date is prior to the date of such
          issuance.

               14. Remedies.  The parties hereto  acknowledge and agree that the
          breach of any part of this  Agreement may cause  irreparable  harm and
          that monetary  damages  alone may be  inadequate.  The parties  hereto
          therefore agree that any party shall be entitled to injunctive  relief
          or such other applicable  remedy as a court of competent  jurisdiction
          may provide.  Nothing  contained herein will be construed to limit any
          party's  right to any remedies at law,  including  recovery of damages
          for breach of any part of this Agreement.

               15. Controlling Law. This Agreement and all questions relating to
          its validity,  interpretation,  performance and enforcement,  shall be
          governed by and construed in accordance  with the laws of the state of
          North   Carolina,   notwithstanding   any  North   Carolina  or  other
          conflict-of-law provisions to the contrary.

               16.  Notices.   All  notices,   requests,   demands,   and  other
          communications  required or permitted under this Agreement shall be in
          writing  and  shall be  deemed to have  been  duly  given,  made,  and
          received when delivered  against receipt,  upon receipt of a facsimile
          transmission,  or upon actual receipt of registered or certified mail,
          postage  prepaid,  return  receipt  requested,  addressed as set forth
          below:

         (a)      If to the Company:
 
                  Culp, Inc.
                  P.O. Box 2686
                  101 South Main Street
                  High Point, North Carolina  27261-2686
                  Attention:  Franklin N. Saxon
                  Facsimile:  (910) 887-7087
 
         with a copy given in the manner prescribed above, to:

         (b)      Robinson, Bradshaw & Hinson, P.A.
                  101 North Tryon Street, Suite 1900
                  Charlotte, North Carolina  28246-1900
                  Attention:  Henry H. Ralston
                  Facsimile:  (704) 378-4000

                  If to Phillips:

                  S. Davis Phillips
                  P.O. Box 1350
                  High Point, North Carolina
                  Facsimile:  (910) 882-3131

         with a copy given in the manner prescribed above, to:

                  Womble Carlyle Sandridge & Rice
                  1600 BB&T Financial Center
                  P.O. Drawer 84
                  Winston-Salem, North Carolina  27102
                  Attention:  William A. Davis, II
                  Facsimile:  (910) 733-8364

               Any party may alter the address to which communications or copies
          are to be sent by giving  notice  of such  change to each of the other
          parties hereto in conformity with the provisions of this paragraph for
          the giving of notice.

               17. Binding Nature of Agreement.  This Agreement shall be binding
          upon  and  inure  to the  benefit  of the  parties  hereto  and  their
          respective heirs, personal representatives, successors, and assigns.

               18.  Entire  Agreement.   This  Agreement   contains  the  entire
          agreement and  understanding  among the parties hereto with respect to
          the subject matter hereof and supersedes all prior and contemporaneous
          agreements and understandings,  inducements or conditions,  express or
          implied,  oral or  written,  except as herein  contained.  The express
          terms hereof  control and supersede any course of  performance  and/or
          usage of the trade  inconsistent  with any of the terms  hereof.  This
          Agreement may not be modified or amended other than by an agreement in
          writing.

               19. Section Headings.  The section headings in this Agreement are
          for  convenience  only;  they form no part of this Agreement and shall
          not affect its interpretation.

               20.  Gender.  Words  used  herein,  regardless  of the number and
          gender specifically used, shall be deemed and construed to include any
          other number,  singular or plural,  and any other  gender,  masculine,
          feminine or neuter, as the context requires.

               21. Indulgences,  Not Waivers.  Neither the failure nor any delay
          on the  part of a party to  exercise  any  right,  remedy,  power,  or
          privilege under this Agreement shall operate as a waiver thereof,  nor
          shall any single or partial exercise of any right,  remedy,  power, or
          privilege  preclude  any other or further  exercise of the same or any
          other right, remedy, power, or privilege,  nor shall any waiver of any
          right,  remedy,  power, or privilege with respect to any occurrence be
          construed as a waiver of such right, remedy,  power, or privilege with
          respect to any other  occurrence.  No waiver shall be effective unless
          it is in writing and is signed by the party  asserted to have  granted
          such waiver.

               22. Execution in Counterparts.  This Agreement may be executed in
          any  number of  counterparts,  each of which  shall be deemed to be an
          original as against any party whose signature appears thereon, and all
          of which shall together  constitute one and the same instrument.  This
          Agreement shall become binding when one or more  counterparts  hereof,
          individually  or taken  together,  shall bear the signatures of all of
          the parties reflected hereon as the signatories.

               23.  Provisions  Separable.  The provisions of this Agreement are
          independent  and separable from each other,  and no provision shall be
          affected or rendered  invalid,  or unenforceable by virtue of the fact
          that for any  reason  any other or others  of them may be  invalid  or
          unenforceable in whole or in part.

               24.  Number of Days. In computing the number of days for purposes
          of this  Agreement,  all days shall be counted,  including  Saturdays,
          Sundays, and holidays; provided, however, that if the final day of any
          time period falls on a Saturday,  Sunday,  or holiday,  then the final
          day  shall  be  deemed  to be the next  day  which is not a  Saturday,
          Sunday, or holiday.




               IN WITNESS  WHEREOF,  the undersigned has executed this Agreement
          as of the date and year first above written.


                                       The Company:

                                       CULP, INC.


                                       By: ____________________________________
                                       Its:____________________________________




                                      __________________________________________
                                            S. Davis Phillips


Culp, Inc.
August 4, 1997
Page 4


C-479484v01!.02340.01193

C-479484v01!.02340.01193
                                    EXHIBIT B



                                 August 4, 1997



Culp, Inc.
101 South Main Street
High Point, NC 27261-2686

Ladies and Gentlemen:

               We have served as counsel to Phillips  Industries,  Inc., a North
          Carolina corporation  ("Industries"),  Phillips Weaving Mills, Inc., a
          North Carolina corporation ("Weaving"), Phillips Printing Mills, Inc.,
          a North  Carolina  corporation  ("Printing"),  Phillips  Velvet Mills,
          Inc.,  a  North  Carolina  corporation   ("Velvet"),   Phillip  Mills,
          Incorporated,   a  North  Carolina  corporation  ("Mills"),   Phillips
          Property Company, LLC ("Properties," and collectively with Industries,
          Weaving,   Printing,  Velvet  and  Mills,  the  "Seller  Parties")  in
          connection  with the Asset  Purchase  Agreement  dated as of August 4,
          1997 (the  "Agreement") by and among the Seller Parties and Culp, Inc.
          ("Buyer").  We  have  also  acted  as  counsel  to S.  Davis  Phillips
          ("Phillips")  who  is  also a  party  to the  Agreement  f or  limited
          purposes.  This opinion is being  delivered to you pursuant to Section
          6.3(d)  of the  Agreement.  Capitalized  terms not  otherwise  defined
          herein shall have the meanings  given to them in the Agreement and all
          references  to  sections  or  schedules  shall be with  respect to the
          Agreement.

               As counsel to the Seller  Parties and Phillips,  we have reviewed
          originals or copies  identified to our  satisfaction of the Agreement,
          records relating to the organization of the Seller Parties,  including
          the  Articles  of  Incorporation   and  Bylaws  (or  the  Articles  of
          Organization in the case of Properties),  and all amendments  thereto,
          and records of all  proceedings  of the Board of Directors (or Members
          in the  case of  Properties)  of the  Seller  Parties  and  all  other
          documents  deemed  relevant  to and  necessary  as a  basis  for,  the
          opinions herein expressed. In rendering the opinions expressed herein,
          we have relied as to certain  factual  matters  upon  certificates  of
          public officials and officials and agents of the Seller Parties.

               In connection with such examinations,  we have assumed,  with you
          permission,  that the  Agreement and all other  documents  executed in
          connection  therewith  have been properly  authorized by the Buyer and
          have been  properly  authorized  by the  Buyer and have been  properly
          executed and delivered by Buyer;  that the Agreement  constitutes  the
          valid,  binding,  and enforceable  obligation  against the Buyer;  the
          legal   capacity  of  all  natural   persons   executing   agreements,
          instruments  or documents;  the  genuineness  of all  signatures;  the
          authenticity  of  all  documents  submitted  to us as  originals;  the
          conformity to original  documents of all documents  submitted to us as
          certified or photostatic  copies, and the authenticity of originals of
          such  documents;  and the proper issuance and accuracy of certificates
          of public officials and officials and agents of the Seller Parties. As
          to any facts material to our opinions  expressed herein which were not
          independently  established or verified, we have relied upon statements
          and  representations  of  officers  and other  representatives  of the
          Seller Parties and of Phillips.

               Whenever  any opinion  herein with  respect to the  existence  or
          absence of facts is qualified by the phrase "to our  knowledge,"  such
          phrase indicates only that, during the course of our representation of
          the  Seller  Parties  and  Phillips,  no  information  has come to the
          attention of the lawyers of this firm involved in such  representation
          in this transaction  which would give such lawyers actual knowledge of
          the existence or absence of such facts. Except to the extent expressly
          stated herein, we have not undertaken any independent investigation to
          determine the existence or absence of any such facts, and no inference
          as to our  knowledge  of the  existence  of such facts should be drawn
          from  the  fact of our  representation  of the  Seller  Parties  or of
          Phillips.

               This  opinion  is  limited  to the  laws of the  State  of  North
          Carolina,  excluding  local laws of the State of North Carolina (i.e.,
          the statutes and  ordinances,  the  administrative  decisions  and the
          rules and regulations of counties,  towns,  municipalities and special
          political subdivisions of, or authorities or quasi-governmental bodies
          constituted  under  the laws of,  the  State  of  North  Carolina  and
          judicial decisions to the extent they deal with any of the foregoing),
          and the  laws of the  United  States  of  America,  that  are,  in our
          experience,  normally  applicable  to the  transactions  of  the  type
          contemplated in the Agreement,  and we are expressing no opinion as to
          the effect of the laws of any other jurisdiction.

               Based  on  and  subject  to the  foregoing,  and  subject  to the
          qualifications and limitations set forth herein, and having regard for
          such legal considerations as we deem relevant, it is our opinion that:

               1.  Each  of  the  Seller   Parties   (other   than   Properties)
          (collectively  the  "Seller   Corporations")  is  a  corporation  duly
          incorporated  and validly  existing under the laws of North  Carolina.
          The Seller  Corporations'  Articles of Incorporation are not suspended
          for  failure  to  comply  with the  Revenue  Act of the State of North
          Carolina,   and  the  Seller  Corporations  are  not  administratively
          dissolved  for  failure  to comply  with the  provisions  of the North
          Carolina Business  Corporation Act.  Properties is a limited liability
          company  organized  and  validly  existing  under  the  laws of  North
          Carolina.

               2. Each of the Seller  Parties has the full  corporate  power and
          authority  (or,  in the case of  Properties,  power  under  the  North
          Carolina  Limited  Liability  Company  Act) to execute and deliver the
          Agreement,  the Leases entered into pursuant to Section 6.3(o (herein,
          the "New Leases"),  and the assignments of the Assigned Leases, to own
          its  property  and  assets  (including  the  Assets),  to carry on the
          business of manufacturing  upholstery  fabrics,  and to sell,  assign,
          transfer, convey and deliver the Assets as provided in the Agreement.

               3. The execution,  delivery and performance of the Agreement, the
          New Leases and the  assignments  of the Assigned  Leases by the Seller
          Parties and the consummation of the transactions  contemplated thereby
          have  been  duly  authorized  by all  requisite  action.  Each  of the
          Agreement,  the New Leases and the  assignments of the Assigned Leases
          has been executed and delivered by authorized  officers,  or managers,
          as the case may be, of each of the Seller  Parties and each is a valid
          and binding  obligation  of each of them  enforceable  against each in
          accordance with its terms,  except as enforceability may be limited by
          bankruptcy,  insolvency,  reorganization,  moratorium or other similar
          laws affecting  creditors'  rights  generally or by general  equitable
          principles.

               4. The Agreement has been duly and validly executed and delivered
          by Phillips,  and to the extent  applicable  to him,  constitutes  the
          legal,  valid and binding agreement of Phillips,  enforceable  against
          him  in  accordance  with  its  terms,   except  to  the  extent  that
          enforceability may be limited by applicable bankruptcy,  insolvency or
          other  laws  of  general   applicability   relating  to  or  affecting
          creditors' rights generally or by general equitable principles.

               5.  Neither  the  execution,   delivery  or  performance  of  the
          Agreement,  the New Leases or the assignments of the Assigned  Leases,
          nor  the  consummation  of  the   transactions   contemplated  by  the
          Agreement,  will  (i)-violate  or conflict  with any  provision of the
          Articles of Incorporation,  as amended,  or Bylaws, as amended (or the
          Articles  of  Organization  in the case of  Properties)  of any of the
          Seller  Parties;  or  (ii)-to  our  knowledge,   contravene  any  law,
          regulation,   ordinance  or  code   applicable  to  the   transactions
          contemplated by the Agreement or require the consent,  approval, order
          or authorization of or registration  with, or the giving of notice to,
          any  governmental  or public  body or  authority  by any of the Seller
          Parties,  as to any material aspects of the transactions  contemplated
          by the  Agreement,  except such notices,  consents or approvals  which
          have previously been obtained.

               6.  To our  knowledge,  and  in  recognition  that  we  have  not
          represented   any  Seller   Parties   except  with   respect  to  this
          transaction,  there are no  actions,  suits or legal,  administrative,
          arbitration  or other  proceedings  pending or  threatened  (except as
          noted in Schedule 3.8) against or affecting any of the Seller  Parties
          or any of their properties or assets (including the Assets), at law or
          in equity  before any court or  administration  officer or agency that
          might result in a material adverse change in the business or financial
          condition of any of the Seller Parties or impair the ability of any of
          the Seller Parties to perform their  obligations  under the Agreement,
          the New  Leases  or the  assignments  of the  Assigned  Leases or that
          question the validity of any of such documents.

               This  opinion  is solely for your  information  and is not tot be
          quoted in whole or in part or  otherwise  referred to, nor is it to be
          filed with any governmental agency or other person,  without our prior
          written  consent.  No person other than the addressee  hereof shall be
          entitled to rely on this opinion without our prior written consent. By
          rendering  this opinion we have  neither  assumed nor  undertaken  any
          obligation for events occurring after the date of this letter.

                                        Sincerely,

                                        WOMBLE CARLYLE SANDRIDGE & RICE
                                        A Professional Limited Liability Company


                                                     Murray C. Greason, Jr.

MCGj/pds

10
C-479453v01!.02340.01193

C-479453v01!.02340.01193
                                    Exhibit C


                                  Weaving Plant


                                 LEASE AGREEMENT


               THIS LEASE AGREEMENT (the "Lease") is made and entered into as of
          the 4th day of August, 1997, by and between PHILLIPS PROPERTY COMPANY,
          LLC, a North Carolina limited liability company (the "Landlord"),  and
          CULP, INC., a North Carolina corporation (the "Tenant").

                                   BACKGROUND

               A.  Landlord  is the  owner of that  certain  parcel of land (the
          "Land")  containing  approximately N/A acres and located at 608 Broome
          Street in Monroe, Union County, North Carolina 28110. The Land is more
          particularly described on Exhibit A attached hereto.

               B.  Located  on the Land is a building  containing  approximately
          70,000  sq.ft.  of space (the  "Building")  and  related  improvements
          including   but  not  limited  to  parking   spaces,   utilities   and
          landscaping.  The Land, the Building,  the improvements located on the
          Land,  and  all  rights  appurtenant  to  the  Land  are  referred  to
          collectively in this Lease as the "Premises."

               NOW,  THEREFORE,  in  consideration  of the mutual  covenants and
          conditions  contained  in this Lease,  including  the  covenant to pay
          rent, and other good and valuable  consideration,  Landlord and Tenant
          hereby  agree,  for  themselves,  their  successors  and  assigns,  as
          follows:

               1. Premises.  Landlord  leases to Tenant,  and Tenant accepts and
          rents from Landlord,  the Premises,  for the term and on the terms and
          conditions  set forth in this Lease.  Tenant and its  subtenants,  and
          their officers, employees, agents, customers, invitees, successors and
          assigns,  shall  have  the  exclusive  right  to use  and  occupy  the
          Premises.

               2. Term. The term of this Lease ("Term") shall begin on August-4,
          1997 (the  "Commencement  Date") and shall end at midnight on the date
          three (3) years after the Commencement Date. In addition, Tenant shall
          have two (2) successive options to renew the Term, each renewal period
          to be three (3) years (each such period, a "Renewal  Period").  Tenant
          shall  exercise each option by written  notice to Landlord given on or
          before the date three (3) months before the  commencement  date of the
          Renewal  Period in  question.  The  first  Renewal  Period,  if Tenant
          exercises its option  therefor,  shall commence upon the expiration of
          the  initial  Term,  and each  subsequent  Renewal  Period,  if Tenant
          exercises its option  therefor,  shall commence upon the expiration of
          the immediately preceding Renewal Period. All references to the "Term"
          in this Lease shall,  unless the context clearly indicates a different
          meaning,  be deemed to include a reference to the initial Term of this
          Lease and any and all Renewal  Periods.  Each renewal  shall be on the
          same provisions as are set forth herein.

               3. Delivery of Premises.  Landlord  shall deliver the Premises to
          Tenant on or before the Commencement Date.

               4. Rent.  Tenant shall pay to Landlord annual rent of One Hundred
          Twenty  Thousand and no/100  Dollars  ($120,000.00),  payable in equal
          monthly  installments of Ten Thousand and no/100 Dollars  ($10,000.00)
          ("Monthly  Base  Rent") in advance  on the first day of each  calendar
          month,  commencing  twelve (12) months after the Commencement Date and
          continuing  thereafter  throughout the Term. All rent shall be paid to
          Landlord at the address to which  notices to Landlord are given as set
          forth in  Section  21  below.  Rent  for any  partial  month  shall be
          prorated on a daily basis.

               Beginning at the  commencement  of the first  Renewal  Period (if
          Tenant's  option  therefor is  exercised),  Monthly Base Rent shall be
          increased by an amount reflecting the percentage  increase in the cost
          of living  from the date two  months  prior to the  Commencement  Date
          until the date two  months  prior to the  expiration  of the Term.  If
          Tenant exercises any further renewal options,  Monthly Base Rent shall
          be similarly increased by an amount reflecting the percentage increase
          in  the  cost  of  living  from  the  date  two  months  prior  to the
          commencement  of the  immediately  preceding  Renewal Period until the
          date  two  months  prior to the  expiration  thereof.  The  percentage
          increase in the cost of living shall be determined by reference to the
          Consumer  Price  Index For All  Urban  Consumers  (1982-1984=100),  as
          published  by the  Bureau of Labor  Statistics  of the  United  States
          Department of Labor,  and as most  recently  available on the date for
          which  the  cost  of  living  determination  is  being  made.  If  the
          above-referenced  index is  discontinued,  calculated  in a  different
          manner  or   unavailable,   Landlord  may   substitute  a  comparable,
          generally-accepted cost of living index.

               5. Repair and Maintenance. Tenant, at its expense, shall maintain
          in neat,  clean and good  order the  Premises  and shall  perform  all
          necessary  repairs and  maintenance  necessary  with  respect  thereto
          including  without  limitation  repairs to and  maintenance of parking
          areas, driveways,  landscaping, grounds, structures, roofs, exteriors,
          foundations,   and  Building  systems  (including  without  limitation
          plumbing,  heating,  cooling,  ventilation and electrical systems) but
          excluding,   except  as  provided  in  section  10  below,  casualties
          (including   without  limitation  fire,  damage  from  sprinklers  and
          flooding),  and repairs  required due to the negligence of Landlord or
          its employees or invitees.  Tenant shall also be  responsible  for any
          repairs to Tenant's personal  property and equipment  installed in the
          Building by Tenant.

               6. Alterations. Tenant shall have no right to make any structural
          alterations  to the  Building  without  the prior  written  consent of
          Landlord, which shall not be unreasonably withheld.  Tenant shall have
          the right to make  non-structural  alterations to the Premises without
          consent,  provided  such  alterations  must be performed in a good and
          workmanlike manner.

               7. Personal  Property.  All  inventory,  equipment,  fixtures and
          furnishings of Tenant in or attached to the Premises may be removed by
          Tenant at any time during the Term, provided that any damage caused by
          such removal will be promptly  repaired by Tenant at its expense.  Any
          such property not so removed  before the  expiration of the Term shall
          become the property of Landlord unless reasonably  promptly removed by
          Tenant.

               8. Taxes.  Tenant  shall pay prior to  delinquency  (a)-all  real
          property taxes  applicable to the Premises during the Term and (b)-all
          taxes that are levied  against any  personal  property or equipment of
          Tenant.  Landlord shall deliver to Tenant,  within thirty (30) days of
          Landlord's  receipt  thereof,  any real estate tax bills pertaining to
          the Premises;  provided,  however,  the failure of Landlord to deliver
          any such tax bill shall not relieve  Tenant of the obligation of taxes
          hereunder.  Notwithstanding the foregoing,  Tenant shall not be deemed
          in default for  nonpayment of taxes if it is in good faith  contesting
          the validity or amount thereof in compliance with all applicable laws,
          and the enforcement of any lien therefor is suspended or stayed during
          such  contest.  Landlord  agrees to cooperate  with Tenant in any such
          contest. Taxes for the year in which the Term commences or expires (or
          otherwise terminates) shall be prorated.

               9.  Utilities and Services.  Tenant shall pay all charges for its
          usage of electricity,  telephone, gas, water and sewer to the Premises
          during the Tenn.  If as a result of any failure to furnish or delay or
          interruption in furnishing any of the utilities or services  described
          above,  the  Premises  are  rendered  substantially  untenantable  for
          Tenant's purposes for a period of twenty-four (24) consecutive  hours,
          then,  commencing  upon such failure or delay,  rent shall abate until
          the utility or service has been resumed.

               10.  Damage  by Fire or Other  Casualty.  Tenant  shall  promptly
          notify  Landlord of any damage to the Premises caused by fire or other
          casualty.

               If (a)-the  Building is rendered  untenantable  or  substantially
          untenantable  (as  reasonably  determined  by Tenant) by fire or other
          casualty,  or (b)-the  Building or other  portions of the Premises are
          totally or partially  damaged or destroyed by fire or other  casualty,
          and Tenant's architect  reasonably estimates that the damage will take
          longer  than ninety  (90) days to repair,  then  Tenant may elect,  by
          giving  Landlord  written notice within sixty (60) days of the fire or
          other  casualty,  to  terminate  this  Lease  as of the  date  of such
          casualty.

               If the Building or other  portions of the Premises are damaged or
          destroyed by fire or other casualty covered by insurance maintained by
          Tenant,  and this Lease is not  terminated  pursuant to the  preceding
          paragraph,  then Tenant shall, upon receipt of the insurance proceeds,
          repair and restore the damaged  portions,  to  substantially  the same
          condition  as  existed   immediately  prior  to  the  casualty.   Upon
          completion  of the  restoration  work,  the remainder of the insurance
          proceeds  shall be  disbursed  to Tenant.  Rent shall abate during any
          such period of damage or repair. Notwithstanding the foregoing, if the
          damage  occurs  during the last twelve  (12) months of the Term,  then
          Tenant shall have the right to terminate  this Lease as of the date of
          the  casualty  by giving  written  notice of  termination  to Landlord
          within thirty (30) days after the fire or casualty.

               11.  Insurance.   Throughout  the  Term,  Tenant  shall  maintain
          (i)-casualty  insurance  on  the  Buildings  covering  all  casualties
          included  under  standard  insurance  industry  practices  within  the
          classification "Fire and Lightening,  Extended Coverage, Vandalism and
          Malicious  Mischief" in an amount equal to one hundred  percent (100%)
          of the  replacement  value of each Building  (including the fixtures),
          and  (ii)-comprehensive  public  liability  insurance  covering death,
          bodily  injury  and  property  damage  in the  amount  of at least Two
          Million and No/100 Dollars  ($2,000,000.00) per  occurrence/aggregate.
          Tenant's  liability  insurance  shall name  Landlord as an  additional
          insured  and  shall  include  contractual  liability  consistent  with
          standard ISO provisions,  and Tenant's  casualty  insurance shall name
          Landlord as an owner and additional insured.

         All insurance required under this Lease:

               (a) shall be  issued by an  insurance  company  authorized  to do
          business in the State of North Carolina;

               (b) shall, if available without  additional cost, with respect to
          property insurance, contain - a waiver by the insurer of any rights of
          subrogation  or indemnity  to which the insurer  might  other-wise  be
          entitled; and

               (c) shall,  if  available  without  additional  cost,  contain an
          endorsement  requiring  thirty  (30)  days'  written  notice  from the
          insurance company to Landlord prior to any  cancellation,  non-renewal
          or material reduction in coverage of the policy.

               Notwithstanding  anything to the contrary herein,  each policy of
          property insurance required by this Lease shall contain an endorsement
          in which the insurance company waives any right of subrogation that it
          may  acquire  against  Landlord by virtue of payment of any loss under
          such policy. In addition, Tenant waives any claims it may have against
          Landlord  arising  out of any  casualty  that  would be covered by any
          policy of property  insurance  required to be  maintained  by it under
          this  Lease,  or that  actually  is covered by any policy of  property
          insurance   maintained  by  Tenant,   without  giving  effect  to  any
          deductible amounts or self-insured risks. Prior to the commencement of
          the Term, and annually thereafter, Tenant shall, upon request, deliver
          to Landlord  certificates  of  insurance  evidencing  the  policies of
          insurance required by this section.

               12.  Taking for Public  Use. If all or any  substantial  part (as
          reasonably  determined  by Tenant) of the  Premises  are taken for any
          public  or any  quasi-public  use  under  any  statute  or by right of
          eminent domain,  or by private  purchase in lieu thereof,  then either
          Landlord  or Tenant  may  terminate  this Lease as of the date of such
          taking by  providing  thirty  (30) days'  written  notice to the other
          party.

               If any part of the  Premises  is so taken  and this  Lease is not
          terminated under the provisions of the preceding paragraph,  then Rent
          shall be  apportioned  according  to the space so taken,  and Landlord
          shall,  to the extent  possible  with any award of  damages  from such
          taking,  restore the  remaining  portion of the Premises to the extent
          necessary to render it reasonably  suitable for the purposes for which
          it is leased,  and shall make all  repairs  to any  Building  or other
          improvements  damaged  by  such  taking  to the  extent  necessary  to
          constitute the Building and Premises a complete,  functional property.
          Rent shall abate during any such period of repair and restoration.

               The proceeds of any condemnation  award for the Premises shall be
          the property of Landlord,  but the proceeds of any condemnation  award
          for  the  leasehold  interest  and  the  improvements  located  on the
          Premises  that have been  installed by Tenant shall be the property of
          Tenant  Landlord  shall  have no  interest  in any award to Tenant for
          relocation  expenses or for the taking of  Tenant's  fixtures or other
          personal property within the Premises, or for loss of business, or for
          depreciation  to,  damage to, the cost of removal  of, or the value of
          stock,  trade  fixtures,  furniture,  and other property  belonging to
          Tenant or subtenants,  provided,  however, that no award to the Tenant
          for any of the foregoing  shall directly  result in a reduction in the
          amount due to Landlord as a condemnation award for the Premises.

               13. Tenant  Default.  The  occurrence of any one of the following
          shall constitute a default by Tenant:

               (a) Failure to pay rent or any other  amount  payable  under this
          Lease within five (5) days of when due; or

               (b) Failure to perform any other  provision  of this Lease if the
          failure to perform is not cured  within  thirty (30) days after notice
          thereof  has been  given to  Tenant;  provided,  however,  that if the
          default is not reasonably  capable of being cured in thirty (30) days,
          Tenant  shall not be in default if it  commences  the cure within that
          thirty  (30)  day  period  and  diligently   prosecutes  the  cure  to
          completion.

               14.  Landlord's  Remedies.  Landlord  shall  have  the  following
          remedies if Tenant  defaults.  These remedies are not exclusive;  they
          are  cumulative  in addition to any remedies  now or later  allowed by
          law.

               (a) Lessor  shall have the right to terminate  Lessee's  right of
          possession of the Premises without terminating this Lease, and as long
          as Lessor does not terminate this Lease, collect rent when due. Lessee
          shall surrender  possession of the Premises to Lessor and Lessor shall
          have the right to enter the  Premises  without  notice to vacate  (any
          right to which is hereby  waived by Lessee)  and relet  them,  without
          prior  notice  or  demand,  using  such  reasonable  force  as  may be
          necessary, changing any or all locks on the Premises all without being
          liable for forcible entry,  trespass,  or other tort.  Lessee shall be
          liable  immediately  to Lessor  for all costs  Lessor  shall  incur in
          reletting  the  Premises  including,   without  limitation,   broker's
          commissions,  expenses for remodeling  required by the reletting,  and
          like costs.  Reletting can be for a period  shorter or longer than the
          remaining  term of the Lease.  Lessee shall pay to Lessor the rent due
          under  this  Lease  on the date  that  the rent is due,  less the rent
          Lessor  receives from any reletting.  No act by Lessor allowed by this
          paragraph or surrender of possession of the Premises  pursuant to this
          paragraph  shall  terminate this Lease unless Lessor  notifies  Lessee
          that Lessor elects to terminate this Lease.

               (b) Lessor shall have the right to terminate  this Lease  without
          notice to vacate  (any right to which is hereby  waived by Lessee) and
          Lessee's rights to possession of the Premises at any time, and reenter
          the Premises as described in subparagraph  (a) herein above. No act by
          Lessor  other than the giving  notice of  termination  to Lessee shall
          terminate this Lease. Upon termination, Lessor shall have the right to
          pursue  its  remedies  at law or in equity to  recover  of Lessee  all
          amounts of rent then due or thereafter accruing and such other damages
          as are caused by Lessee's default.

               15. Landlord Default.  If Landlord fails timely to perform any of
          its duties  under this Lease  within  thirty (30) days after notice of
          such default,  Tenant shall have the right (but not the obligation) to
          perform any such duty on behalf and at the  expense of  Landlord  upon
          notice to  Landlord,  and all sums  expended or  expenses  incurred by
          Tenant in  performing  such duty shall be due and  payable by Landlord
          upon  demand by  Tenant.  Alternatively,  Tenant may deduct and offset
          such  amounts,  with  interest at the rate set forth  below,  from and
          against Rent due under this Lease.

               16. Assignment and Subleasing. Tenant shall not assign this Lease
          or sublet the Premises  without the prior written consent of Landlord,
          which  shall  not  be  unreasonably  withheld  or  delayed;  provided,
          however,  that Tenant may assign this Lease or sublease  the  Premises
          from time to time to entities of which  Tenant is the  majority  owner
          without restriction or consent,  provided,  however, that Tenant shall
          provide  Landlord  written notice of such assignment at least ten (10)
          days prior to any such assignment.

               17.   Landlord's   Representations   and   Warranties.   Landlord
          represents and warrants to Tenant, and agrees, that:

               (a) Landlord owns good, valid,  insurable and marketable title to
          the Premises  free and clear of all liens,  charges,  assessments  and
          encumbrances.

               (b) To its actual knowledge,  the Premises are in compliance with
          all applicable legal requirements (including without limitation zoning
          requirements).

               (c) There is no litigation,  action, suit, other legal proceeding
          or  governmental  investigation  pending  or  threatened  against  the
          Premises,  and Landlord  has no actual  knowledge or reason to know of
          any ground for any such action.

               (d) The  following  utilities  and services are  available to the
          Building: electricity, telephone, gas, water and sewer.

               (e)  Provided  Tenant  performs  its  covenants,  agreements  and
          obligations hereunder,  Landlord will warrant and defend Tenant in the
          peaceful and quiet enjoyment of the Premises.
 
               18. Use Clause/Compliance with Legal Requirements. Tenant may use
          the Premises ,or any lawful purpose.  Tenant shall properly dispose of
          all trash, refrain from burning anything on or about the Premises, and
          refrain from engaging in any illegal or immoral activities on or about
          the Premises.
   
         19.      Hazardous Materials.

               (a) Tenant agrees that it shall not generate, use, store, release
          or  dispose  of any  Hazardous  Material  on the  Premises  except  in
          material compliance with applicable  Environmental Laws. Tenant shall,
          at its sole cost and  expense,  cure  within  thirty  (30) days  after
          written  notice  from  Landlord  any breach of this  Section  19(a) by
          taking all  necessary  response and  corrective  actions in accordance
          with all applicable Environmental Laws.

               (b)  Tenant  agrees  to  indemnify,   defend  and  hold  harmless
          Landlord, its officers,  directors,  shareholders,  employees, agents,
          successors and assigns, from and against all claims, damages, actions,
          proceedings, costs, liens, requirements, judgments, losses, penalties,
          fines,  settlements  and  liabilities of any kind  (including  without
          limitation  attorneys' fees and court costs, and consultant and expert
          witness fees) arising in any manner, directly or indirectly, out of or
          by reason of  (i)'any  breach of any  representation  or  covenant  of
          Tenant in this Lease,  (ii)
any  violation or alleged violation of any
          Environmental  Law by Tenant with  respect to the  Premises  (provided
          such violation or alleged violation does not represent the substantial
          continuation of a violation or alleged  violation that commenced prior
          to  the  Term),  and/or  (iii)'any  presence,  generation,  treatment,
          storage, disposal, transport, release, threatened release or suspected
          release of any Hazardous Material brought on, in, under,  about, to or
          from the Premises by Tenant.  The  provisions  of this  Section  19(b)
          shall survive the expiration or earlier termination of this Lease.

               (c)  Landlord  represents  and  warrants  to Tenant  that  (i)-no
          Hazardous  Material is or will, at the  Commencement  Date, be present
          in,  on,  under or  about  the  Premises;  (ii)-without  limiting  the
          foregoing, the Premises does not contain any underground storage tanks
          except as  otherwise  disclosed by Landlord in writing to Tenant prior
          to the  execution  of  this  Lease;  (iii)-the  Premises  are in  full
          compliance  with all  Environmental  Laws,  and (iv)-the  Premise have
          never  been  the  subject  of  remedial  action  for an  environmental
          problem.  Landlord  shall,  at its sole cost and expense,  cure within
          thirty (30) days after written notice from Tenant any material  breach
          of  the   representations  set  forth  in  this  Section  19(c)  which
          substantially  interferes  with  Tenant's  use  and  enjoyment  of the
          Premises by taking all necessary  response and  corrective  actions in
          accordance with all applicable Environmental Laws.

               (d)  Landlord  agrees  to  indemnify,  defend  and hold  harmless
          Tenant, its subtenants, officers, directors, shareholders,  employees,
          agents,  successors and assigns, from and against all claims, damages,
          actions, proceedings,  costs, liens, requirements,  judgments, losses,
          penalties,  fines,  settlements and liabilities of any kind (including
          without limitation attorneys' fees and court costs, and consultant and
          expert  witness fees) arising in any manner,  directly or  indirectly,
          out  of or by  reason  of  (i)-any  breach  of any  representation  or
          covenant  of Landlord in this  Lease,  (ii)-any  violation  or alleged
          violation of any  Environmental Law with respect to the Premises as of
          or  prior  to  the  Commencement  Date,  and/or  (iii)-any   presence,
          generation,   treatment,   storage,  disposal,   transport,   release,
          threatened  release or suspected release of any Hazardous Material on,
          in,  under,  about,  to or from the Premises to the extent it does not
          result from Tenant's  activities in the  Premises.  The  provisions of
          this Section 19(d) shall survive the expiration or earlier termination
          of this Lease.

               (e) In the event of any  breach by  Landlord  of its  obligations
          pursuant to this Section 19 which is not cured within thirty (30) days
          after notice thereof has been given by Tenant,  Tenant may at any time
          thereafter terminate this Lease by written notice to Landlord.

               (f) As used herein,  "Hazardous  Material" means any substance or
          material meeting any one or more of the following criteria:  (i)-it is
          defined as a hazardous waste, hazardous substance, hazardous material,
          pollutant, contaminant or toxic substance under any Environmental Law;
          (ii)-it  is  toxic,   explosive,   corrosive,   ignitable,   reactive,
          infectious, radioactive, mutagenic, dangerous or other-wise hazardous;
          and/or  (iii)-it  is or  contains,  without  limiting  the  foregoing,
          petroleum hydrocarbons.

               As used herein, "Environmental Law" shall mean any federal, state
          or  local  law,  statute,   ordinance,   rule,  regulation,   pen-nit,
          directive,  license,  approval,  guidance,  interpretation,  order, or
          other legal requirement  relating to the protection of human health or
          the  environment,  including,  but not  limited  to,  any  requirement
          pertaining  to  the  manufacture,   processing,   distribution,   use,
          treatment,  storage, disposal,  transportation,  handling,  reporting,
          licensing, permitting,  investigation or remediation of materials that
          are or may constitute a threat to human health or the environment.

               20. Waiver. The waiver by either Landlord or Tenant of any breach
          of any  covenant  or  agreement  of this  Lease  shall not be deemed a
          waiver of any other default  concerning the same or any other covenant
          or agreement of this Lease.  The receipt and acceptance by Landlord of
          delinquent  or partial  rent shall not  constitute a waiver of that or
          any other default.

               21.  Notice.  Any notice that either party desires or is required
          to give the other  party  shall be in  writing  and shall be deemed to
          have  been  sufficiently  given  if  served  personally  or  sent by a
          reputable  over-night  courier  or  sent  by  prepaid,  registered  or
          certified mail,  addressed to the other party at the address set forth
          below:

         Landlord:                  Phillips Property Company, LLC
                                    P.O. Box 1350
                                    High Point, North Carolina
                                    Attn:   S. Davis Phillips

         with a                     Womble Carlyle Sandridge & Rice, P.L.L.C.
         copy to:          1600 BB&T Financial Center
                                    P.O. Drawer 84
                                    Winston-Salem, North Carolina 27102
                                    Attn:   William A. Davis, II

         Tenant:           Culp, Inc.
                                    P.O. Box 2686
                                    101 South Main Street
                                    High Point, North Carolina 27261-2686
                                    Attn:   Mr. Franklin N. Saxon

         with a                     Robinson, Bradshaw & Hinson, P.A.
                  copy to: 1900 Independence Center
                                    101 North Tryon Street
                                    Charlotte, North Carolina 28246
                                    Attn:  Henry H. Ralston, Esq.

               Either party may change its address by notifying  the other party
          of the change of address in the foregoing manner.

               22.  Surrender and Holding Over.  Upon the  expiration or earlier
          termination  of the Term,  Tenant shall  surrender  possession  of the
          Premises in as good a condition as delivered  to it,  reasonable  wear
          and tear and damage by fire and other casualty excepted.

               23.  Subordination.  This  Lease and the  rights  of the  parties
          hereto are  expressly  subordinate  to the lien and  provisions of any
          first  lien  mortgage  now  or  hereafter  existing   encumbering  the
          Premises,  or any  part  thereof,  and all  amendments,  renewals  and
          modifications  and  extensions  of and to any said  mortgage,  and all
          advances  made or  hereafter  to be made  upon  the  security  of said
          mortgage.   Tenant   agrees  to  execute  and  deliver   such  further
          instruments  subordinating this Lease to the lien of any such mortgage
          as may be requested in writing by Landlord  from time to time. As used
          herein, the term mortgage shall mean any first lien mortgage,  deed of
          trust,  deed to secure debt or other  instruments used to secure debt.
          As a condition  to  subordinating  this Lease to any present or future
          mortgage of the Premises,  Tenant may require that the mortgagee under
          such mortgage agree not to disturb Tenant's rights under this Lease so
          long as Tenant is not in default hereunder this Lease.

               24.  Termination  of Existing  Leases.  Landlord shall provide to
          Tenant evidence  reasonably  satisfactory to Tenant that any leases of
          all or any  part of the  Premises  which  are or have  been in  effect
          within thirty (30) days prior to the  Commencement  Date, if any, have
          been terminated prior to the Commencement Date.

               25.  Interest on Amounts Past Due.  Interest  shall accrue on any
          amounts  payable by  Landlord or Tenant  hereunder  which are not paid
          when due at a rate of ten percent (10%) per annum.

               26.  Applicable Law. This Lease has been entered into under,  and
          shall be governed by the laws of the State of North Carolina.

               27.  Memorandum.  The Memorandum of Lease in the form attached as
          Exhibit  B and  made a part  hereof  shall be  fully  executed  by the
          parties at the time this Lease is executed,  and shall be delivered to
          Tenant.  Tenant may record the  Memorandum at its expense if it wishes
          to do so.

               28. Nature and Extent of Agreement.  This instrument contains the
          complete  agreement of the parties  regarding the terms and conditions
          of the  lease  of the  Premises,  and  there  are no oral  or  written
          conditions,  terms,  understandings  or  other  agreements  pertaining
          thereto  which  have  not  been   incorporated  in  this  Lease.  This
          instrument  creates  only the  relationship  of  landlord  and  tenant
          between the parties as to the Premises. This Lease may be amended only
          by a written  instrument  executed by Landlord and Tenant.  This Lease
          shall be binding  upon and inure to the benefit of Landlord and Tenant
          and their respective  successors and assigns. If any term,  condition,
          covenant,  clause or provision herein contained shall operate or would
          prospectively  operate to  invalidate  this Lease in whole or in part,
          then such term, condition,  covenant,  clause and provision only shall
          be disregarded and the remainder of this Lease shall remain  operative
          and in full force and effect.






               IN WITNESS  WHEREOF,  the  parties  hereto  have cause this Lease
          Agreement  to be duly  executed  under seal as of the date first above
          written.

         LANDLORD:                          PHILLIPS PROPERTY COMPANY, LLC


                                   By:      _________________________________
                                                  _____________, Manager



         TENANT:                       CULP, INC., a North Carolina corporation

         [CORPORATE SEAL]
                                   By:      ___________________________________
Attest:                                            ____________ President


                                            ___________________________________
                                                 _______________ Secretary




STATE OF ___________________

COUNTY OF _________________


               I, _________________________, a Notary Public for said County and
          State, do hereby certify that  _____________________________,  manager
          of  PHILLIPS  PROPERTY  COMPANY,  LLC,  a limited  liability  company,
          personally  appeared  before  me  this  day and  acknowledged  the due
          execution of the foregoing instrument on behalf of the company.

               WITNESS  my  hand  and  official  seal,  this  the  ____  day  of
          _______________, 1997.
 

                                                 ______________________________
                                                 Notary Public

My commission expires:

_____________________

[NOTARIAL SEAL]



STATE OF NORTH CAROLINA

COUNTY OF _________________


     This  ______  day  of  ____________,   1997,   personally  came  before  me
______________________, who, being by me duly sworn, says that he is the _______
President of CULP, INC., a North Carolina corporation, and that the seal affixed
to the foregoing instrument in writing is the corporate seal of the company, and
that said writing

     was  signed  and  sealed  by him,  in behalf  of said  corporation,  by its
authority  duly given.  And the said  _______  President  acknowledged  the said
writing to be the act and deed of said corporation.


                                     __________________________________________
                                         Notary Public

My commission expires:

_______________________

[NOTARIAL SEAL]


9
C-479392v01!.02340.01193
C-479392v01!.02340.01193
                                      Exhibit C
                                  Tupelo Warehouse



                                 LEASE AGREEMENT

               THIS LEASE AGREEMENT (the"Lease") is made and entered into as of
          the 4th day of August, 1997, by and between PHILLIPS PROPERTY COMPANY,
          LLC, a North Carolina limited liability company (the "Landlord"),  and
          CULP, INC., a North Carolina corporation (the "Tenant").

                               B A C K G R O U N D

               A.  Landlord  is the  owner of that  certain  parcel of land (the
          "Land") containing  approximately N/A acres and located at 104 Airport
          Road in Tupelo,  Lee  County,  Mississippi  _______.  The Land is more
          particularly described on Exhibit_A attached hereto.

               B.  Located  on the Land is a building  containing  approximately
          ____ sq.  ft.  of space  (the  "Building")  and  related  improvements
          including   but  not  limited  to  parking   spaces,   utilities   and
          landscaping.  The Land, the Building,  the improvements located on the
          Land,  and  all  rights  appurtenant  to  the  Land  are  referred  to
          collectively in this Lease as the "Premises."

               NOW,  THEREFORE,  in  consideration  of the mutual  covenants and
          conditions  contained  in this Lease,  including  the  covenant to pay
          rent, and other good and valuable  consideration,  Landlord and Tenant
          hereby  agree,  for  themselves,  their  successors  and  assigns,  as
          follows:

               1. Premises.  Landlord  leases to Tenant,  and Tenant accepts and
          rents from Landlord,  the Premises,  for the term and on the terms and
          conditions  set forth in this Lease.  Tenant and its  subtenants,  and
          their officers, employees, agents, customers, invitees, successors and
          assigns,  shall  have  the  exclusive  right  to use  and  occupy  the
          Premises.

               2. Term. The term of this Lease ("Term") shall begin on August-4,
          1997 (the  "Commencement  Date") and shall end at midnight on the last
          day of the sixth month following the month containing the Commencement
          Date. The original term of this Lease shall  automatically  be renewed
          for successive one (1) month periods unless on or before the date that
          is one hundred  eighty (180) days before the end of the original  term
          or any one (1) month renewal period, either party gives written notice
          to the  other  that  this  Lease  shall  terminate  at the  end of the
          original term or the one (1) month renewal period in question. If such
          notice is timely given by either party,  this Lease shall terminate as
          of the end of the  original  term (if the notice is given at least one
          hundred  eighty (180) days prior to the end of the  original  term) or
          the then current  renewal  period (if the notice is given at least one
          hundred eighty (180) days prior to the end of the then-current renewal
          period).  All references to the "Term" in this Lease shall, unless the
          context clearly indicates a different meaning,  be deemed to include a
          reference  to the  initial  Term of this Lease and any and all renewal
          periods.  Each renewal  shall be on the same  provisions  as set forth
          herein.

               3. Delivery of Premises.  Landlord  shall deliver the Premises to
          Tenant on or before the Commencement Date

               4.  Rent.  Tenant  shall pay to  Landlord  monthly  rent of Three
          Thousand One Hundred Fifty and no/100 Dollars ($3,150.00),  payable in
          advance on the first day of each  calendar  month,  commencing  twelve
          (12) months  after the  Commencement  Date and  continuing  thereafter
          throughout the Term. All rent shall be paid to Landlord at the address
          to which  notices  to  Landlord  are given as set forth in  Section-21
          below. Rent for any partial month shall be prorated on a daily basis.

         5.       Repair and Maintenance.

               (a) Tenant,  at its expense,  shall  maintain in neat,  clean and
          good order the Land (including parking areas,  driveways,  landscaping
          and grounds) and the interior of the Building (but excluding  Building
          systems), and shall make all repairs required due to the negligence of
          Tenant or its  employees or invitees and all other  repairs other than
          those for which Landlord is responsible  pursuant to subparagraph  (b)
          below, but excluding  casualties  (including  without limitation fire,
          damage from sprinklers and flooding). Tenant shall also be responsible
          for any repairs to Tenant's personal property and equipment  installed
          in the Building by Tenant.

               (b) Landlord,  at its expense,  shall maintain in neat, clean and
          good  order,  condition  and repair  the  remainder  of the  Premises,
          including  without  limitation  all  structures,   roofs,   exteriors,
          foundations,   and  Building  systems  (including  without  limitation
          plumbing,  heating,  cooling,  ventilation  and  electrical  systems).
          Landlord shall also make any modifications to the Premises required to
          comply  with  applicable   legal   requirements,   including   without
          limitation  the  Americans  with  Disabilities  Act.  If  any  repairs
          required  to be made by  Landlord to the  Premises  are not  completed
          within  thirty  (30)  days  after  written  notice of the need for the
          repairs has been given by Tenant to  Landlord  (or, in the event of an
          emergency,  if not made as soon as reasonably practical),  then Tenant
          may (but has no  obligation  to) make the needed  repairs on behalf of
          and at the expense of Landlord.  Landlord shall  reimburse  Tenant for
          the  reasonable  cost of the  repairs  within  thirty  (30) days after
          written  demand,  accompanied by supporting  invoices.  Alternatively,
          Tenant may deduct and offset such costs and interest  from and against
          rent due and to become due under this Lease.  Notwithstanding anything
          to the contrary herein,  Tenant shall have no  responsibility  to make
          any repairs due to any casualty affecting the Premises.

               6. Alterations. Tenant shall have no right to make any structural
          alterations  to the  Building  without  the prior  written  consent of
          Landlord, which shall not be unreasonably withheld.  Tenant shall have
          the right to make  non-structural  alterations to the Premises without
          consent,  provided  such  alterations  must be performed in a good and
          workmanlike manner.

               7. Personal  Property.  All  inventory,  equipment,  fixtures and
          furnishings of Tenant in or attached to the Premises may be removed by
          Tenant at any time during the Term, provided that any damage caused by
          such removal will be promptly  repaired by Tenant at its expense.  Any
          such property not so removed  before the  expiration of the Term shall
          become the property of Landlord unless reasonably  promptly removed by
          Tenant.

               8. Taxes.  Tenant  shall pay prior to  delinquency  (a)-all  real
          property taxes  applicable to the Premises during the Term and (b)-all
          taxes that are levied  against any  personal  property or equipment of
          Tenant.  Landlord shall deliver to Tenant,  within thirty (30) days of
          Landlord's  receipt  thereof,  any real estate tax bills pertaining to
          the Premises;  provided,  however,  the failure of Landlord to deliver
          any such tax bill shall not relieve  Tenant of the obligation of taxes
          hereunder.  Notwithstanding the foregoing,  Tenant shall not be deemed
          in default for  nonpayment of taxes if it is in good faith  contesting
          the validity or amount thereof in compliance with all applicable laws,
          and the enforcement of any lien therefor is suspended or stayed during
          such  contest.  Landlord  agrees to cooperate  with Tenant in any such
          contest. Taxes for the year in which the Term commences or expires (or
          otherwise terminates) shall be prorated.

               9.  Utilities and Services.  Tenant shall pay all charges for its
          usage of electricity,  telephone, gas, water and sewer to the Premises
          during the Term.  If as a result of any failure to furnish or delay or
          interruption in furnishing any of the utilities or services  described
          above,  the  Premises  are  rendered  substantially  untenantable  for
          Tenant's purposes for a period of twenty-four (24) consecutive  hours,
          then,  commencing  upon such failure or delay,  rent shall abate until
          the utility or service has been resumed.

               10.  Damage  by Fire or Other  Casualty.  Tenant  shall  promptly
          notify  Landlord of any damage to the Premises caused by fire or other
          casualty.  Tenant may terminate  this Lease as of the date of any such
          fire or other  casualty by providing  thirty (30) days' written notice
          to Landlord.

               11.  Insurance.  Throughout  the Term,  Landlord  shall  maintain
          casualty insurance on the Buildings  covering all casualties  included
          under standard  insurance industry practices within the classification
          "Fire and  Lightening,  Extended  Coverage,  Vandalism  and  Malicious
          Mischief'  in an amount  equal to one  hundred  percent  (100%) of the
          replacement  value of each  Building  (including  the  fixtures),  and
          Tenant  shall  maintain   comprehensive   public  liability  insurance
          covering death,  bodily injury and property damage in the amount of at
          least   Two   Million   and   No/100   Dollars   ($2,000,000.00)   per
          occurrence/aggregate. Tenant's liability insurance shall name Landlord
          as an  additional  insured  and shall  include  contractual  liability
          consistent with standard ISO provisions.

               Each  policy of property  insurance  required by this Lease shall
          contain an endorsement in which the insurance company waives any right
          of  subrogation  that it may  acquire  against  Landlord  or Tenant by
          virtue of payment of any loss under such policy. In addition, Landlord
          and  Tenant  each  waives  any  claims it may have  against  the other
          arising  out of any  casualty  that  would be covered by the policy of
          property  insurance  required to be maintained by it under this Lease,
          or that  actually  is  covered  by any  policy of  property  insurance
          maintained  by such party,  without  giving  effect to any  deductible
          amounts or self-insured  risks. Prior to the commencement of the Term,
          and annually  thereafter,  Landlord and Tenant  shall,  upon  request,
          deliver to the other party  certificates  of insurance  evidencing the
          policies of insurance required by this section.

               12.  Taking for Public  Use. If all or any  substantial  part (as
          reasonably  determined  by Tenant) of the  Premises  are taken for any
          public  or any  quasi-public  use  under  any  statute  or by right of
          eminent domain,  or by private  purchase in lieu thereof,  then either
          Landlord  or Tenant  may  terminate  this Lease as of the date of such
          taking by  providing  thirty  (30) days'  written  notice to the other
          party.

               If any part of the  Premises  is so taken  and this  Lease is not
          terminated under the provisions of the preceding paragraph,  then Rent
          shall be  apportioned  according  to the space so taken,  and Landlord
          shall,  to the extent  possible  with any award of  damages  from such
          taking,  restore the  remaining  portion of the Premises to the extent
          necessary to render it reasonably  suitable for the purposes for which
          it is leased,  and shall make all  repairs  to any  Building  or other
          improvements  damaged  by  such  taking  to the  extent  necessary  to
          constitute the Building and Premises a complete,  functional property.
          Rent shall abate during any such period of repair and restoration.

               The proceeds of any condemnation  award for the Premises shall be
          the property of Landlord,  but the proceeds of any condemnation  award
          for  the  leasehold  interest  and  the  improvements  located  on the
          Premises  that have been  installed by Tenant shall be the property of
          Tenant.  Landlord  shall have no  interest  in any award to Tenant for
          relocation  expenses or for the taking of  Tenant's  fixtures or other
          personal property within the Premises, or for loss of business, or for
          depreciation  to,  damage to, the cost of removal  of, or the value of
          stock,  trade  fixtures,  furniture,  and other property  belonging to
          Tenant or subtenants,  provided,  however, that no award to the Tenant
          for any of the foregoing  shall directly  result in a reduction in the
          amount due to Landlord as a condemnation award for the Premises.

               13. Tenant  Default.  The  occurrence of any one of the following
          shall constitute a default by Tenant:

               (a) Failure to pay rent or any other  amount  payable  under this
          Lease within five (5) days of when due; or

               (b) Failure to perform any other  provision  of this Lease if the
          failure to perform is not cured  within  thirty (30) days after notice
          thereof  has been  given to  Tenant;  provided,  however,  that if the
          default is not reasonably  capable of being cured in thirty (30) days,
          Tenant  shall not be in default if it  commences  the cure within that
          thirty  (30)  day  period  and  diligently   prosecutes  the  cure  to
          completion.

               14.  Landlord's  Remedies.  Landlord  shall  have  the  following
          remedies if Tenant  defaults.  These remedies are not exclusive-  they
          are  cumulative  in addition to any remedies  now or later  allowed by
          law.

               (a) Lessor  shall have the right to terminate  Lessee's  right of
          possession of the Premises without terminating this Lease, and as long
          as Lessor does not terminate this Lease, collect rent when due. Lessee
          shall surrender  possession of the Premises to Lessor and Lessor shall
          have the right to enter the  Premises  without  notice to vacate  (any
          right to which is hereby  waived by Lessee)  and relet  them,  without
          prior  notice  or  demand,  using  such  reasonable  force  as  may be
          necessary, changing any or all locks on the Premises all without being
          liable for forcible entry,  trespass,  or other tort.  Lessee shall be
          liable  immediately  to Lessor  for all costs  Lessor  shall  incur in
          reletting  the  Premises  including,   without  limitation,   broker's
          commissions,  expenses for remodeling  required by the reletting,  and
          like costs.  Reletting can be for a period  shorter or longer than the
          remaining  term of the Lease.  Lessee shall pay to Lessor the rent due
          under  this  Lease  on the date  that  the rent is due,  less the rent
          Lessor  receives from any reletting.  No act by Lessor allowed by this
          paragraph or surrender of possession of the Premises  pursuant to this
          paragraph  shall  terminate this Lease unless Lessor  notifies  Lessee
          that Lessor elects to terminate this Lease.

               (b) Lessor shall have the right to terminate  this Lease  without
          notice to vacate  (any right to which is hereby  waived by Lessee) and
          Lessee's rights to possession of the Premises at any time, and reenter
          the Premises as described in subparagraph  (a) herein above. No act by
          Lessor  other than the giving  notice of  termination  to Lessee shall
          terminate this Lease. Upon termination, Lessor shall have the right to
          pursue  its  remedies  at law or in equity to  recover  of Lessee  all
          amounts of rent then due or thereafter accruing and such other damages
          as are caused by Lessee's default.

               15. Landlord Default.  If Landlord fails timely to perform any of
          its duties  under this Lease  within  thirty (30) days after notice of
          such default,  Tenant shall have the right (but not the obligation) to
          perform any such duty on behalf and at the  expense of  Landlord  upon
          notice to  Landlord,  and all sums  expended or  expenses  incurred by
          Tenant in  performing  such duty shall be due and  payable by Landlord
          upon  demand by  Tenant.  Alternatively,  Tenant may deduct and offset
          such amounts,  with interest as set forth below, from and against Rent
          due under this Lease.

               16. Assignment and Subleasing. Tenant shall not assign this Lease
          or sublet the Premises  without the prior written consent of Landlord,
          which  shall  not  be  unreasonably  withheld  or  delayed;  provided,
          however,  that Tenant may assign this Lease or sublease  the  Premises
          from time to time to entities of which  Tenant is the  majority  owner
          without restriction or consent,  provided,  however, that Tenant shall
          provide  Landlord  written notice of such assignment at least ten (10)
          days prior to any such assignment.

               17.   Landlord's   Representations   and   Warranties.   Landlord
          represents and warrants to Tenant and agrees, that:

               (a) Landlord owns good, valid,  insurable and marketable title to
          the Premises  free and clear of all liens,  charges,  assessments  and
          encumbrances.

               (b) To its actual knowledge,  the Premises are in compliance with
          all applicable legal requirements (including without limitation zoning
          requirements).

               (c) There is no litigation,  action, suit, other legal proceeding
          or  governmental  investigation  pending  or  threatened  against  the
          Premises,  and Landlord  has no actual  knowledge or reason to know of
          any ground for any such action.

               (d) The  following  utilities  and services are  available to the
          Building: electricity, telephone, gas, water and sewer.

               (e)  Provided  Tenant  performs  its  covenants,  agreements  and
          obligations hereunder,  Landlord will warrant and defend Tenant in the
          peaceful and quiet enjoyment of the Premises.

               18. Use Clause/Compliance with Legal Requirements. Tenant may use
          the Premises for any lawful purpose.  Tenant shall properly dispose of
          all trash, refrain from burning anything on or about the Premises, and
          refrain from engaging in any illegal or immoral activities on or about
          the Premises.

         19.      Hazardous Materials.

               (a) Tenant agrees that it shall not generate, use, store, release
          or  dispose  of any  Hazardous  Material  on the  Premises  except  in
          material compliance with applicable  Environmental Laws. Tenant shall,
          at its sole cost and  expense,  cure  within  thirty  (30) days  after
          written  notice  from  Landlord  any breach of this  Section-19(a)  by
          taking all  necessary  response and  corrective  actions in accordance
          with all applicable Environmental Laws.

               (b)  Tenant  agrees  to  indemnify,   defend  and  hold  harmless
          Landlord, its officers,  directors,  shareholders,  employees, agents,
          successors and assigns, from and against all claims, damages, actions,
          proceedings, costs, liens, requirements, judgments, losses, penalties,
          fines,  settlements  and  liabilities of any kind  (including  without
          limitation  attorneys' fees and court costs, and consultant and expert
          witness fees) arising in any manner, directly or indirectly, out of or
          by reason of  (i)-any  breach of any  representation  or  covenant  of
          Tenant in this Lease,  (ii-any  violation or alleged violation of any
          Environmental  Law by Tenant with  respect to the  Premises  (provided
          such violation or alleged violation does not represent the substantial
          continuation of a violation or alleged  violation that commenced prior
          to  the  Term),  and/or  (iii)-any  presence,  generation,  treatment,
          storage, disposal, transport, release, threatened release or suspected
          release of any Hazardous Material brought on, in, under,  about, to or
          from the  Premises by Tenant.  The  provisions  of this  Section-19(b)
          shall survive the expiration or earlier termination of this Lease.

               (c)  Landlord  represents  and  warrants  to Tenant  that  (i)-no
          Hazardous  Material is or will, at the  Commencement  Date, be present
          in,  on,  under or  about  the  Premises;  (ii)-without  limiting  the
          foregoing, the Premises does not contain any underground storage tanks
          except as other-wise  disclosed by Landlord in writing to Tenant prior
          to the  execution  of  this  Lease;  (iii)-the  Premises  are in  full
          compliance  with all  Environmental  Laws,  and (iv)-the  Premise have
          never  been  the  subject  of  remedial  action  for an  environmental
          problem.  Landlord  shall,  at its sole cost and expense,  cure within
          thirty (30) days after written notice from Tenant any material  breach
          of  the   representations   set  forth  in  this  Section-19(c)  which
          substantially  interferes  with  Tenant's  use  and  enjoyment  of the
          Premises by taking all necessary  response and  corrective  actions in
          accordance with all applicable Environmental Laws.

               (d)  Landlord  agrees  to  indemnify,  defend  and hold  harmless
          Tenant, its subtenants, officers, directors, shareholders,  employees,
          agents,  successors and assigns, from and against all claims, damages,
          actions, proceedings,  costs, liens, requirements,  judgments, losses,
          penalties,  fines,  settlements and liabilities of any kind (including
          without limitation attorneys' fees and court costs, and consultant and
          expert  witness fees) arising in any manner,  directly or  indirectly,
          out  of or by  reason  of  (i)-any  breach  of any  representation  or
          covenant  of Landlord in this  Lease,  (ii)-any  violation  or alleged
          violation of any  Environmental Law with respect to the Premises as of
          or  prior  to  the  Commencement  Date,  and/or  (iii)-any   presence,
          generation,   treatment,   storage,  disposal,   transport,   release,
          threatened  release or suspected release of any Hazardous Material on,
          in,  under,  about,  to or from the Premises to the extent it does not
          result from Tenant's  activities in the  Premises.  The  provisions of
          this Section-19(d) shall survive the expiration or earlier termination
          of this Lease.

               (e) In the event of any  breach by  Landlord  of its  obligations
          pursuant to this Section-19 which is not cured within thirty (30) days
          after notice thereof has been given by Tenant,  Tenant may at any time
          thereafter terminate this Lease by written notice to Landlord.

               (f) As used herein,  "Hazardous  Material" means any substance or
          material meeting any one or more of the following criteria:  (i)-it is
          defined as a hazardous waste, hazardous substance, hazardous material,
          pollutant, contaminant or toxic substance under any Environmental Law;
          (ii)-it  is  toxic,   explosive,   corrosive,   ignitable,   reactive,
          infectious,  radioactive, mutagenic, dangerous or otherwise hazardous;
          and/or  (iii)-it  is or  contains,  without  limiting  the  foregoing,
          petroleum hydrocarbons.

               As used herein, "Environmental Law" shall mean any federal, state
          or local law, statute, ordinance, rule, regulation, permit, directive,
          license,  approval,  guidance,  interpretation,  order, or other legal
          requirement  relating  to  the  protection  of  human  health  or  the
          environment, including, but not limited to, any requirement pertaining
          to the manufacture, processing, distribution, use, treatment, storage,
          disposal, transportation,  handling, reporting, licensing, permitting,
          investigation or remediation of materials that are or may constitute a
          threat to human health or the environment.

               20. Waiver. The waiver by either Landlord or Tenant of any breach
          of any  covenant  or  agreement  of this  Lease  shall not be deemed a
          waiver of any other default  concerning the same or any other covenant
          or agreement of this Lease.  The receipt and acceptance by Landlord of
          delinquent  or partial  rent shall not  constitute a waiver of that or
          any other default.

               21.  Notice.  Any notice that either party desires or is required
          to give the other  party  shall be in  writing  and shall be deemed to
          have  been  sufficiently  given  if  served  personally  or  sent by a
          reputable  over-night  courier  or  sent  by  prepaid,  registered  or
          certified mail,  addressed to the other party at the address set forth
          below:

         Landlord:         Phillips Property Company, LLC
                           P.O. Box 1350
                           High Point, North Carolina
                           Attn:    S. Davis Phillips

         with a            Womble Carlyle Sandridge & Rice, P.L.L.C.
         copy to: 1600 BB&T Financial Center
                           P.O. Drawer 84
                           Winston-Salem, North Carolina 27102
                           Attn:  William A. Davis, II

         Tenant:  Culp, Inc.
                           P.O. Box 2686
                           101 South Main Street
                           High Point, North Carolina 27261-2686
                           Attn:  Mr. Franklin N. Saxon

         with a            Robinson, Bradshaw & Hinson, P.A.
         copy to: 1900 Independence Center
                           101 North Tryon Street
                           Charlotte, North Carolina 28246
                           Attn:  Henry H. Ralston, Esq.

               Either party may change its address by notifying  the other party
          of the change of address in the foregoing manner.

               22.  Surrender and Holding Over.  Upon the  expiration or earlier
          termination  of the Term,  Tenant shall  surrender  possession  of the
          Premises in as good a condition as delivered  to it,  reasonable  wear
          and tear and damage by fire and other casualty excepted.

               23.  Interest on Amounts Past Due.  Interest  shall accrue on any
          amounts  payable by  Landlord or Tenant  hereunder  which are not paid
          when due at a rate of ten percent (10%) per annum.

               24.  Applicable Law. This Lease has been entered into under,  and
          shall be governed by, the laws of the State of Mississippi.

               25.  Memorandum.  The Memorandum of Lease in the form attached as
          Exhibit-B  and  made a part  hereof  shall be  fully  executed  by the
          parties at the time this Lease is executed,  and shall be delivered to
          Tenant.  Tenant may record the  Memorandum at its expense if it wishes
          to do so.

               26. Nature and Extent of Agreement.  This instrument contains the
          complete  agreement of the parties  regarding the terms and conditions
          of the  lease  of the  Premises,  and  there  are no oral  or  written
          conditions,  terms,  understandings  or  other  agreements  pertaining
          thereto  which  have  not  been   incorporated  in  this  Lease.  This
          instrument  creates  only the  relationship  of  landlord  and  tenant
          between the parties as to the Premises. This Lease may be amended only
          by a written  instrument  executed by Landlord and Tenant.  This Lease
          shall be binding  upon and inure to the benefit of Landlord and Tenant
          and their respective  successors and assigns. If any term,  condition,
          covenant,  clause or provision herein contained shall operate or would
          prospectively  operate to  invalidate  this Lease in whole or in part,
          then such term, condition,  covenant,  clause and provision only shall
          be disregarded and the remainder of this Lease shall remain  operative
          and in full force and effect.





               IN WITNESS  WHEREOF,  the  parties  hereto have caused this Lease
          Agreement  to be duly  executed  under seal as of the date first above
          written.


LANDLORD:                       PHILLIPS PROPERTY COMPANY, LLC


                                By:      ________________________________ (SEAL)
                                         __________________, Manager




TENANT:                         CULP, INC., a North Carolina corporation

[CORPORATE SEAL]

Attest:                         By.      ___________________________________
                                         ________________ President
                                        _________________ Secretary



4
C-479420v01!.02340.01193
                                     Exhibit C
                                  High Point Offices
C-479420v01!.02340.01193

                                 LEASE AGREEMENT

               THIS LEASE AGREEMENT (the "Lease") is made and entered into as of
          the 4th day of August, 1997, by and between PHILLIPS PROPERTY COMPANY,
          LLC, as attorney in fact for Market Square  Limited  Partnership  (the
          "Landlord"),  and  CULP,  INC.,  a  North  Carolina  corporation  (the
          "Tenant").


                               B A C K G R O U N D

               A.  Landlord  is the  owner of that  certain  parcel of land (the
          "Land")  containing  approximately  N/A acres and  located at 910 Mill
          Avenue in High Point,  Guilford County, North Carolina 27260. The Land
          is more particularly described on Exhibit-A attached hereto.

               B.  Located  on the Land is a building  containing  approximately
          12,000 sq.  ft. of space (the  "Building")  and  related  improvements
          including   but  not  limited  to  parking   spaces,   utilities   and
          landscaping.  The Land, the Building,  the improvements located on the
          Land,  and  all  rights  appurtenant  to  the  Land  are  referred  to
          collectively in this Lease as the "Premises."

               NOW,  THEREFORE,  in  consideration  of the mutual  covenants and
          conditions  contained  in this Lease,  including  the  covenant to pay
          rent, and other good and valuable  consideration,  Landlord and Tenant
          hereby  agree,  for  themselves,  their  successors  and  assigns,  as
          follows:

               1. Premises.  Landlord  leases to Tenant,  and Tenant accepts and
          rents from Landlord,  the Premises,  for the term and on the terms and
          conditions  set forth in this Lease.  Tenant and its  subtenants,  and
          their officers, employees, agents, customers, invitees, successors and
          assigns,  shall  have  the  exclusive  right  to use  and  occupy  the
          Premises.

               2. Term. The term of this Lease ("Term") shall begin on August 4,
          1997 (the  "Commencement  Date") and shall end at midnight on the date
          three (3) years after the Commencement Date. In addition, Tenant shall
          have two (2) successive options to renew the Term, each renewal period
          to be three (3) years (each such period, a "Renewal  Period").  Tenant
          shall  exercise each option by written  notice to Landlord given on or
          before the date three (3) months before the  commencement  date of the
          Renewal  Period in  question.  The  first  Renewal  Period,  if Tenant
          exercises its option  therefor,  shall commence upon the expiration of
          the  initial  Term,  and each  subsequent  Renewal  Period,  if Tenant
          exercises its option  therefor,  shall commence upon the expiration of
          the immediately preceding Renewal Period. All references to the "Term"
          in this Lease shall,  unless the context clearly indicates a different
          meaning,  be deemed to include a reference to the initial Term of this
          Lease and any and all Renewal  Periods.  Each renewal  shall be on the
          same provisions as are set forth herein.

               3. Delivery of Premises.  Landlord  shall deliver the Premises to
          Tenant on or before the Commencement Date.

               4. Rent.  Tenant shall pay to Landlord annual rent of Thirty-Five
          Thousand and no/100  Dollars  ($35,000.00),  payable in equal  monthly
          installments  of Two Thousand Nine Hundred  Sixteen and 67/100 Dollars
          ($2,916.67)  ("Monthly Base Rent") in advance on the first day of each
          calendar month,  commencing  twelve (12) months after the Commencement
          Date  and   continuing   thereafter   throughout   the  Term.  If  the
          Commencement  Date  falls  on a day  other  than  the  first  day of a
          calendar  month,  the  installment  of rent  payable  for the  initial
          partial calendar month for which rent is due shall be payable upon the
          Commencement  Date.  All rent shall be paid to Landlord at the address
          to which  notices  to  Landlord  are given as set forth in  Section 21
          below. Rent for any partial month shall be prorated on a daily basis.

               Beginning at the  commencement  of the first  Renewal  Period (if
          Tenant's  option  therefor is  exercised),  Monthly Base Rent shall be
          increased by an amount reflecting the percentage  increase in the cost
          of living  from the date two  months  prior to the  Commencement  Date
          until the date two  months  prior to the  expiration  of the Term.  If
          Tenant exercises any further renewal options,  Monthly Base Rent shall
          be similarly increased by an amount reflecting the percentage increase
          in  the  cost  of  living  from  the  date  two  months  prior  to the
          commencement  of the  immediately  preceding  Renewal Period until the
          date  two  months  prior to the  expiration  thereof.  The  percentage
          increase in the cost of living shall be determined by reference to the
          Consumer  Price  Index For All  Urban  Consumers  (1982-1984=100),  as
          published  by the  Bureau of Labor  Statistics  of the  United  States
          Department of Labor,  and as most  recently  available on the date for
          which  the  cost  of  living  determination  is  being  made.  If  the
          above-referenced  index is  discontinued,  calculated  in a  different
          manner  or   unavailable,   Landlord  may   substitute  a  comparable,
          generally-accepted cost of living index.

               5. Repair and Maintenance. Tenant, at its expense, shall maintain
          in neat,  clean and good  order the  Premises  and shall  perform  all
          necessary  repairs and  maintenance  necessary  with  respect  thereto
          including  without  limitation  repairs to and  maintenance of parking
          areas, driveways,  landscaping, grounds, structures, roofs, exteriors,
          foundations,   and  Building  systems  (including  without  limitation
          plumbing,  heating,  cooling,  ventilation and electrical systems) but
          excluding,   except  as  provided  in  section  10  below,  casualties
          (including   without  limitation  fire,  damage  from  sprinklers  and
          flooding),  and repairs  required due to the negligence of Landlord or
          its employees or invitees.  Tenant shall also be  responsible  for any
          repairs to Tenant's personal  property and equipment  installed in the
          Building by Tenant.

               6. Alterations. Tenant shall have no right to make any structural
          alterations  to the  Building  without  the prior  written  consent of
          Landlord, which shall not be unreasonably withheld.  Tenant shall have
          the right to make  non-structural  alterations to the Premises without
          consent,  provided  such  alterations  must be performed in a good and
          workmanlike manner.

               7. Personal  Property.  All  inventory,  equipment,  fixtures and
          furnishings of Tenant in or attached to the Premises may be removed by
          Tenant at any time during the Term, provided that any damage caused by
          such removal will be promptly  repaired by Tenant at its expense.  Any
          such property not so removed  before the  expiration of the Term shall
          become the property of Landlord unless reasonably  promptly removed by
          Tenant.

               8. Taxes.  Tenant  shall pay prior to  delinquency  (a)-all  real
          property taxes  applicable to the Premises during the Term and (b)-all
          taxes that are levied  against any  personal  property or equipment of
          Tenant.  Landlord shall deliver to Tenant,  within thirty (30) days of
          Landlord's  receipt  thereof,  any real estate tax bills pertaining to
          the Premises;  provided,  however,  the failure of Landlord to deliver
          any such tax bill shall not relieve  Tenant of the obligation of taxes
          hereunder.  Notwithstanding the foregoing,  Tenant shall not be deemed
          in default for  nonpayment of taxes if it is in good faith  contesting
          the validity or amount thereof in compliance with all applicable laws,
          and the enforcement of any lien therefor is suspended or stayed during
          such  contest.  Landlord  agrees to cooperate  with Tenant in any such
          contest. Taxes for the year in which the Term commences or expires (or
          otherwise terminates) shall be prorated.

               9. Utilities and- Services.  Tenant shall pay all charges for its
          usage of electricity,  telephone, gas, water and sewer to the Premises
          during the Term.  If as a result of any failure to furnish or delay or
          interruption in furnishing any of the utilities or services  described
          above,  the  Premises  are  rendered  substantially  untenantable  for
          Tenant's purposes for a period of twenty-four (24) consecutive  hours,
          then,  commencing  upon such failure or delay,  rent shall abate until
          the utility or service has been resumed.

               10.  Damage  by Fire or Other  Casualty.  Tenant  shall  promptly
          notify  Landlord of any damage to the Premises caused by fire or other
          casualty.

               If (a)-the  Building is rendered  untenantable  or  substantially
          untenantable  (as  reasonably  determined  by Tenant) by fire or other
          casualty,  or (b)-the  Building or other  portions of the Premises are
          totally or partially  damaged or destroyed by fire or other  casualty,
          and Tenant's architect  reasonably estimates that the damage will take
          longer  than ninety  (90) days to repair,  then  Tenant may elect,  by
          giving  Landlord  written notice within sixty (60) days of the fire or
          other  casualty,  to  terminate  this  Lease  as of the  date  of such
          casualty.

               If the Building or other  portions of the Premises are damaged or
          destroyed by fire or other casualty covered by insurance maintained by
          Tenant,  and this Lease is not  terminated  pursuant to the  preceding
          paragraph,  then Tenant shall, upon receipt of the insurance proceeds,
          repair and restore the damaged  portions,  to  substantially  the same
          condition  as  existed   immediately  prior  to  the  casualty.   Upon
          completion  of the  restoration  work,  the remainder of the insurance
          proceeds  shall be  disbursed  to Tenant.  Rent shall abate during any
          such period of damage or repair. Notwithstanding the foregoing, if the
          damage  occurs  during the last twelve  (12) months of the Term,  then
          Tenant shall have the right to terminate  this Lease as of the date of
          the  casualty  by giving  written  notice of  termination  to Landlord
          within thirty (30) days after the fire or casualty.

               11.  Insurance.   Throughout  the  Term,  Tenant  shall  maintain
          (1)-casualty  insurance  on  the  Buildings  covering  all  casualties
          included  under  standard  insurance  industry  practices  within  the
          classification "Fire and Lightening,  Extended Coverage, Vandalism and
          Malicious  Mischief' in an amount equal to one hundred  percent (100%)
          of the  replacement  value of each Building  (including the fixtures),
          and  (ii)-comprehensive  public  liability  insurance  covering death,
          bodily  injury  and  property  damage  in the  amount  of at least Two
          Million and No/100 Dollars  ($2,000,000.00) per  occurrence/aggregate.
          Tenant's  liability  insurance  shall name  Landlord as an  additional
          insured  and  shall  include  contractual  liability  consistent  with
          standard ISO provisions,  and Tenant's  casualty  insurance shall name
          Landlord as an owner and additional insured.

               All insurance required under this Lease:

               (a) shall be  issued by an  insurance  company  authorized  to do
          business in the State of North Carolina;

               (b) shall, if available without  additional cost, with respect to
          property  insurance,  contain a waiver by the insurer of any rights of
          subrogation  or  indemnity  to which the insurer  might  otherwise  be
          entitled; and

               (c) shall,  if  available  without  additional  cost,  contain an
          endorsement  requiring  thirty  (30)  days'  written  notice  from the
          insurance company to Landlord prior to any  cancellation,  non-renewal
          or material reduction in coverage of the policy.

               Notwithstanding  anything to the contrary herein,  each policy of
          property insurance required by this Lease shall contain an endorsement
          in which the insurance company waives any right of subrogation that it
          may  acquire  against  Landlord by virtue of payment of any loss under
          such policy. In addition, Tenant waives any claims it may have against
          Landlord  arising  out of any  casualty  that  would be covered by any
          policy of property  insurance  required to be  maintained  by it under
          this  Lease,  or that  actually  is covered by any policy of  property
          insurance   maintained  by  Tenant,   without  giving  effect  to  any
          deductible amounts or self-insured risks. Prior to the commencement of
          the Term, and annually thereafter, Tenant shall, upon request, deliver
          to Landlord  certificates  of  insurance  evidencing  the  policies of
          insurance required by this section.

               12.  Taking for Public  Use. If all or any  substantial  part (as
          reasonably  determined  by Tenant) of the  Premises  are taken for any
          public  or any  quasi-public  use  under  any  statute  or by right of
          eminent domain,  or by private  purchase in lieu thereof,  then either
          Landlord  or Tenant  may  terminate  this Lease as of the date of such
          taking by  providing  thirty  (30) days'  written  notice to the other
          party.

               If any part of the  Premises  is so taken  and this  Lease is not
          terminated under the provisions of the preceding paragraph,  then Rent
          shall be  apportioned  according  to the space so taken,  and Landlord
          shall,  to the extent  possible  with any award of  damages  from such
          taking,  restore the  remaining  portion of the Premises to the extent
          necessary to render it reasonably  suitable for the purposes for which
          it is leased,  and shall make all  repairs  to any  Building  or other
          improvements  damaged  by  such  taking  to the  extent  necessary  to
          constitute the Building and Premises a complete,  functional property.
          Rent shall abate during any such period of repair and restoration.

               The proceeds of any condemnation  award for the Premises shall be
          the property of Landlord,  but the proceeds of any condemnation  award
          for  the  leasehold  interest  and  the  improvements  located  on the
          Premises  that have been  installed by Tenant shall be the property of
          Tenant.  Landlord  shall have no  interest  in any award to Tenant for
          relocation  expenses or for the taking of  Tenant's  fixtures or other
          personal property within the Premises, or for loss of business, or for
          depreciation  to,  damage to, the cost of removal  of, or the value of
          stock,  trade  fixtures,  furniture,  and other property  belonging to
          Tenant or subtenants,  provided,  however, that no award to the Tenant
          for any of the foregoing  shall directly  result in a reduction in the
          amount due to Landlord as a condemnation award for the Premises.

               13. Tenant  Default.  The  occurrence of any one of the following
          shall constitute a default by Tenant:

               (a) Failure to pay rent or any other  amount  payable  under this
          Lease within five (5) days of when due; or

               (b) Failure to perform any other  provision  of this Lease if the
          failure to perform is not cured  within  thirty (30) days after notice
          thereof  has been  given to  Tenant;  provided,  however,  that if the
          default is not reasonably  capable of being cured in thirty (30) days,
          Tenant  shall not be in default if it  commences  the cure within that
          thirty  (30)  day  period  and  diligently   prosecutes  the  cure  to
          completion.

               14.  Landlord's  Remedies.  Landlord  shall  have  the  following
          remedies if Tenant  defaults.  These remedies are not exclusive;  they
          are  cumulative  in addition to any remedies  now or later  allowed by
          law.

               (a) Lessor  shall have the right to terminate  Lessee's  right of
          possession of the Premises without terminating this Lease, and as long
          as Lessor does not terminate this Lease, collect rent when due. Lessee
          shall surrender  possession of the Premises to Lessor and Lessor shall
          have the right to enter the  Premises  without  notice to vacate  (any
          right to which is hereby  waived by Lessee)  and relet  them,  without
          prior  notice  or  demand,  using  such  reasonable  force  as  may be
          necessary, changing any or all locks on the Premises all without being
          liable for forcible entry,  trespass,  or other tort.  Lessee shall be
          liable  immediately  to Lessor  for all costs  Lessor  shall  incur in
          reletting  the  Premises  including,   without  limitation,   broker's
          commissions,  expenses for remodeling  required by the reletting,  and
          like costs.  Reletting can be for a period  shorter or longer than the
          remaining  term of the Lease.  Lessee shall pay to Lessor the rent due
          under  this  Lease  on the date  that  the rent is due,  less the rent
          Lessor  receives from any reletting.  No act by Lessor allowed by this
          paragraph or surrender of possession of the Premises  pursuant to this
          paragraph  shall  terminate this Lease unless Lessor  notifies  Lessee
          that Lessor elects to terminate this Lease.

               (b) Lessor shall have the right to terminate  this Lease  without
          notice to vacate  (any right to which is hereby  waived by Lessee) and
          Lessee's rights to possession of the Premises at any time, and reenter
          the Premises as described in subparagraph  (a)-herein above. No act by
          Lessor  other than the giving  notice of  termination  to Lessee shall
          terminate this Lease. Upon termination, Lessor shall have the right to
          pursue  its  remedies  at law or in equity to  recover  of Lessee  all
          amounts of rent then due or thereafter accruing and such other damages
          as are caused by Lessee's default.

               15. Landlord Default.  If Landlord fails timely to perform any of
          its duties  under this Lease  within  thirty (30) days after notice of
          such default,  Tenant shall have the right (but not the obligation) to
          perform any such duty on behalf and at the  expense of  Landlord  upon
          notice to  Landlord,  and all sums  expended or  expenses  incurred by
          Tenant in  performing  such duty shall be due and  payable by Landlord
          upon  demand by  Tenant.  Alternatively,  Tenant may deduct and offset
          such  amounts,  with  interest at the rate set forth  below,  from and
          against Rent due under this Lease.

               16. Assignment and Subleasing. Tenant shall not assign this Lease
          or sublet the Premises  without the prior written consent of Landlord,
          which  shall  not  be  unreasonably  withheld  or  delayed;  provided,
          however,  that Tenant may assign this Lease or sublease  the  Premises
          from time to time to entities of which  Tenant is the  majority  owner
          without restriction or consent,  provided,  however, that Tenant shall
          provide  Landlord  written notice of such assignment at least ten (10)
          days prior to any such assignment.

               17.   Landlord's   Representations   and   Warranties.   Landlord
          represents and warrants to Tenant, and agrees, that:

               (a) Landlord owns good, valid,  insurable and marketable title to
          the Premises  free and clear of all liens,  charges,  assessments  and
          encumbrances.

               (b) To the best of its knowledge,  the Premises are in compliance
          with all applicable legal  requirements  (including without limitation
          zoning requirements);

               (c) There is no litigation,  action, suit, other legal proceeding
          or  governmental  investigation  pending  or  threatened  against  the
          Premises,  and  Landlord  has no  knowledge  or  reason to know of any
          ground for any such action.

               (d) The  following  utilities  and services are  available to the
          Building: electricity, telephone, gas, water and sewer.

               (e)  Provided  Tenant  performs  its  covenants,  agreements  and
          obligations hereunder,  Landlord will warrant and defend Tenant in the
          peaceful and quiet enjoyment of the Premises.

               18. Use Clause/Compliance with Legal Requirements. Tenant may use
          the Premises for any lawful purpose.  Tenant shall properly dispose of
          all trash, refrain from burning anything on or about the Premises, and
          refrain from engaging in any illegal or immoral activities on or about
          the Premises.

         19.      Hazardous Materials.

               (a) Tenant agrees that it shall not generate, use, store, release
          or  dispose  of any  Hazardous  Material  on the  Premises  except  in
          material compliance with applicable  Environmental Laws. Tenant shall,
          at its sole cost and  expense,  cure  within  thirty  (30) days  after
          written notice from Landlord any material breach of this Section 19(a)
          which  substantially  affects  the  Premises  by taking all  necessary
          response and  corrective  actions in  accordance  with all  applicable
          Environmental Laws.

               (b)  Tenant  agrees  to  indemnify,   defend  and  hold  harmless
          Landlord, its officers,  directors,  shareholders,  employees, agents,
          successors and assigns, from and against all claims, damages, actions,
          proceedings, costs, liens, requirements, judgments, losses, penalties,
          fines,  settlements  and  liabilities of any kind  (including  without
          limitation  attorneys' fees and court costs, and consultant and expert
          witness fees) arising in any manner, directly or indirectly, out of or
          by reason of  (i)-any  breach of any  representation  or  covenant  of
          Tenant in this Lease,  (ii)-any  violation or alleged violation of any
          Environmental  Law by Tenant with  respect to the  Premises  (provided
          such violation or alleged violation does not represent the substantial
          continuation of a violation or alleged  violation that commenced prior
          to  the  Term),  and/or  (iii)-any  presence,  generation,  treatment,
          storage, disposal, transport, release, threatened release or suspected
          release of any Hazardous Material brought on, in, under,  about, to or
          from the  Premises by Tenant.  The  provisions  of this  Section-19(b)
          shall survive the expiration or earlier termination of this Lease.

               (c)  Landlord  represents  and  warrants  to Tenant  that  (i)-no
          Hazardous  Material is or will, at the  Commencement  Date, be present
          in,  on,  under or  about  the  Premises;  (ii)-without  limiting  the
          foregoing, the Premises does not contain any underground storage tanks
          except as  otherwise  disclosed by Landlord in writing to Tenant prior
          to the  execution  of  this  Lease;  (iii)-the  Premises  are in  full
          compliance  with all  Environmental  Laws,  and (iv)-the  Premise have
          never  been  the  subject  of  remedial  action  for an  environmental
          problem.  Landlord  shall,  at its sole cost and expense,  cure within
          thirty (30) days after written notice from Tenant any material  breach
          of  the   representations   set  forth  in  this  Section-19(c)  which
          substantially  interferes  with  Tenant's  use  and  enjoyment  of the
          Premises by taking all necessary  response and  corrective  actions in
          accordance with all applicable Environmental Laws.

               (d)  Landlord  agrees  to  indemnify,  defend  and hold  harmless
          Tenant, its subtenants, officers, directors, shareholders,  employees,
          agents,  successors and assigns, from and against all claims, damages,
          actions, proceedings,  costs, liens, requirements,  judgments, losses,
          penalties,  fines,  settlements and liabilities of any kind (including
          without limitation attorneys' fees and court costs, and consultant and
          expert  witness fees) arising in any manner,  directly or  indirectly,
          out  of or by  reason  of  (i)-any  breach  of any  representation  or
          covenant  of Landlord in this  Lease,  (ii)-any  violation  or alleged
          violation of any  Environmental Law with respect to the Premises as of
          or  prior  to  the  Commencement  Date,  and/or  (iii)-any   presence,
          generation,   treatment,   storage,  disposal,   transport,   release,
          threatened  release or suspected release of any Hazardous Material on,
          in,  under,  about,  to or from the Premises to the extent it does not
          result from Tenant's  activities in the  Premises.  The  provisions of
          this Section-19(d) shall survive the expiration or earlier termination
          of this Lease.

               (e) In the event of any  breach by  Landlord  of its  obligations
          pursuant to this Section-19 which is not cured within thirty (30) days
          after notice thereof has been given by Tenant,  Tenant may at any time
          thereafter terminate this Lease by written notice to Landlord.

               (f) As used herein, "Hazardous  Material" means any substance or
          material meeting any one or more of the following criteria:  (i)-it is
          defined as a hazardous waste, hazardous substance, hazardous material,
          pollutant, contaminant or toxic substance under any Environmental Law;
          (ii)-it  is  toxic,   explosive,   corrosive,   ignitable,   reactive,
          infectious,  radioactive, mutagenic, dangerous or otherwise hazardous;
          and/or  (iii-it  is or  contains,  without  limiting  the  foregoing,
          petroleum hydrocarbons.

               As used herein, "Environmental Law" shall mean any federal, state
          or local law, statute, ordinance, rule, regulation, permit, directive,
          license,  approval,  guidance,  interpretation,  order, or other legal
          requirement  relating  to  the  protection  of  human  health  or  the
          environment, including, but not limited to, any requirement pertaining
          to the manufacture, processing, distribution, use, treatment, storage,
          disposal, transportation,  handling, reporting, licensing, permitting,
          investigation or remediation of materials that are or may constitute a
          threat to human health or the environment.

               20. Waiver. The waiver by either Landlord or Tenant of any breach
          of any  covenant  or  agreement  of this  Lease  shall not be deemed a
          waiver of any other default  concerning the same or any other covenant
          or agreement of this Lease.  The receipt and acceptance by Landlord of
          delinquent  or partial  rent shall not  constitute a waiver of that or
          any other default.

               21.  Notice.  Any notice that either party desires or is required
          to give the other  party  shall be in  writing  and shall be deemed to
          have  been  sufficiently  given  if  served  personally  or  sent by a
          reputable  over-night  courier  or  sent  by  prepaid,  registered  or
          certified mail,  addressed to the other party at the address set forth
          below:

                  Landlord:            Phillips Property Company, LLC
                                       P.O. Box 1350
                                       High Point, North Carolina
                                       Attn:  S. Davis Phillips

                  with a               Womble Carlyle Sandridge & Rice, P.L.L.C.
                  copy to:             1600 BB&T Financial Center
                                       P.O. Drawer 84
                                       Winston-Salem, North Carolina 27102
                                       Attn:  William A. Davis, II

                  Tenant:              Culp, Inc.
                                       P.O. Box 2686
                                       101 South Main Street
                                       High Point, North Carolina  27261-2686
                                       Attn:  Mr. Franklin N. Saxon

                  with a               Robinson, Bradshaw & Hinson, P.A.
                  copy to:             1900 Independence Center
                                       101 North Tryon Street
                                       Charlotte, North Carolina  28246
                                       Attn:  Henry H. Ralston, Esq.

               Either party may change its address by notifying  the other party
          of the change of address in the foregoing manner.

               22.  Surrender and Holding Over.  Upon the  expiration or earlier
          termination  of the Term,  Tenant shall  surrender  possession  of the
          Premises in as good a condition as delivered  to it,  reasonable  wear
          and tear and damage by fire and other casualty excepted.

               23.  Subordination.  This  Lease and the  rights  of the  parties
          hereto are  expressly  subordinate  to the lien and  provisions of any
          first  lien  mortgage  now  or  hereafter  existing   encumbering  the
          Premises,  or any  part  thereof,  and all  amendments,  renewals  and
          modifications  and  extensions  of and to any said  mortgage,  and all
          advances  made or  hereafter  to be made  upon  the  security  of said
          mortgage.   Tenant   agrees  to  execute  and  deliver   such  further
          instruments  subordinating this Lease to the lien of any such mortgage
          as may be requested in writing by Landlord  from time to time. As used
          herein, the term mortgage shall mean any first lien mortgage,  deed of
          trust,  deed to secure debt or other  instruments used to secure debt.
          As a condition  to  subordinating  this Lease to any present or future
          mortgage of the Premises,  Tenant may require that the mortgagee under
          such mortgage agree not to disturb Tenant's rights under this Lease so
          long as Tenant is not in default hereunder this Lease.

               24.  Termination  of Existing  Leases.  Landlord shall provide to
          Tenant evidence  reasonably  satisfactory to Tenant that any leases of
          all or any  part of the  Premises  which  are or have  been in  effect
          within thirty (30) days prior to the  Commencement  Date, if any, have
          been terminated prior to the Commencement Date.

               25.  Interest on Amounts Past Due.  Interest  shall accrue on any
          amounts  payable by  Landlord or Tenant  hereunder  which are not paid
          when due at a rate of ten percent (10%) per annum.

               26.  Applicable Law. This Lease has been entered into under,  and
          shall be governed by, the laws of the State of North Carolina.

               27.  Memorandum.  The Memorandum of Lease in the form attached as
          Exhibit-B  and  made a part  hereof  shall be  fully  executed  by the
          parties at the time this Lease is executed,  and shall be delivered to
          Tenant.  Tenant may record the  Memorandum at its expense if it wishes
          to do so.

               28. Nature and Extent of Agreement.  This instrument contains the
          complete  agreement of the parties  regarding the terms and conditions
          of the  lease  of the  Premises,  and  there  are no oral  or  written
          conditions,  terms,  understandings  or  other  agreements  pertaining
          thereto  which  have  not  been   incorporated  in  this  Lease.  This
          instrument  creates  only the  relationship  of  landlord  and  tenant
          between the parties as to the Premises. This Lease may be amended only
          by a written  instrument  executed by Landlord and Tenant.  This Lease
          shall be binding  upon and inure to the benefit of Landlord and Tenant
          and their respective  successors and assigns. If any term,  condition,
          covenant,  clause or provision herein contained shall operate or would
          prospectively  operate to  invalidate  this Lease in whole or in part,
          then such term, condition,  covenant,  clause and provision only shall
          be disregarded and the remainder of this Lease shall remain  operative
          and in full force and effect.

               IN WITNESS  WHEREOF,  the  parties  hereto have caused this Lease
          Agreement  to be duly  executed  under seal as of the date first above
          written.


                                                LANDLORD:

                                                PHILLIPS PROPERTY COMPANY, LLC


                                                By:      _______________________
                                                         Manager



                                         TENANT:

                                        CULP, INC., a North Carolina corporation
 

[CORPORATE SEAL]                        By.      _______________________________
                                                         _________ President
ATTEST:


__________________________
____________ Secretary



11
C-479452v01!.02340.01193
C-479452v01!.02340.01193
                                      Exhibit C
                                      Yarn Plant


                                 LEASE AGREEMENT


               THIS LEASE AGREEMENT (the "Lease") is made and entered into as of
          the 4th day of August,  1997, by and between  PHILLIPS  WEAVING MILLS,
          INC., a North Carolina corporation (the "Landlord"), and CULP, INC., a
          North Carolina corporation (the "Tenant").

                                   BACKGROUND

     A.  Landlord  is the owner of that  certain  parcel  of land  (the  "Land")
containing approximately N/A acres and located at 325 Suthland Avenue in Monroe,
Union County,  North Carolina 28111. The Land is more particularly  described on
Exhibit A attached hereto.

               B.  Located  on the Land is a building  containing  approximately
          70,000  sq.ft.  of space (the  "Building")  and  related  improvements
          including   but  not  limited  to  parking   spaces,   utilities   and
          landscaping.  The Land, the Building,  the improvements located on the
          Land,  and  all  rights  appurtenant  to  the  Land  are  referred  to
          collectively in this Lease as the "Premises."

               NOW,  THEREFORE,  in  consideration  of the mutual  covenants and
          conditions  contained  in this Lease,  including  the  covenant to pay
          rent, and other good and valuable  consideration,  Landlord and Tenant
          hereby  agree,  for  themselves,  their  successors  and  assigns,  as
          follows:

               1. Premises.  Landlord  leases to Tenant,  and Tenant accepts and
          rents from Landlord,  the Premises,  for the term and on the terms and
          conditions  set forth in this Lease.  Tenant and its  subtenants,  and
          their officers, employees, agents, customers, invitees, successors and
          assigns,  shall  have  the  exclusive  right  to use  and  occupy  the
          Premises.

               2. Term. The term of this Lease ("Term") shall begin on August-4,
          1997 (the  "Commencement  Date") and shall end at midnight on the date
          two (2) years after the Commencement  Date. In addition,  Tenant shall
          have two (2) successive options to renew the Term, each renewal period
          to be two (2) years (each such  period,  a "Renewal  Period").  Tenant
          shall  exercise each option by written  notice to Landlord given on or
          before the date three (3) months before the  commencement  date of the
          Renewal  Period in  question.  The  first  Renewal  Period,  if Tenant
          exercises its option  therefor,  shall commence upon the expiration of
          the  initial  Term,  and each  subsequent  Renewal  Period,  if Tenant
          exercises its option  therefor,  shall commence upon the expiration of
          the immediately preceding Renewal Period. All references to the "Term"
          in this Lease shall,  unless the context clearly indicates a different
          meaning,  be deemed to include a reference to the initial Term of this
          Lease and any and all Renewal  Periods.  Each renewal  shall be on the
          same provisions as are set forth herein.

               3. Delivery of Premises.  Landlord  shall deliver the Premises to
          Tenant on or before the Commencement Date.

               4.  Rent.  Tenant  shall pay to  Landlord  annual  rent of Ninety
          Thousand and no/100  Dollars  ($90,000.00),  payable in equal  monthly
          installments  of  Seven  Thousand  Five  Hundred  and  no/100  Dollars
          ($7,500.00)  ("Monthly Base Rent") in advance on the first day of each
          calendar month,  commencing  twelve (12) months after the Commencement
          Date  and   continuing   thereafter   throughout   the  Tenn.  If  the
          Commencement  Date  falls  on a day  other  than  the  first  day of a
          calendar  month,  the  installment  of rent  payable  for the  initial
          partial calendar month for which rent is due shall be payable upon the
          Commencement  Date.  All rent shall be paid to Landlord at the address
          to which  notices  to  Landlord  are given as set forth in  Section 21
          below. Rent for any partial month shall be prorated on a daily basis.

               Beginning at the  commencement  of the first  Renewal  Period (if
          Tenant's  option  therefor is  exercised),  Monthly Base Rent shall be
          increased by an amount reflecting the percentage  increase in the cost
          of living  from the date two  months  prior to the  Commencement  Date
          until the date two  months  prior to the  expiration  of the Term.  If
          Tenant exercises any further renewal options,  Monthly Base Rent shall
          be similarly increased by an amount reflecting the percentage increase
          in  the  cost  of  living  from  the  date  two  months  prior  to the
          commencement  of the  immediately  preceding  Renewal Period until the
          date  two  months  prior to the  expiration  thereof.  The  percentage
          increase in the cost of living shall be determined by reference to the
          Consumer  Price  Index For All  Urban  Consumers  (1982-1984=100),  as
          published  by the  Bureau of Labor  Statistics  of the  United  States
          Department of Labor,  and as most  recently  available on the date for
          which  the  cost  of  living  determination  is  being  made.  If  the
          above-referenced  index is  discontinued,  calculated  in a  different
          manner  or   unavailable,   Landlord  may   substitute  a  comparable,
          generally-accepted cost of living index.

         5.       Repair and Maintenance.

               (a) Tenant, at its expense,  shall maintain the Premises in neat,
          clean and good  order and  repair,  and shall be  responsible  for all
          maintenance,  replacements  and repair with  respect to the  Premises,
          including  without  limitation all paving,  parking areas,  driveways,
          landscaping, grounds roofs, structures,  exteriors, foundations, glass
          and Building systems (including without limitation plumbing,  heating,
          cooling,  ventilation,  and electrical systems), except as provided in
          subparagraph (b) below, and shall be solely responsible for making all
          repairs  required due to the  negligence of Tenant or its employees or
          invitees and all other repairs other than those for which  Landlord is
          partially   responsible   pursuant  to  subparagraph  (b)  below,  but
          excluding,   except  as  provided  in  section  10  below,  casualties
          (including   without  limitation  fire,  damage  from  sprinklers  and
          flooding).  Tenant  shall  also  be  responsible  for any  repairs  to
          Tenant's personal property and equipment  installed in the Building by
          Tenant, except as provided in section 10 below.

               (b)  Notwithstanding  the provisions of  subparagraph  (a) above,
          Landlord and Tenant shall each bear fifty percent (50%) of the cost of
          major  repairs  and  complete  or  substantial  replacement  or  major
          overhaul or reconstruction  of structural  components of the Building,
          roofs and Building  systems as described  in  subparagraph  (a) above.
          Landlord  and Tenant  shall also each pay fifty  percent  (50%) of the
          cost of making any  modifications  to the Premises  required to comply
          with applicable legal  requirements,  including without limitation the
          Americans with  Disabilities  Act. Landlord shall reimburse Tenant for
          its share of the  reasonable  cost of the repairs  within  thirty (30)
          days  after  written  demand,   accompanied  by  supporting  invoices.
          Alternatively,  Tenant may deduct and offset  such costs and  interest
          from  and  against  rent  due and to  become  due  under  this  Lease.
          Notwithstanding  anything to the contrary herein, Tenant shall have no
          responsibility  to make any repairs due to any casualty  affecting the
          Premises.

               6. Alterations. Tenant shall have no right to make any structural
          alterations  to the  Building  without  the prior  written  consent of
          Landlord, which shall not be unreasonably withheld.  Tenant shall have
          the right to make  non-structural  alterations to the Premises without
          consent,  provided  such  alterations  must be performed in a good and
          workmanlike manner.

               7. Personal  Property.  All  inventory,  equipment,  fixtures and
          furnishings of Tenant in or attached to the Premises may be removed by
          Tenant at any time during the Term, provided that any damage caused by
          such removal will be promptly  repaired by Tenant at its expense.  Any
          such property not so removed  before the  expiration of the Term shall
          become the property of Landlord unless reasonably  promptly removed by
          Tenant.

               8. Taxes.  Tenant  shall pay prior to  delinquency  (a)-all  real
          property taxes  applicable to the Premises during the Term and (b)-all
          taxes that are levied  against any  personal  property or equipment of
          Tenant.  Landlord shall deliver to Tenant,  within thirty (30) days of
          Landlord's  receipt  thereof,  any real estate tax bills pertaining to
          the Premises;  provided,  however,  the failure of Landlord to deliver
          any such tax bill shall not relieve  Tenant of the obligation of taxes
          hereunder.  Notwithstanding the foregoing,  Tenant shall not be deemed
          in default for  nonpayment of taxes if it is in good faith  contesting
          the validity or amount thereof in compliance with all applicable laws,
          and the enforcement of any lien therefor is suspended or stayed during
          such  contest.  Landlord  agrees to cooperate  with Tenant in any such
          contest. Taxes for the year in which the Term commences or expires (or
          otherwise terminates) shall be prorated.

               9.  Utilities and Services.  Tenant shall pay all charges for its
          usage of electricity,  telephone, gas, water and sewer to the Premises
          during the Tenn.  If as a result of any failure to furnish or delay or
          interruption in furnishing any of the utilities or services  described
          above,  the  Premises  are  rendered  substantially  untenantable  for
          Tenant's purposes for a period of twenty-four (24) consecutive  hours,
          then,  commencing  upon such failure or delay,  rent shall abate until
          utility or service has been resumed.

               10.  Damage  by Fire or Other  Casualty.  Tenant  shall  promptly
          notify  Landlord of any damage to the Premises caused by fire or other
          casualty.

               If (a)-the  Building is rendered  untenantable  or  substantially
          untenantable  (as  reasonably  determined  by Tenant) by fire or other
          casualty,  or (b)-the  Building or other  portions of the Premises are
          totally or partially  damaged or destroyed by fire or other  casualty,
          and Tenant's architect  reasonably estimates that the damage will take
          longer  than ninety  (90) days to repair,  then  Tenant may elect,  by
          giving  Landlord  written notice within sixty (60) days of the fire or
          other  casualty,  to  terminate  this  Lease  as of the  date  of such
          casualty.

               If the Building or other  portions of the Premises are damaged or
          destroyed by fire or other casualty covered by insurance maintained by
          Tenant,  and this Lease is not  terminated  pursuant to the  preceding
          paragraph,  then Tenant shall, upon receipt of the insurance proceeds,
          repair and restore the damaged  portions,  to  substantially  the same
          condition  as  existed   immediately  prior  to  the  casualty.   Upon
          completion  of the  restoration  work,  the remainder of the insurance
          proceeds  shall be  disbursed  to Tenant.  Rent shall abate during any
          such period of damage or repair. Notwithstanding the foregoing, if the
          damage  occurs  during the last twelve  (12) months of the Term,  then
          Tenant shall have the right to terminate  this Lease as of the date of
          the  casualty  by giving  written  notice of  termination  to Landlord
          within thirty (30) days after the fire or casualty.

               11.  Insurance.   Throughout  the  Term,  Tenant  shall  maintain
          (i)-casualty  insurance  on  the  Buildings  covering  all  casualties
          included  under  standard  insurance  industry  practices  within  the
          classification "Fire and Lightening,  Extended Coverage, Vandalism and
          Malicious  Mischief' in an amount equal to one hundred  percent (100%)
          of the  replacement  value of each Building  (including the fixtures),
          and  (ii)-comprehensive  public  liability  insurance  covering death,
          bodily  injury  and  property  damage  in the  amount  of at least Two
          Million and No/100 Dollars  ($2,000,000.00) per  occurrence/aggregate.
          Tenant's  liability  insurance  shall name  Landlord as an  additional
          insured  and  shall  include  contractual  liability  consistent  with
          standard ISO provisions,  and Tenant's  casualty  insurance shall name
          Landlord as an owner and additional insured.

         All insurance required under this Lease:

               (a) shall be  issued by an  insurance  company  authorized  to do
          business in the State of North Carolina;

               (b) shall, if available without  additional cost, with respect to
          property  insurance,  contain a waiver by the insurer of any rights of
          subrogation  or  indemnity  to which the insurer  might  otherwise  be
          entitled; and

               (c) shall,  if  available  without  additional  cost,  contain an
          endorsement  requiring  thirty  (30)  days'  written  notice  from the
          insurance company to Landlord prior to any  cancellation,  non-renewal
          or material reduction in coverage of the policy.

               Notwithstanding  anything to the contrary herein,  each policy of
          property insurance required by this Lease shall contain an endorsement
          in which the insurance company waives any right of subrogation that it
          may  acquire  against  Landlord by virtue of payment of any loss under
          such policy. In addition, Tenant waives any claims it may have against
          Landlord  arising  out of any  casualty  that  would be covered by any
          policy of property  insurance  required to be  maintained  by it under
          this  Lease,  or that  actually  is covered by any policy of  property
          insurance   maintained  by  Tenant,   without  giving  effect  to  any
          deductible amounts or self-insured risks. Prior to the commencement of
          the Term, and annually thereafter, Tenant shall, upon request, deliver
          to Landlord  certificates  of  insurance  evidencing  the  policies of
          insurance required by this section.

               12.  Taking for Public  Use. If all or any  substantial  part (as
          reasonably  determined  by Tenant) of the  Premises  are taken for any
          public  or any  quasi-public  use  under  any  statute  or by right of
          eminent domain,  or by private  purchase in lieu thereof,  then either
          Landlord  or Tenant  may  terminate  this Lease as of the date of such
          taking by  providing  thirty  (30) days'  written  notice to the other
          party.

               If any part of the  Premises  is so taken  and this  Lease is not
          terminated under the provisions of the preceding paragraph,  then Rent
          shall be  apportioned  according  to the space so taken,  and Landlord
          shall,  to the extent  possible  with any award of  damages  from such
          taking,  restore the  remaining  portion of the Premises to the extent
          necessary to render it reasonably  suitable for the purposes for which
          it is leased,  and shall make all  repairs  to any  Building  or other
          improvements  damaged  by  such  taking  to the  extent  necessary  to
          constitute the Building and Premises a complete,  functional property.
          Rent shall abate during any such period of repair and restoration.

               The proceeds of any condemnation  award for the Premises shall be
          the property of Landlord,  but the proceeds of any condemnation  award
          for  the  leasehold  interest  and  the  improvements  located  on the
          Premises  that have been  installed by Tenant shall be the property of
          Tenant.  Landlord  shall have no  interest  in any award to Tenant for
          relocation  expenses or for the taking of  Tenant's  fixtures or other
          personal property within the Premises, or for loss of business, or for
          depreciation  to,  damage to, the cost of removal  of, or the value of
          stock,  trade  fixtures,  furniture,  and other property  belonging to
          Tenant or subtenants,  provided,  however, that no award to the Tenant
          for any of the foregoing  shall directly  result in a reduction in the
          amount due to Landlord as a condemnation award for the Premises.

               13. Tenant  Default.  The  occurrence of any one of the following
          shall constitute a default by Tenant:

               (a) Failure to pay rent or any other  amount  payable  under this
          Lease within five (5) days of when due; or

               (b) Failure to perform any other  provision  of this Lease if the
          failure to perform is not cured  within  thirty (30) days after notice
          thereof  has been  given to  Tenant;  provided,  however,  that if the
          default is not reasonably  capable of being cured in thirty (30) days,
          Tenant  shall not be in default if it  commences  the cure within that
          thirty  (30)  day  period  and  diligently   prosecutes  the  cure  to
          completion.

               14.  Landlord's  Remedies.  Landlord  shall  have  the  following
          remedies if Tenant  defaults.  These remedies are not exclusive;  they
          are  cumulative  in addition to any remedies  now or later  allowed by
          law.

               (a) Lessor  shall have the right to terminate  Lessee's  right of
          possession of the Premises without terminating this Lease, and as long
          as Lessor does not terminate this Lease, collect rent when due. Lessee
          shall surrender  possession of the Premises to Lessor and Lessor shall
          have the right to enter the  Premises  without  notice to vacate  (any
          right to which is hereby  waived by Lessee)  and relet  them,  without
          prior  notice  or  demand,  using  such  reasonable  force  as  may be
          necessary, changing any or all locks on the Premises all without being
          liable for forcible entry,  trespass,  or other tort.  Lessee shall be
          liable  immediately  to Lessor  for all costs  Lessor  shall  incur in
          reletting  the  Premises  including,   without  limitation,   broker's
          commissions,  expenses for remodeling  required by the reletting,  and
          like costs.  Reletting can be for a period  shorter or longer than the
          remaining  term of the Lease.  Lessee shall pay to Lessor the rent due
          under  this  Lease  on the date  that  the rent is due,  less the rent
          Lessor  receives from any reletting.  No act by Lessor allowed by this
          paragraph or surrender of possession of the Premises  pursuant to this
          paragraph  shall  terminate this Lease unless Lessor  notifies  Lessee
          that Lessor elects to terminate this Lease.

               (b) Lessor shall have the right to terminate  this Lease  without
          notice to vacate  (any right to which is hereby  waived by Lessee) and
          Lessee's rights to possession of the Premises at any time, and reenter
          the Premises as described in subparagraph  (a) herein above. No act by
          Lessor  other than the giving  notice of  termination  to Lessee shall
          terminate this Lease. Upon termination, Lessor shall have the right to
          pursue  its  remedies  at law or in equity to  recover  of Lessee  all
          amounts of rent then due or thereafter accruing and such other damages
          as are caused by Lessee's default.

               15. Landlord Default.  If Landlord fails timely to perform any of
          its duties  under this Lease  within  thirty (30) days after notice of
          such default,  Tenant shall have the right (but not the obligation) to
          perform any such duty on behalf and at the  expense of  Landlord  upon
          notice to  Landlord,  and all sums  expended or  expenses  incurred by
          Tenant in  performing  such duty shall be due and  payable by Landlord
          upon  demand by  Tenant.  Alternatively,  Tenant may deduct and offset
          such  amounts,  with  interest at the rate set forth  below,  from and
          against Rent due under this Lease.

               16. Assignment and Subleasing. Tenant shall not assign this Lease
          or sublet the Premises  without the prior written consent of Landlord,
          which  shall  not  be  unreasonably  withheld  or  delayed;  provided,
          however,  that Tenant may assign this Lease or sublease  the  Premises
          from time to time to entities of which  Tenant is the  majority  owner
          without restriction or consent,  provided,  however, that Tenant shall
          provide  Landlord  written notice of such assignment at least ten (10)
          days prior to any such assignment.

               17.   Landlord's   Representations   and   Warranties.   Landlord
          represents and warrants to Tenant, and agrees, that:

               (a) Landlord owns good, valid,  insurable and marketable title to
          the Premises  free and clear of all liens,  charges,  assessments  and
          encumbrances.

               (b) To the best of its knowledge,  the Premises are in compliance
          with all applicable legal  requirements  (including without limitation
          zoning requirements).

               (c) There is no litigation,  action, suit, other legal proceeding
          or  governmental  investigation  pending  or  threatened  against  the
          Premises,  and  Landlord  has no  knowledge  or  reason to know of any
          ground for any such action.

               (d) The  following  utilities  and services are  available to the
          Building: electricity, telephone, gas, water and sewer.

               (e)  Provided  Tenant  performs  its  covenants,  agreements  and
          obligations hereunder,  Landlord will warrant and defend Tenant in the
          peaceful and quiet enjoyment of the Premises,

               18. Use Clause/Compliance with Legal Requirements. Tenant may use
          the Premises for any lawful purpose.  Tenant shall properly dispose of
          all trash, refrain from burning anything on or about the Premises, and
          refrain from engaging in any illegal or immoral activities on or about
          the Premises.

         19.      Hazardous Materials.

               (a) Tenant agrees that it shall not generate, use, store, release
          or  dispose  of any  Hazardous  Material  on the  Premises  except  in
          material compliance with applicable  Environmental Laws. Tenant shall,
          at its sole cost and  expense,  cure  within  thirty  (30) days  after
          written  notice  from  Landlord  any breach of this  Section  19(a) by
          taking all  necessary  response and  corrective  actions in accordance
          with all applicable Environmental Laws.

               (b)  Tenant  agrees  to  indemnify,   defend  and  hold  harmless
          Landlord, its officers,  directors,  shareholders,  employees, agents,
          successors and assigns, from and against all claims, damages, actions,
          proceedings, costs, liens, requirements, judgments, losses, penalties,
          fines,  settlements  and  liabilities of any kind  (including  without
          limitation  attorneys' fees and court costs, and consultant and expert
          witness fees) arising in any manner, directly or indirectly, out of or
          by reason of  (1)-any  breach of any  representation  or  covenant  of
          Tenant in this Lease,  (ii)-any  violation or alleged violation of any
          Environmental  Law by Tenant with  respect to the  Premises  (provided
          such violation or alleged violation does not represent the substantial
          continuation of a violation or alleged  violation that commenced prior
          to  the  Term),  and/or  (iii)-any  presence,  generation,  treatment,
          storage, disposal, transport, release, threatened release or suspected
          release of any Hazardous Material brought on, in, under,  about, to or
          from the Premises by Tenant.  The  provisions  of this  Section  19(b)
          shall survive the expiration or earlier termination of this Lease.

               (c)  Landlord  represents  and  warrants  to Tenant  that  (i)-no
          Hazardous  Material is or will, at the  Commencement  Date, be present
          in,  on,  under or  about  the  Premises;  (ii)-without  limiting  the
          foregoing, the Premises does not contain any underground storage tanks
          except as  otherwise  disclosed by Landlord in writing to Tenant prior
          to the  execution  of  this  Lease;  (iii)-the  Premises  are in  full
          compliance  with all  Environmental  Laws,  and (iv)-the  Premise have
          never  been  the  subject  of  remedial  action  for an  environmental
          problem.  Landlord  shall,  at its sole cost and expense,  cure within
          thirty (30) days after written notice from Tenant any material  breach
          of  the   representations  set  forth  in  this  Section  19(c)  which
          substantially  interferes  with  Tenant's  use  and  enjoyment  of the
          Premises by taking all necessary  response and  corrective  actions in
          accordance with all applicable Environmental Laws.

               (d)  Landlord  agrees  to  indemnify,  defend  and hold  harmless
          Tenant, its subtenants, officers, directors, shareholders,  employees,
          agents,  successors and assigns, from and against all claims, damages,
          actions, proceedings,  costs, liens, requirements,  judgments, losses,
          penalties,  fines,  settlements and liabilities of any kind (including
          without limitation attorneys' fees and court costs, and consultant and
          expert  witness fees) arising in any manner,  directly or  indirectly,
          out  of or by  reason  of  (i)-any  breach  of any  representation  or
          covenant  of Landlord in this  Lease,  (ii)-any  violation  or alleged
          violation of any  Environmental Law with respect to the Premises as of
          or  prior  to  the  Commencement  Date,  and/or  (iii)-any   presence,
          generation,   treatment,   storage,  disposal,   transport,   release,
          threatened  release or suspected release of any Hazardous Material on,
          in,  under,  about,  to or from the Premises to the extent it does not
          result from Tenant's  activities in the  Premises.  The  provisions of
          this Section 19(d) shall survive the expiration or earlier termination
          of this Lease.

               (e) In the event of any  breach by  Landlord  of its  obligations
          pursuant to this Section 19 which is not cured within thirty (30) days
          after notice thereof has been given by Tenant,  Tenant may at any time
          thereafter terminate this Lease by written notice to Landlord.

               (f) As used herein,  "Hazardous  Material" means any substance or
          material meeting any one or more of the following criteria:  (i)-it is
          defined as a hazardous waste, hazardous substance, hazardous material,
          pollutant, contaminant or toxic substance under any Environmental Law;
          (ii)-it  is  toxic,   explosive,   corrosive,   ignitable,   reactive,
          infectious,  radioactive, mutagenic, dangerous or otherwise hazardous;
          and/or  (iii)-it  is or  contains,  without  limiting  the  foregoing,
          petroleum hydrocarbons.

               As used herein, "Environmental Law" shall mean any federal, state
          or local law, statute, ordinance, rule, regulation, permit, directive,
          license,  approval,  guidance,  interpretation,  order, or other legal
          requirement  relating  to  the  protection  of  human  health  or  the
          environment, including, but not limited to, any requirement pertaining
          to the manufacture, processing, distribution, use, treatment, storage,
          disposal, transportation,  handling, reporting, licensing, permitting,
          investigation or remediation of materials that are or may constitute a
          threat to human health or the environment.

               20. Waiver. The waiver by either Landlord or Tenant of any breach
          of any  covenant  or  agreement  of this  Lease  shall not be deemed a
          waiver of any other default  concerning the same or any other covenant
          or agreement of this Lease.  The receipt and acceptance by Landlord of
          delinquent  or partial  rent shall not  constitute a waiver of that or
          any other default.

               21.  Notice.  Any notice that either party desires or is required
          to give the other  party  shall be in  writing  and shall be deemed to
          have  been  sufficiently  given  if  served  personally  or  sent by a
          reputable  over-night  courier  or  sent  by  prepaid,  registered  or
          certified mail,  addressed to the other party at the address set forth
          below:

         Landlord:                  Phillips Weaving Mills, Inc.
                                    P.O. Box 1350
                                    High Point, North Carolina
                                    Attn:   S. Davis Phillips

         with a                     Womble Carlyle Sandridge & Rice, P.L.L.C.
         copy to:                   1600 BB&T Financial Center
                                    P.O. Drawer 84
                                    Winston-Salem, North Carolina 27102
                                    Attn:   William A. Davis, II

         Tenant:           Culp, Inc.
                                    P.O. Box 2686
                                    101 South Main Street
                                    High Point, North Carolina  27261-2686
                                    Attn:   Mr. Franklin N. Saxon

         with a                     Robinson, Bradshaw & Hinson, P.A.
         copy to:                   1900 Independence Center
                                    101 North Tryon Street
                                    Charlotte, North Carolina 28246
                                    Attn: Henry H. Ralston, Esq.

               Either party may change its address by notifying  the other party
          of the change of address in the foregoing manner.

               22.  Surrender and Holding Over.  Upon the  expiration or earlier
          termination  of the Term,  Tenant shall  surrender  possession  of the
          Premises in as good a condition as delivered  to it,  reasonable  wear
          and tear and damage by fire and other casualty excepted.

               23.  Subordination.  This  Lease and the  rights  of the  parties
          hereto are  expressly  subordinate  to the lien and  provisions of any
          first  lien  mortgage  now  or  hereafter  existing   encumbering  the
          Premises,  or any  part  thereof,  and all  amendments,  renewals  and
          modifications  and  extensions  of and to any said  mortgage,  and all
          advances  made or  hereafter  to be made  upon  the  security  of said
          mortgage.   Tenant   agrees  to  execute  and  deliver   such  further
          instruments  subordinating this Lease to the lien of any such mortgage
          as may be requested in writing by Landlord  from time to time. As used
          herein, the term mortgage shall mean any first lien mortgage,  deed of
          trust,  deed to secure debt or other  instruments used to secure debt.
          As a condition  to  subordinating  this Lease to any present or future
          mortgage of the Premises,  Tenant may require that the mortgagee under
          such mortgage agree not to disturb Tenant"s rights under this Lease so
          long as Tenant is not in default hereunder this Lease.

     24.  Termination  of  Existing  Leases.  Landlord  shall  provide to Tenant
evidence  reasonably  satisfactory to Tenant that any leaIses of all or any part
of the Premises  which are or have been in effect  within thirty (30) days prior
to the Commencement Date, if any, have been terminated prior to the Commencement
Date.

               25.  Interest on Amounts Past Due.  Interest  shall accrue on any
          amounts  payable by  Landlord or Tenant  hereunder  which are not paid
          when due at a rate of ten percent (10%) per annum.

               26.  Applicable Law. This Lease has been entered into under,  and
          shall be governed by, the laws of the State of North Carolina.

               27.  Memorandum.  The Memorandum of Lease in the form attached as
          Exhibit  B and  made a part  hereof  shall be  fully  executed  by the
          parties at the time this Lease is executed,  and shall be delivered to
          Tenant.  Tenant may record the  Memorandum at its expense if it wishes
          to do so.

               28. Nature and Extent of Agreement.  This instrument contains the
          complete  agreement of the parties  regarding the terms and conditions
          of the  lease  of the  Premises,  and  there  are no oral  or  written
          conditions,  terms,  understandings  or  other  agreements  pertaining
          thereto  which  have  not  been   incorporated  in  this  Lease.  This
          instrument  creates  only the  relationship  of  landlord  and  tenant
          between the parties as to the Premises. This Lease may be amended only
          by a written  instrument  executed by Landlord and Tenant.  This Lease
          shall be binding  upon and inure to the benefit of Landlord and Tenant
          and their respective  successors and assigns. If any term,  condition,
          covenant,  clause or provision herein contained shall operate or would
          prospectively  operate to  invalidate  this Lease in whole or in part,
          then such term, condition,  covenant,  clause and provision only shall
          be disregarded and the remainder of this Lease shall remain  operative
          and in full force and effect.





               IN WITNESS  WHEREOF,  the  parties  hereto  have cause this Lease
          Agreement  to be duly  executed  under seal as of the date first above
          written.


         LANDLORD:                     PHILLIPS WEAVING MILLS, INC.

[CORPORATE SEAL]
                                       By:  ___________________________________
Attest:                                     ________ President


__________________________________
________________ Secretary


         TENANT:                       CULP, INC., a North Carolina corporation

[CORPORATE SEAL]
                                       By:  _________________________________
Attest:                                     ______________ President

___________________________________
_____________ Secretary






STATE OF NORTH CAROLINA

COUNTY OF ________________


                    This  _____  day of  _____________,  1997,  personally  came
               before  me  ____________  ______________,  who,  being by me duly
               sworn,  says that he is the President of PHILLIPS  WEAVING MILLS,
               INC., a North Carolina corporation,  and that the seal affixed to
               the foregoing  instrument in writing is the corporate seal of the
               company,  and that said  writing was signed and sealed by him, in
               behalf of said corporation,  by its authority duly given. And the
               said  President  acknowledged  the said writing to be the act and
               deed of said corporation.


                                     __________________________________________
                                     Notary Public
My commission expires:

________________________

[NOTARIAL SEAL]





STATE OF NORTH CAROLINA

COUNTY OF _________________


                    This  _____ day of  ______________,  1997,  personally  came
               before me ________________________,  who, being by me duly sworn,
               says  that he is the  ______  President  of CULP,  INC.,  a North
               Carolina corporation,  and that the seal affixed to the foregoing
               instrument in writing is the corporate  seal of the company,  and
               that said writing was signed and sealed by him, in behalf of said
               corporation, by its authority duly given. And the said __________
               President acknowledged the said writing to be the act and deed of
               said corporation.


                                       _________________________________________
                                       Notary Public
My commission expires:

_____________________

[NOTARIAL SEAL]



5
C-479386v01!.02340.01193
C-479386v01!.02340.01193
                                     Exhibit D

                               LICENSE AGREEMENT


                    THIS  LICENSE  AGREEMENT  ("Agreement")  is made and entered
               into as of the 4th day of August,  1997 by and  between  PHILLIPS
               VELVET MILLS,  INC., a North Carolina  corporation  "Licensor"),
               and CULP, INC., a North Carolina corporation ("Licensee").

                                    RECITALS:

                    Licensor leases certain real property  located in Jamestown,
               Guilford County, North Carolina,  as more particularly  described
               in  Exhibit  A  attached   hereto  and  made  part   hereof  (the
               "Property").  Licensor  has sold certain  assets (the  "Purchased
               Assets")  to Licensee  as of the date of this  Agreement,  and by
               this Agreement, shall provide Licensee access to certain portions
               of  the  Property,  as  provided  below,  to  allow  Licensee  to
               dismantle  and remove  Purchased  Assets and to wind up  business
               related to such assets.

                             STATEMENT OF AGREEMENT

                    NOW,  THEREFORE,  for  and in  consideration  of the  mutual
               agreements  contained  in this  Agreement,  the parties  agree as
               follows:

                    1. Grant of License.  Licensor  hereby  grants unto Licensee
               upon the  terms and  conditions  set  forth in this  Agreement  a
               license (the "License") for Licensee, its agents, contractors and
               employees to enter upon the  following  portions of the Property,
               which are  hereinafter  collectively  referenced  as the "License
               Area":

                    (a) The area  above the  surface of the  driveways,  parking
               areas and loading docks on the Property cross-hatched on the site
               plan of the Property attached hereto as Exhibit B and made a part
               hereof, and

                    (b) The area above the  surface of the floors and within the
               exterior  walls of the  manufacturing  building  at the  Property
               shown on Exhibit B attached hereto.

                    Notwithstanding  anything to the  contrary  herein or in any
               other agreement between Licensor and Licensee, Licensee shall not
               have any  license  or other  right to enter,  use or  access  any
               portion of the  Property  other than the  License  Area.  Without
               limiting the foregoing,  the License Area  specifically  does not
               include the two sheds at the Property,  the structure that housed
               the former wastewater  treatment system at the Property,  and the
               outside drum storage area at the Property.  Licensor shall retain
               complete authority and control over all portions of the Property,
               with the exception of the License Area,  and Licensee  shall have
               no  authority,  control or other right with respect to such areas
               of the Property  outside of the License  Area.  The License shall
               allow  entry  to  the  License  Area  solely  for  the  following
               purposes:   (a)-dismantling  and  removing  any  or  all  of  the
               Purchased  Assets  presently  located in the  License  Area,  and
               (b)-winding up business related to such assets.

                    2.  Obligations  of  Licensee.  Licensee  agrees  to  pay to
               Licensor a license  fee for the License of $3,810 per month to be
               paid monthly in arrears on the 4th of each month.

                    3. Term. The term of this Agreement and the License  granted
               herein  shall  commence as of the date hereof and shall expire at
               11:59  p.m.  on  October  4,  1997;  provided,  however,  that if
               Licensee  surrenders  the License  Area to  Licensor  before that
               date, the term shall terminate automatically upon such surrender.

                    4.  Insurance  and  Utilities.  Throughout  the term of this
               Agreement, Licensee shall maintain a policy of commercial general
               liability  insurance in an amount of not less than $1,000,000 per
               occurrence.  Also, during the term of the License, Licensee shall
               maintain casualty insurance on the manufacturing  building on the
               Property   covering  all   casualties   included  under  standard
               insurance industry practices within the classification  "Fire and
               Lightning,  Extended Coverage, Vandalism and Malicious Mischief."
               Each of Licensor and Licensee hereby waives,  on behalf of itself
               and its insurers,  all claims against the other for damage to the
               License  Area or Property  that is covered by property  insurance
               maintained  by it. Each of Licensor  and Licensee  shall  require
               that its  insurers  include in its  property  insurance  policies
               insuring the Property  effective  waivers of subrogation  for the
               benefit of the other.  Notwithstanding  the  foregoing,  Licensee
               shall be  responsible  for insuring the Purchased  Assets and all
               other  personal  property  located on the Property,  and Licensor
               shall not be responsible for damage thereto.

                    Licensee  shall,  within 30 days after notice from  Licensor
               accompanied  with  appropriate  bills,  pay  bills  for  usage of
               utilities in the License Area by Licensee during the term of this
               Agreement  (such  bills  to be pro  rated  between  Licensor  and
               Licensee  on a daily  basis  for any  billing  periods  that  are
               partially within the term of this Agreement).  Licensor agrees to
               cooperate  with Licensee to arrange for  continuation  of utility
               services  currently  provided to the License Area during the term
               of this Agreement.

                    5. Indemnification. Licensee will indemnify, defend and hold
               harmless   Licensor,   and  its  partners,   agents,   employees,
               successors and assigns, from and against any and all liabilities,
               damages,  claims, causes of action,  losses,  demands,  costs and
               expenses   of  every  kind  and  nature   (including   reasonable
               attorneys' fees) arising out of any injury or damage to person or
               property  caused by  Licensee's  activities  in the License  Area
               under this Agreement, and this indemnity obligation shall survive
               the expiration or earlier termination of this Agreement.

         6.       Hazardous Materials.

                    (a) Licensee agrees that it shall not generate,  use, store,
               release or dispose of any Hazardous  Material on the License Area
               except in  compliance  with all  applicable  Environmental  Laws.
               Licensee shall, at its sole cost and expense,  cure within thirty
               (30)-days  after written  notice from Licensor any breach of this
               Section  6(a) by taking all  necessary  response  and  corrective
               actions in accordance with all applicable Environmental Laws.

                    (b) Licensee  agrees to indemnify,  defend and hold harmless
               Licensor,  its  officers,  directors,  shareholders,   employees,
               agents,  successors  and  assigns,  from and  against all claims,
               damages,  actions,   proceedings,   costs,  liens,  requirements,
               judgments,  losses, penalties, fines, settlements and liabilities
               of any kind (including without limitation  reasonable  attorneys'
               fees and court costs,  and  consultant  and expert  witness fees)
               arising  in any  manner,  directly  or  indirectly,  out of or by
               reason of (i)-any  breach of any  representation  or  covenant of
               Licensee  in  this  Licensee,   (ii)-any   violation  or  alleged
               violation of any  Environmental  Law by Licensee  with respect to
               the  License  Area,   and/or  (iii)-any   presence,   generation,
               treatment,  storage,  disposal,  transport,  release,  threatened
               release or suspected  release of any Hazardous  Material  brought
               on, in,  under,  about,  to or from the License Area by Licensee.
               The  provisions of this Section 6(b) shall survive the expiration
               or earlier termination of this Agreement,

                    (c) Licensor represents and warrants to Licensee that (i)-no
               Hazardous  Material  is, as of the date  hereof,  present in, on,
               under or about the License Area,  except for Hazardous  Materials
               properly stored in compliance  with all applicable  Environmental
               Laws  for  use in the  manufacturing  business  conducted  at the
               License Area;  (ii)-without  limiting the foregoing,  the License
               Area does not contain any  underground  storage tanks,  (iii)-the
               License Area is in full compliance with all  Environmental  Laws,
               and (iv)-the  License Area has never been the subject of remedial
               action for an environmental problem.  Licensor shall, at its sole
               cost and expense,  cure within  thirty  (30)-days  after  written
               notice from Licensee any breach of the  representations set forth
               in this  Section  6(c)  by  taking  all  necessary  response  and
               corrective    actions   in   accordance   with   all   applicable
               Environmental Laws.

                    (d) Licensor  agrees to indemnify,  defend and hold harmless
               Licensee, its sublicensees,  officers,  directors,  shareholders,
               employees,  agents,  successors and assigns, from and against all
               claims,   damages,    actions,    proceedings,    costs,   liens,
               requirements,  judgments,  losses, penalties,  fines, settlements
               and  liabilities  of  any  kind  (including   without  limitation
               reasonable  attorneys'  fees and court costs,  and consultant and
               expert   witness  fees)  arising  in  any  manner,   directly  or
               indirectly,  out  of  or by  reason  of  (i)-any  breach  of  any
               representation   or  covenant  of  Licensor  in  this  Agreement,
               (ii)-any  violation or alleged violation of any Environmental Law
               with  respect to the  License  Area or Property as of or prior to
               the Commencement  Date,  and/or (iii)-any  presence,  generation,
               treatment,  storage,  disposal,  transport,  release,  threatened
               release or suspected  release of any  Hazardous  Material on, in,
               under,  about,  to or from the License Area or Property except to
               the extent  resulting from  Licensee's  activities in the License
               Area.  The  provisions  of this  Section  6(d) shall  survive the
               expiration or earlier termination of this Agreement.

                    (e) As used herein, "Hazardous Material" means any substance
               or material  meeting any one or more of the  following  criteria:
               (i)-it is  defined as a  hazardous  waste,  hazardous  substance,
               hazardous  material,  pollutant,  contaminant or toxic  substance
               under  any  Environmental  Law;  (ii)-it  is  toxic,   explosive,
               corrosive,   ignitable,   reactive,   infectious,    radioactive,
               mutagenic,  dangerous or otherwise hazardous;  and/or (iii)-it is
               or   contains,   without   limiting  the   foregoing,   petroleum
               hydrocarbons.

                    As used herein,  "Environmental Law" shall mean any federal,
               state or local law, statute, ordinance, rule, regulation, permit,
               directive, license, approval, guidance, interpretation, order, or
               other  legal  requirement  relating  to the  protection  of human
               health or the  environment,  including,  but not  limited to, any
               requirement   pertaining   to   the   manufacture,    processing,
               distribution, use, treatment, storage, disposal,  transportation,
               handling,  reporting,  licensing,  permitting,  investigation  or
               remediation  of materials  that are or may constitute a threat to
               human health or the environment.

                    7. Damage.  Licensee shall promptly repair any damage to the
               License  Area  caused  by its  activities  in the  License  Area,
               excluding ordinary wear and tear.

                    8. Liens.  Licensee shall pay for all services and materials
               contracted  for by it in  connection  with its  activities in the
               License Area, and shall promptly after notice cause to be removed
               of record any lien or claim for lien filed  against any  property
               of Licensor in connection  with such services or materials.  This
               obligation shall survive the expiration or earlier termination of
               this Agreement.

                    9.  Default.  If Licensee  fails to perform  any  obligation
               under this Agreement, and fails to cure

                    the default  within fifteen  (15)-days  after written notice
               from  Licensor,  then Licensor  shall have the right to terminate
               this  Agreement  and remove all  persons  and  property  from the
               License Area.

                    10. Notices.  Any notice  permitted or required by the terms
               of this  Agreement  shall be deemed  given three  (3)-days  after
               being sent by registered or certified United States Mail, postage
               prepaid, properly addressed to the parties as follows:

         to Licensor:                           Phillips Velvet Mills, Inc.
                                                Post Office Box 1350
                                                High Point, North Carolina 27261
                                                Attention:  S. Davis Phillips

         to Licensee:                           Culp, Inc.
                                                Post Office Box 2686
                                                High Point, North Carolina 27261
                                                Attention: Franklin N. Saxon

                    11. Effect on Successors and Assignees. This Agreement shall
               be  binding  upon and inure to the  benefit of the  Licensor  and
               Licensee,   and  their   successors  and  assigns,   except  that
               Licensee's  rights under this  Agreement  are not  assignable  by
               Licensee  without the prior written consent of Licensor,  consent
               not to be unreasonably withheld.

                    12. Entire  Agreement.  This  Agreement  contains the entire
               agreement  between  Licensor and Licensee  regarding the License,
               and there are no other agreements,  terms or conditions that have
               not been  incorporated  herein.  This Agreement  creates only the
               relationship  of licensor and licensee  between the parties.  The
               laws of the State of North  Carolina  shall govern the  validity,
               interpretation and enforcement of this Agreement.

                    IN WITNESS  WHEREOF,  the parties  hereto have executed this
               Agreement as of the day and year first above written.

                                      LICENSOR:

                                      PHILLIPS VELVET MILLS, INC.


                                      By:      _________________________________
                                      Name:
                                      Title:


                                      LICENSEE:

                                      CULP, INC.




                                      By:      _________________________________
                                      Name:
                                      Title:

                               ACQUISITION OF THE ASSETS


                                              OF


                                ARTEE INDUSTRIES, INCORPORATED


                                              BY


                                          CULP, INC.












                                       October 14, 1997




                                       8

   


                                       TABLE OF CONTENTS


         ARTICLE I
                              SALE OF ASSETS AND TERMS OF PAYMENT

         1.1.     The Sale..................................................-1-
         1.2.     Purchase Price............................................-2-
         1.3.     Purchase Price Adjustment.................................-3-
         1.4.     Preparation of Closing Balance Sheet......................-3-
         1.5.     Procedure for Determination of Purchase Price Adjustment..-3-
         1.6.     Post-Closing Payment......................................-4-
         1.7.     Contingent Payment........................................-4-
         1.8.     Assignment and Assumption of Obligations and Liabilities..-6-
         1.9.     Procedures for Purchased Assets Not Transferable..........-7-
         1.10.    Allocations...............................................-7-

         ARTICLE II
                                          THE CLOSING

         2.1.     Time and Place of Closing.................................-7-
         2.2.     Deliveries by Seller......................................-8-
         2.3.     Deliveries by Buyer.......................................-8-

         ARTICLE III
                           REPRESENTATIONS AND WARRANTIES OF SELLER

         3.1.     Existence; Capital Stock; and Ownership...................-9-
         3.2.     Authority Relative to this Agreement......................-9-
         3.3.     Consent and Approvals; No Violation.......................-9-
         3.4.     Financial Statements.....................................-10-
         3.5.     Undisclosed Liabilities..................................-10-
         3.6.     Absence of Certain Changes or Events.....................-10-
         3.7.     Certain Contracts and Arrangements.......................-10-
         3.8.     Litigation...............................................-11-
         3.9.     Labor Matters............................................-11-
         3.10.    Employee Benefit Plans; ERISA............................-11-
         3.11.    Tax Matters..............................................-13-
         3.12.    Licenses and Authorizations..............................-13-
         3.13.    Compliance with Laws.....................................-14-
         3.14.    Title to Purchased Assets................................-14-
         3.15.    Tangible Purchased Assets................................-14-
         3.16.    Leased Property..........................................-14-
         3.17.    Bank Accounts............................................-14-
         3.18.    Corporate and Personnel Data; Labor Relations............-14-
         3.19.    Insurance................................................-14-
         3.20.    Customers................................................-15-
         3.21.    Inventories..............................................-15-
         3.22.    Accounts Receivable......................................-15-
         3.23.    Intellectual Property....................................-15-
         3.24.    Environmental Matters....................................-15-
         3.25.    Product Warranty.........................................-17-
         3.26.    Product Liability........................................-17-
         3.27.    Claims and Charges against Products......................-17-
         3.28.    Disclosure...............................................-17-

         ARTICLE IV
                            REPRESENTATIONS AND WARRANTIES OF BUYER

         4.1.     Organization.............................................-18-
         4.2.     Authority Relative to this Agreement.....................-18-
         4.3.     Consents and Approvals; No Violation.....................-18-

         ARTICLE V
                                   COVENANTS OF THE PARTIES

         5.1.     Conduct of Business......................................-18-
         5.2.     Financial Statements.....................................-20-
         5.3.     Access to Information; Confidentiality...................-20-
         5.4.     Change of Corporate Name.................................-20-
         5.5.     Filings..................................................-21-
         5.6.     Employees and Employee Benefits..........................-21-
         5.7.     Noncompetition...........................................-22-
         5.8.     Lien Search..............................................-23-
         5.9.     Other Actions............................................-24-
         5.10.    Corporate Action.........................................-24-
         5.11.    No Solicitation..........................................-24-
         5.12.    Robert T. Davis..........................................-24-
         5.14.    Equipment Lease..........................................-24-

         ARTICLE VI
                                      CLOSING CONDITIONS

     6.1.  Conditions  to Each Party's  Obligations  to Effect the
           Transactions Contemplated Hereby................................-25-

     6.2.  Conditions to the Obligations of Seller to Effect the
           Transactions Contemplated Hereby................................-25-

     6.3.  Conditions to the Obligations of Buyer to Effect the
           Transactions Contemplated Hereby................................-26-


         ARTICLE VII
                         SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION

         7.1.     Survival of Representations...............................-27-
         7.2.     Seller's Agreement to Indemnify...........................-27-
         7.3.     Buyer's Agreement to Indemnify............................-30-

         ARTICLE VIII
                                          TERMINATION

         8.1.     Termination...............................................-32-
         8.2.     Procedure and Effect of Termination or Failure to Close...-32-

         ARTICLE IX
                                   MISCELLANEOUS PROVISIONS

         9.1.     Commissions...............................................-33-
         9.2.     Expenses..................................................-33-
         9.3.     Further Assurances........................................-33-
         9.4.     Amendment and Modification................................-33-
         9.5.     Waiver of Compliance; Consents............................-33-
         9.6.     Notices...................................................-34-
         9.7.     Action by Shareholders....................................-35-
         9.8.     Right of Set-Off..........................................-35-
         9.9.     Assignment................................................-35-
         9.10.    Governing Law.............................................-35-
         9.11.    Counterparts..............................................-35-
         9.12.    Interpretation............................................-35-
         9.13.    Entire Agreement..........................................-35-




                                       4


                                           EXHIBITS

A                         Form of Assignment Agreement
B                         Form of Seller's Opinion
C                         Form of Equipment Lease Agreement
1.7                       Calculation of Contingent Payment



                                           SCHEDULES

1.1(a)                    Purchased Property
1.1(b)                    Leased Property
1.1(c)                    Tangible Personal Property
1.1(d)                    Contracts
1.1(f)                    Prepaid Expenses
1.8                       Debt to Be Paid at Closing
3.1                       Qualification
3.5                       Undisclosed Liabilities
3.6                       Absence of Certain Changes or Events
3.7                       Contracts and Arrangements
3.8                       Litigation
3.9                       Labor Matters
3.10                      Employee Benefit Plans; ERISA
3.12                      Licenses and Authorizations
3.14(a)                   Exceptions to Title
3.14(b)                   Excluded Assets
3.17                      Bank Accounts
3.18                      Corporate and Personnel Data
3.19                      Insurance
3.20                      Customers
3.23                      Intellectual Property
3.24                      Environmental Matters



                                       5











                                        7



                                   ASSET PURCHASE AGREEMENT


     THIS ASSET PURCHASE AGREEMENT (the  "Agreement"),  dated as of the 14th day
of October,  1997, is among CULP, INC., a North Carolina corporation  ("Buyer"),
ARTEE INDUSTRIES, INCORPORATED, a North Carolina corporation (the "Seller"), and
ROBERT T. DAVIS,  ROBERT L. DAVIS,  Trustee of Robert T. Davis Irrevocable Trust
under  agreement  dated  8/25/94,  ROBERT L.  DAVIS,  LOUIS W.  DAVIS,  KELLY D.
ENGLAND,  J.  MARSHALL  BRADLEY,   FRANKIE  S.  BRADLEY  and  MICKY  R.  BRADLEY
(collectively, the "Shareholders").


                                     Background Statement

     Seller  desires to sell and Buyer desires to purchase  Seller's  assets and
assume  certain of Seller's  liabilities  held or incurred  in  connection  with
Seller's yarn  manufacturing  operations (the "Business"),  as more specifically
provided  herein.  Based upon the  representations  and warranties  made by each
party to the other in this Agreement,  the parties have agreed to consummate the
sale of such assets and assumption of such  liabilities  on the terms  contained
herein.


                          Statement  of  Agreement 

     In consideration of the premises and the mutual covenants herein contained,
the parties  hereto,  for  themselves,  their  successors and assigns,  agree as
follows:






                                           ARTICLE I
                              SALE OF ASSETS AND TERMS OF PAYMENT

     I.1.  The Sale.  Upon the  terms  and  subject  to the  conditions  of this
Agreement,  at Closing,  Seller  will sell and deliver to Buyer,  and Buyer will
purchase  and  accept  from  Seller,  all the  assets of Seller  held or used in
connection  with the Business,  whether  personal,  tangible or intangible,  but
excluding those assets  specifically listed on Schedule 3.14(b) hereto (all such
assets being referred to herein as the "Purchased  Assets"),  including  without
limitation:

     (a) Seller's real property  identified on Schedule  1.1(a) (the  "Purchased
Property");
 
     (b) Seller's rights with respect to the leased real property  identified on
Schedule 1.1(b) (the "Leased Property");

     (c) Seller's tangible personal property,  including  machinery,  equipment,
supplies and inventories,  vehicles, furniture, furnishings, fixtures, and spare
parts, including without limitation the property listed on Schedule 1.1(c);

     (d) Seller's accounts  receivable and rights under the contracts,  purchase
orders,  options, leases and other agreements that are listed on Schedule 1.1(d)
(the "Contracts");

     (e) Seller's right, title and interest in and to all permits,  licenses and
other governmental authorizations,  copyrights, patents, trademarks, trade names
and any combination or shortened form thereof, processes,  computer programs and
program rights,  trade secrets,  customer lists, and other intangible rights and
interests owned by Seller and used in connection with the Business;
 
     (f) All prepaid  expenses,  surety  bonds,  surety  deposits  and  security
deposits  posted by or on behalf of Seller in  connection  with the operation of
the Business,  a recent listing of which is attached  hereto as Schedule  1.1(f)
hereto;

     (g) All books,  records,  correspondence,  customer  lists,  vendor  lists,
product  literature,  designs,  development  records and files,  computer files,
technical reports and all other business  documents relating to the operation of
the Business;

     (h) All of Seller's telephone numbers and telephone  directory listings and
advertisements;

     (i) All  claims,  causes of action and suits that  Seller  have or may have
against third parties in connection with the Business;

     (j) All insurance policies,  including life insurance  policies,  currently
issued in favor of Seller; and

     (k) The Business as a going concern.

     . Upon the terms and subject to the conditions and adjustments contained in
this Agreement,  and in consideration of the sale of the Purchased Assets, Buyer
will pay or issue and deliver on the Closing  Date (a) to Seller an amount equal
to  $2,000,000  in cash and a note (the  "Note")  made  payable to Seller in the
aggregate  amount of $1,600,000 and (b) to the Shareholders the number of shares
of the common stock of Buyer (the  "Buyer's  Stock")  valued in the aggregate at
$5,400,000 based on a price per share of the Buyer's Stock of $19.

     The amount of the foregoing payments, collectively, are referred to in this
Agreement as the "Base  Purchase  Price," which price is subject to the Purchase
Price  Adjustment  to be made  pursuant  to Section  1.3.  The amount  upon such
adjustment is referred to herein as the "Final Purchase Price."

     Not later than 30 days prior to the Closing  Date,  Seller shall deliver to
Buyer a schedule  specifying the manner in which the foregoing payment of shares
of the Buyer's  Stock will be allocated  among the  Shareholders.  Such schedule
shall be binding upon Seller and the  Shareholders  upon  delivery to Buyer.  No
fractional  shares of the Buyer's Stock shall be issued in connection  with this
Agreement.  If a person otherwise has the right to receive .5 or more of a share
of the Buyer's  Stock,  such person  shall  receive an  additional  share of the
Buyer's  Stock;  otherwise,  such person  shall  receive no such shares or other
consideration  for such a fractional  interest in the Final Purchase Price.  The
shares of the Buyer's Stock to be issued hereunder shall be registered and fully
transferrable  without  limitation under the federal  securities laws, except as
may be imposed by Rule 145 of the Securities and Exchange Commission promulgated
thereby under the Securities Act of 1933, as amended,  and shall be approved for
listing on the New York Stock Exchange.

     The Note  shall  bear  interest  at 6.5% per annum,  and the  interest  and
principal  thereunder  shall  become due and  payable on the 10th day  following
final determination of the Final Purchase Price.

     .  (a)  The  Base  Purchase  Price  shall  be  adjusted  as  follows  (such
adjustment,  the "Purchase Price Adjustment"):  The Base Purchase Price shall be
increased  by the  dollar  amount,  if any,  by which the  Stockholders'  Equity
Computation (as defined below) exceeds  $6,300,000,  and the Base Purchase Price
shall be  decreased  by the dollar  amount,  if any, by which the  Stockholders'
Equity Computation is less than $6,000,000.

     (b) "Stockholders'  Equity Computation" means, as of 11:59 p.m. on the date
immediately preceding the Closing Date, the dollar amount of the total assets of
Seller less the dollar  amount of the total  liabilities  of Seller,  as derived
from the audited  Closing Balance Sheet prepared  pursuant to Section-1.4  below
and subject to the procedure for its determination in Section 1.5 below.  Assets
and liabilities  shall have the meanings given to them under generally  accepted
accounting  principles  (as  recognized  by the American  Institute of Certified
Public Accountants), as in effect from time to time and consistent with Seller's
past  practices  as  reflected  in  the  Financial  Statements,  as  defined  in
Section-3.4 ("Generally Accepted Accounting Principles").

     (c) Based on the Closing  Balance  Sheet,  Buyer shall compute the Purchase
Price  Adjustment  and  Stockholders'  Equity  Computation  and shall deliver to
Seller and the Shareholders within 90 days after the Closing Date, a certificate
attached to the Closing  Balance  Sheet  setting  forth its  calculation  of the
Stockholders' Equity Computation and the Purchase Price Adjustment.

     . (a)  Within 90 days  after the  Closing  Date,  Buyer  shall  cause to be
prepared and audited by its independent  public accountants and shall deliver to
Seller and the  Shareholders an audited balance sheet of Seller as of 11:59 p.m.
on the date immediately prior to the Closing Date (the "Closing Balance Sheet").
Seller and the Shareholders  shall give their full cooperation and shall provide
such information  required for Buyer to prepare and its accountants to audit the
Closing Balance Sheet. Seller and the Shareholders shall have the right to audit
the Closing  Balance  Sheet and shall be permitted to have access to the records
and  information  involved  in the  preparation  of the Closing  Balance  Sheet,
Stockholders'  Equity  Computation and Purchase Price Adjustment upon request by
Seller or the  Shareholders,  and Buyer  shall  give  reasonable  assistance  as
requested by Seller and the Shareholders in reviewing such matters.

     (b) The  Closing  Balance  Sheet  shall  be  prepared  in  accordance  with
Generally Accepted Accounting Principles,  and it shall reflect all expenses and
fees of Seller and the Shareholders  incurred and not paid, or to be incurred or
paid by Seller, in connection with this Agreement,  including without limitation
all attorneys' and accountants'  fees and costs for fringe benefits of employees
(including those related to health care and vacation).

     . If Seller and the Shareholders do not accept the Closing Balance Sheet or
the  Stockholders'   Equity  Computation   prepared  by  Buyer,  Seller  or  the
Shareholders  shall give written  notice to Buyer within 30 days after  delivery
thereof.  The  notice  shall set forth in  reasonable  detail  the bases for any
objections  by  Seller  or the  Shareholders.  Seller  shall be  deemed  to have
accepted the Closing  Balance  Sheet and the  Stockholders'  Equity  Computation
prepared and proposed by Buyer at 5:00 p.m.  Charlotte,  North  Carolina time on
the 30th day after  delivery  thereof if Seller  has not by then  given  written
notice of  disagreement.  Within 30 days  after  delivery  of  Seller's  written
notice,  the  parties  shall  engage  Arthur  Andersen  LLP or another  mutually
agreeable  independent  public  accounting  firm to  resolve  the  issues.  Such
accounting  firm shall apply  Generally  Accepted  Accounting  Principles to the
issues at hand and shall not have the power to alter,  modify,  amend, add to or
subtract  from any terms or provisions  of this  Agreement.  The decision of the
accounting  firm shall be rendered within 30 days of its engagement and shall be
binding on the parties  hereto.  Buyer and Seller each shall pay one-half of the
cost of the accounting firm.

     . If the Final Purchase Price exceeds the Base Purchase Price,  Buyer shall
pay the  difference to Seller in cash. If the Final  Purchase Price is less than
the Base  Purchase  Price,  the amount  payable  under the Note  (including  any
accrued but unpaid interest) shall be offset and decreased by the difference. If
the amount  payable under the Note is less than the amount to be offset,  Seller
and each of the  Shareholders  shall have a joint and several  obligation to pay
such  deficiency  to Buyer in cash.  Any  payment  to be made  pursuant  to this
Section  1.6 shall be made within 10 days after the final  determination  of the
Final Purchase Price.

 .       I.7.   Contingent Payment

     (i) After the fiscal year of Buyer  beginning May 4, 1998 and ending May 2,
1999  (the  "Measurement  Period"),  Buyer  shall pay to  Seller  the  following
amounts, as and if applicable (the "Contingent Payment"):

     (A) if Artee Pre-tax Income (as defined below) for the  Measurement  Period
is $2,200,000, Buyer shall pay to Seller $2,200,000;
 
     (B) if Artee  Pre-tax  Income for the  Measurement  Period is greater  than
$2,200,000  but less than  $5,200,000,  Buyer  shall pay to the Seller an amount
equal  to the  sum  of  (i)  $2,200,000  plus  (ii)  the  amount  determined  by
multiplying  $5,000,000  by a fraction,  the numerator of which is the amount by
which  Pre-tax  Income  exceeds  $2,200,000  and the  denominator  of  which  is
$3,000,000; or

     (C) if Artee  Pre-tax  Income  for the  Measurement  Period  is equal to or
greater than $5,200,000, Buyer shall pay to Seller $7,200,000.

     Forty percent  (40%) of the amount of any payment  required by this Section
1.7  shall be paid in cash and  sixty  percent  (60%)  of any such  amount  (the
"Contingent  Stock  Payment")  shall be paid by the  delivery  of  shares of the
Buyer's Stock,  the number of which will be based upon a price of $19 per share;
provided,  however,  that in the event the average  closing price of the Buyer's
Stock,  as  reported  in The  Wall  Street  Journal,  for  the 20  trading  days
immediately  prior to the  Contingent  Payment Date (as defined  below):  (i) is
greater  than  $24,  the  number of shares  of  Buyer's  Stock to be issued  and
delivered under this Section 1.2 shall be computed by (A) multiplying $24 by the
fraction of which the amount of the  Contingent  Stock  Payment is the numerator
and $19 is the  denominator,  the  product of which is then (B)  divided by such
20-day average price;  or (ii) is less than $14, the number of shares of Buyer's
Stock to be issued and delivered under this Section 1.2 shall be computed by (A)
multiplying  $14 by the  fraction  of which the amount of the  Contingent  Stock
Payment is the  numerator  and $19 is the  denominator,  the product of which is
then (B) divided by such 20-day average price;  and provided,  further,  that in
the event that any such shares of the Buyer's  Stock are to be issued at $15 per
share or less, Buyer shall have the option,  at its sole  discretion,  to make a
payment  of cash in lieu of all or any  portion of its  obligation  to issue and
deliver shares of the Buyer's Stock under this Section 1.7.

     The  issuance of such  shares of the  Buyer's  Stock is subject to the same
fractional  share  adjustment  set forth in Section  1.2.  Buyer shall make such
payment and issue such shares of the Buyer's Stock by the latest to occur of (A)
45 days after the end of  Buyer's  fiscal  year ended May 2, 1999,  (B) ten days
after the  certification  of Artee Pre-tax Income for the Measurement  Period by
Buyer's  independent  public  accountants in connection with the fiscal year-end
audit of Buyer's financial  condition and results of operations,  or (C)-30 days
after Seller delivers the notice required below specifying the allocation of the
Buyer's Stock among the Shareholders (such date, the "Contingent Payment Date").
Not later than 30 days prior to such  payment,  Seller shall  deliver to Buyer a
schedule  specifying  the manner in which the  foregoing  payment of the Buyer's
Stock will be allocated among the  Shareholders.  Such schedule shall be binding
upon Seller and the Shareholders upon delivery to Buyer.

     "Artee Pre-tax Income" shall mean the income of Buyer's division  comprised
of the  Business  before  income  taxes,  all as  computed  in  accordance  with
Generally  Accepted  Accounting  Principles,  applied to the Artee business unit
using the Seller's  historical  cost basis.  For purposes of  calculating  Artee
Pre-tax  Income  during  the  Measurement  Period,  the  depreciation  schedules
currently  used by the Seller will  continue to be used,  even though  Buyer may
institute different depreciation schedules for financial accounting purposes. In
addition,  for such purpose,  LIFO inventory accounting policies will be applied
to the  inventory of the Artee  business unit as a separate  inventory  pool and
using Seller's historical LIFO cost basis.

     (ii) Books and Records.  Throughout  the period  commencing  at Closing and
continuing  thereafter  through  May 2, 1999,  Buyer  shall  maintain  books and
records of its  operations  to the extent  necessary  for  ensuring the accurate
calculation of Artee Pre-tax Income.

     (iii)  Operation of the  Business.  The parties  intend that the  following
principles  will govern the conduct of the Business and the calculation of Artee
Pre-tax Income during the Measurement Period: The Business will be operated as a
separate  business unit of the Buyer,  with Robert T. Davis  ("Bob")  serving as
chairman and Robert L. Davis ("Rob")  serving as chief executive of the business
unit.  Rob will succeed Bob as chairman of the business unit if Bob is unable to
serve as chairman  throughout the  Measurement  Period.  The volume of yarn that
will be available for the Buyer's  internal  consumption is set forth on Exhibit
1.7 hereto.  The Business will make such volumes of yarn available to Buyer,  as
Buyer shall request, and the transfer pricing for such yarn will be as set forth
on Exhibit 1.7. If the Buyer  requires  more yarn from the Artee  business  unit
than the  volumes  set forth on  Exhibit  1.7,  the  transfer  pricing  for such
additional  yarn will be established  with reference to the outside  business of
the business unit, if any,  displaced by such  additional  requirements.  If raw
material  prices to the Artee  business  unit  increase or  decrease,  then such
increased or  decreased  costs will be passed  through to the  transfer  pricing
established  hereunder,  on a  dollar-for-dollar  basis. The Artee business unit
will be charged for the financing provided to it by the Buyer from and after the
closing (including the payoff of outside debt, financing of capital expenditures
and  working  capital  needs,  and  financing  of the  chenille  machines  to be
installed at the Artee premises (whether purchased or "leased" from the Buyer)),
all at the Buyer's cost of funds under its bank loan  documents.  The Buyer will
not  allocate  overhead  costs  to the  Artee  business  unit  for  purposes  of
calculating  Artee's  Pre-tax  Income  during  the  Measurement  Period.  If the
adoption of Buyer's  benefit  plans causes an increase in Artee's costs of doing
business  from the costs that would have been  experienced  by Seller  using its
current benefit plans in an amount that is in excess of cost savings realized by
other changes instituted by Buyer (e.g.  elimination of factoring),  such amount
of net increased cost will be disregarded in calculating  Artee Pre-tax  Income.
The parties intend that, to the extent feasible, the Artee business unit will be
operated as an independent  entity after the closing by its current  management.
Notwithstanding  the  foregoing,  it is understood  and agreed that the ultimate
control of the Business will  transfer to the Buyer as of the Closing Date.  The
parties hereto understand and acknowledge that (a) Buyer is a public company and
must be managed  and  operated  in the best  interests  of its  shareholders  by
Buyer's  management and board of directors,  (b) the Contingent Payment provided
for in this Section 1.7 could create a conflict of interest  between  Seller and
Buyer  during the  Measurement  Period and (c) in the  unlikely  event of such a
conflict, decisions may have to be made before and during the Measurement Period
that would be in the best interests of Buyer and its  shareholders  but contrary
to the best interests of Seller and its  shareholders  as  beneficiaries  of the
Contingent Payment provided for in this Section 1.7.

             (iv)  Calculation  of Contingent  Payment. 

     Buyer shall deliver to Seller a schedule, prepared by Buyer and reviewed by
Buyer's independent accountants,  setting forth the computation of Artee Pre-tax
Income for each fiscal  quarter of Buyer during the  Measurement  Period,  along
with copies of such backup  documentation  and such financial  information as is
reasonable to inform Seller of the information and  calculations  used in making
such computation.  The computation of such Artee Pre-tax Income shall be made on
the basis of financial statements prepared in accordance with Generally Accepted
Accounting  Principles applied as described above in this Section and a physical
count of inventory.  Buyer's computation of any such payment shall be conclusive
and binding upon the parties  hereto  unless,  within thirty (30) days following
Seller's  receipt of such  schedule  or, with respect to Buyer's  fiscal  fourth
quarter in the  Measurement  Period,  10 days after Buyer's  independent  public
accountants certify Artee's Pre-tax Income for the Measurement Period, whichever
is later,  Seller  notifies  Buyer in writing  that it  disagrees  with  Buyer's
computation  of Artee Pre-tax  Income or the amount of any  Contingent  Payment;
provided,  however, that in the event any such computations are discovered to be
in error as a result of the fiscal year-end audit of Buyer's financial condition
and results of operations by its independent public  accountants,  equitable and
appropriate  adjustments  will be made  thereto.  If  such  disagreement  is not
resolved within 30 days after delivery of Seller's timely written notice,  Buyer
and Seller shall  request  Arthur  Andersen LLP or such other  national  firm of
independent  certified public accountants  mutually agreeable to such parties to
compute the amount of Artee Pre-tax  Income for the  Measurement  Period and any
Contingent  Payment  and resolve any other  objection  as promptly as  possible,
which  computation  and  resolution  shall be  conclusive  and binding  upon the
parties  hereto.  Buyer and Seller  shall each pay  one-half of the expenses and
fees of such accounting firm relating to the resolution of such disagreement.

 .       I.8.   Assignment and Assumption of Obligations and Liabilities

     (a) As of the Closing,  Buyer shall assume and pay,  discharge and perform,
and Seller shall assign all the  obligations and liabilities of Seller listed on
the Closing Date Balance Sheet, including the following,  but only to the extent
that such obligations and liabilities  arise or accrue with respect to a time or
period before the Closing  Date:  accounts  payable;  accrued wages and bonuses;
payroll  taxes-accrued  and  withheld;  commissions  payable;  accrued  interest
payable;  accrued profit sharing;  property taxes payable;  accrued claims;  and
other accrued expenses.

     (b) Buyer will not assume Seller's bank debt to  NationsBank,  N.A. and the
other note made to Robert T. Davis, both as described in detail on Schedule 1.8,
but at Closing will make  payment in  immediately  available  funds of an amount
necessary to pay such  liabilities  and obligations of Seller as of the Closing.
Upon such payments,  Seller will cause all liens on any of the Purchased  Assets
securing such liabilities and obligations to be released at Seller's expense and
appropriate  instruments and documents to be executed and filed  evidencing such
release of liens.

     (c) Except as explicitly set forth in this  Agreement,  Buyer shall neither
assume nor become  liable for the  payment or  performance  of any  obligations,
claims,  liabilities,  contracts,  commitments or  undertakings of Seller or the
Shareholders,  whether  known or  unknown,  fixed  or  contingent,  reported  or
unreported.  Without  limiting the foregoing,  the Buyer shall not be liable for
workers' compensation claims that relate to any accident, injury or other events
occurring prior to the Closing Date.

     . If any of the  Contracts  or the  Lease or any other  property  or rights
included in the Purchased  Assets are not assignable or  transferable  either by
virtue of the provisions  thereof or under applicable law without the consent of
some other party or parties, Seller and the Shareholders shall use each of their
best efforts to obtain such consents  prior to Closing and shall notify Buyer on
or  prior to the  Closing  Date of any  consents  not so  obtained.  If any such
consent  cannot be obtained  prior to Closing,  Buyer may (a) in the exercise of
its sole  discretion  waive such  requirement as a condition to Closing,  and in
such event,  this Agreement,  and the related  instruments of transfer shall not
constitute  an  assignment  or  transfer  thereof and Buyer shall not assume any
obligations  with respect thereto or  (b)-terminate  this Agreement  pursuant to
Section  8.1(d).  Following  the Closing,  each  Shareholder  shall use his best
efforts to obtain any consents not previously obtained as soon as possible after
Closing or otherwise obtain for Buyer the practical  benefit of such property or
rights.

     I.10.  Allocations.  The  Purchase  Price  will be  allocated  in a  manner
mutually determined by Buyer and Seller.


                                          ARTICLE II
                                          THE CLOSING

     II.1.  Time and  Place of  Closing.  The  closing  (the  "Closing")  of the
transactions  contemplated  hereby  shall take place at the offices of Robinson,
Bradshaw & Hinson,  P.A.  on the  earlier to occur of (a) May 4, 1998 or (b) the
first day of Buyer's fiscal month immediately  following the fiscal month during
which it shall be determined  (as provided  below) that Artee Pre-tax Income for
any  consecutive  three-month  period shall be at least  $200,000 (with no month
during any such period having negative Pre-tax Income), or on such other date or
at such other time or place as shall be  mutually  satisfactory  to the  parties
hereto (the "Closing Date"); provided, however, that if there shall be less than
10 days  between  such  determination  of  Pre-tax  Income  and the first day of
Buyer's next fiscal  month,  Closing  shall not occur until the first day of the
second fiscal month of Buyer following such determination of Pre-tax Income.

     Such Artee  Pre-tax  Income  shall be  computed  on the basis of  financial
statements  prepared by Seller in accordance with Generally Accepted  Accounting
Principles.  It shall be Seller's  obligation to notify Buyer of Seller reaching
such level of  profitability,  and Seller shall  deliver to the  Shareholders  a
schedule  prepared by Seller  setting  forth the  computation  of Artee  Pre-tax
Income  for any such  three-month  period,  along  with  copies  of such  backup
documentation and such financial information as is reasonable to inform Buyer of
the  information  and  calculations  used in making such  computation.  Seller's
computation  of such Artee Pre-tax  Income shall be conclusive  and binding upon
the parties hereto unless,  within 15 days following  Seller's  delivery of such
schedule to Buyer,  Buyer  notifies  Seller in writing  that it  disagrees  with
Seller's  computation of Artee Pre-tax Income for such  three-month  period.  If
such  disagreement is not resolved within ten days after Seller's receipt of any
such notice,  Buyer and Seller shall request  Arthur  Andersen LLP or such other
national firm of independent  certified public accountants mutually agreeable to
them to compute  the  amount of Artee  Pre-tax  Income for any such  three-month
period  and  resolve  any  other  objection  as  promptly  as  possible,   which
computation  and  resolution  shall be  conclusive  and binding upon the parties
hereto.  Buyer and Seller  shall each pay  one-half of the  expenses and fees of
such accounting firm relating to the resolution of such disagreement.

     II.2.  Deliveries by Seller.  At the Closing,  Seller will deliver to Buyer
the following:

     (a) General warranty deeds to the Purchased Property;

     (b)  Assignment  and Assumption  Agreement  (the  "Assignment  Agreement"),
substantially in the form attached hereto as Exhibit A;

     (c) All bills of sale,  certificates  of title,  assignments  of leases and
other agreements,  and other instruments of transfer necessary to transfer title
to the Purchased Assets, as may be reasonably required by Buyer;

     (d)  Evidence  satisfactory  to Buyer and its counsel that all liens on the
Purchased Assets will be released at or upon Closing;

     (e) The opinions,  certificates,  consents and other documents contemplated
by Section-6.3 hereof; and

     (f) All other documents,  certificates,  instruments and writings  required
hereunder to be delivered by Seller,  or as may reasonably be requested by Buyer
at or prior to the Closing pursuant to this Agreement.

     II.3. Deliveries by Buyer. At the Closing,  Buyer will deliver to Seller or
the Shareholders (as provided herein) the following:

     (a) The payment of $2,000,000 in cash;

     (b) The Note;

     (c) The stock  certificates  representing  the  number of shares of Buyer's
Stock  valued in the  aggregate  at  $5,400,000  based on the price per share of
Buyer's  Stock  determined in  accordance  with Section 1.2,  such  certificates
bearing  legends  reflecting  any  restrictions  on the resale of the underlying
shares imposed by Rule 145 of the Securities and Exchange Commission promulgated
thereby under the Securities Act of 1933, as amended;

     (d) The Assignment Agreement;

     (e) The  certificates  and other  documents  contemplated  by  Section  6.2
hereof; and

     (f) All other documents,  certificates,  instruments and writings  required
hereunder to be delivered by Buyer,  or as may reasonably be requested by Seller
at or prior to the Closing pursuant to this Agreement.


                                          ARTICLE III
                REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS

     Each of Seller and the  Shareholders  jointly and  severally  represent and
warrant to Buyer as follows:

     III.1.  Existence;  Capital Stock;  and Ownership.  Seller is a corporation
duly  organized,  validly  existing and in good  standing  under the laws of its
state of organization. Seller has the full power and authority to own, lease and
operate the Purchased  Assets and carry on its Business as such  operations  are
now being conducted.  All of the issued and outstanding  capital stock of Seller
has been duly authorized and validly issued and is fully paid and  nonassessable
and is entirely owned by the Shareholders.  Except as set forth on Schedule 3.1,
there are no outstanding options,  warrants,  convertible rights, calls, puts or
other rights or  commitments  of any  character to acquire the capital  stock of
Seller,  no  contracts  or  commitments  to issue  any such  options,  warrants,
convertible rights,  calls, puts or other rights or similar agreements affecting
the shares of stock of Seller.  Seller is duly  qualified  to do business and in
good  standing  as a  foreign  corporation  or  limited  liability  company,  as
applicable,  in the states set forth on Schedule 3.1 attached hereto,  which are
all the states in which either the  ownership or use of its  properties,  or the
nature of the activities  conducted by it, requires such  qualification.  Seller
does not presently own,  directly or indirectly,  any shares of capital stock of
or other equity interest in any corporation,  partnership or other entity nor is
Seller  otherwise under any obligation to purchase or subscribe for any interest
in, make any loan or advance to, or otherwise in any manner make any  investment
in, any corporation, partnership or other entity.

     III.2. Authority Relative to this Agreement.  Seller has the full corporate
power,  authority  and legal right to execute and deliver this  Agreement and to
carry out the transactions and perform its obligations  contemplated hereby. The
execution  and  delivery  of  this  Agreement  and  the   consummation   of  the
transactions  contemplated  hereby have been duly and validly  authorized by all
necessary  corporate  action on the part of Seller  (including  approval  by its
shareholders in accordance with applicable law), and no other proceedings on the
part of Seller are  necessary to authorize  this  Agreement  or  consummate  the
transactions  contemplated  hereby.  This  Agreement  has been duly and  validly
executed and delivered by each of Seller and the  Shareholders and constitutes a
legal, valid and binding obligation of each of them, enforceable against each of
them in accordance with its terms.

     III.3. Consent and Approvals; No Violation. No permit, consent, approval or
authorization  of,  or  declaration  to or  filing  with,  any  governmental  or
regulatory authority is required in connection with any aspect of the execution,
delivery and  performance  of this  Agreement,  except for  compliance  with the
Hart-Scott-Rodino  Antitrust  Improvements  Act of 1976  (the  "HSR  Act").  The
execution,  delivery and performance of this Agreement by each of Seller and the
Shareholders  will  not (a)  conflict  with any  provision  of the  Articles  of
Incorporation or bylaws of Seller,  (b) result in a default (or give rise to any
right of  termination,  cancellation or acceleration or creation of liens) under
any of  the  terms,  conditions  or  provisions  of any  note,  bond,  mortgage,
indenture,  agreement,  lease or other instrument or obligation  relating to the
Business  or to which any of Seller or the  Shareholders  is a party or to which
any of the Purchased Assets may be subject,  except for such defaults (or rights
of  termination,  cancellation or acceleration or creation of liens) as to which
requisite  waivers or  consents  have been  obtained,  or (c)  violate  any law,
statute,  rule,  regulation,  order, writ,  injunction or decree of any federal,
state or local governmental authority or agency.

     III.4.  Financial  Statements.   Seller  has  furnished  to  Buyer  audited
financial  statements as of and for the twelve-month  periods ending on or about
December 31, 1994, 1995 and 1996, and unaudited balance sheets and statements of
income  for each  completed  month  thereafter.  The  foregoing  statements  are
hereinafter referred to as the "Financial  Statements." The Financial Statements
(a) fairly  present the results of operations  and financial  position of Seller
for the  periods and as of the dates set forth,  in  accordance  with  Generally
Accepted  Accounting  Principles,  except for normal  adjustments in the case of
unaudited  financial  statements,  and (b) are  consistent  with the  books  and
records of Seller (which books and records are correct and complete).

     III.5. Undisclosed Liabilities. Except as set forth in Schedule-3.5 hereto,
Seller  has  no  obligation  or  liability  (whether  absolute,   contingent  or
otherwise,   including,  without  limitation,  product  liability  and  warranty
obligations) except liabilities, obligations or contingencies (i) that are fully
accrued  or  reserved  against  in the  Financial  Statements  or (ii) that were
incurred  in the  ordinary  course of business  since the date of the  Financial
Statements.

     III.6.  Absence  of  Certain  Changes  or  Events.  Except  as set forth in
Schedule  3.6 and except as  otherwise  contemplated  by this  Agreement,  since
December  31,  1996 there has not been (a) any  material  adverse  change in the
Business or the  results of its  operation,  properties  or  prospects;  (b) any
damage,  destruction  or casualty  loss,  whether  covered by  insurance or not,
adversely affecting the Purchased Assets or the Business;  (c)-(i)-any  increase
in the rate or terms of  compensation  payable to or to become payable to any of
Seller's employees (the "Employees"),  except increases  occurring in accordance
with such  Seller's  customary  practices or as required by existing  employment
agreements  or (ii)-any  modifications  in employee  benefits to the  Employees;
(d)-entry  into,  termination  of  (except  by  reason  of the  occurrence  of a
contractually  specified  termination  date) or  amendment  to any  contract  or
commitment  or  license  or permit  applicable  to the  Business,  except in the
ordinary  course of business or as contemplated  herein;  (e) any creation of or
assumption of any mortgage, pledge, or other lien or encumbrance upon any of the
assets of Seller,  including the  Purchased  Assets;  (f)-any sale,  assignment,
lease,  transfer  or  other  disposition  of any of its  assets,  except  in the
ordinary  course of business;  (g) any imposition or incurring of any obligation
or liability,  fixed or contingent,  except in the ordinary  course of business;
(h) entry into any  agreement  with  respect to the  operation  of the  Business
pursuant to which the aggregate annual financial  obligation of Buyer may exceed
$10,000,  or which is not  terminable by Buyer without  penalty upon thirty (30)
days'  notice  or less;  (i)-any  commitment  with  respect  to any  inventories
relating to the  operation of any  Business,  except in the  ordinary  course of
business;  (j)-any commitment in excess of $10,000 for any capital  expenditure;
(k)-any change in the  accounting  practices of Seller or the manner in which it
maintains  its books of account and records;  or (l) any  transaction  otherwise
relating to the Business not in the ordinary course of business.

     III.7. Certain Contracts and Arrangements. All contracts existing as of the
date  hereof  to which  Seller is a party and that  relate to the  Business  are
either  (a)-listed in Schedule 3.7 or (b) listed on Schedule 1.1(d).  All of the
Contracts (as defined in Section 1.1) may be assigned by Seller to Buyer without
the consent of any other party,  or, if required,  such consent will be obtained
by Seller  prior to the Closing.  Seller has  complied in all respects  with the
provisions  of such  Contracts  and is not now and at the Closing will not be in
default  under any of them.  There is not any  breach or  anticipated  breach by
Seller or any other party to, or any right of acceleration  or termination  with
respect to, such  Contracts.  Each of such  Contracts  will be in full force and
effect at the Closing with no  modification of its respective  terms,  unless by
its terms it expires prior thereto.  Except as set forth on Schedule 3.7, Seller
has no contracts, oral or written, with any sales representatives. Seller has no
written  contract  with any of its  employees.  Seller has  delivered to Buyer a
correct and  complete  copy of each such  Contract and all  contracts  listed on
Schedule 3.7.

     III.8. Litigation. Except as set forth in Schedule 3.8, there are no legal,
administrative,  arbitration or other proceedings or governmental investigations
pending or, to the knowledge of each Seller and Shareholder,  threatened against
Seller or the  Shareholders  in  connection  with the operation of the Business.
There is no court order, judgment or decree adversely affecting the Business.

     III.9. Labor Matters. Except as disclosed on Schedule-3.9 hereto, Seller is
not a party to any  collective  bargaining  agreement  or any other  union labor
agreement  covering or relating to any of the Employees,  and has not recognized
and has not  received  a demand for  recognition  of any  collective  bargaining
representative  with respect  thereto.  There are no strikes,  labor disputes or
work  stoppages  in effect or, to the  knowledge  of Seller or any  Shareholder,
threatened  against Seller.  Seller has not committed any unfair labor practice.
Neither Seller nor any of it officers, directors, members, managers or employees
with responsibility for employment matters nor any Shareholder has any knowledge
of any organizational  effort presently being made or threatened by or on behalf
of any labor union with respect to employees of Seller.

 .        III.10.  Employee Benefit Plans; ERISA

     (a)  Schedule  3.10  lists  all  employee  pension  and  welfare  plans  or
arrangements, including, without limitation, pension or profit sharing or thrift
plans,  company  contributions to medical benefit,  death benefit and disability
programs,  and  vacation,  severance and sick leave  policies  applicable to the
Employees.  Except as set forth on Schedule-3.10,  with respect to all "employee
benefit plans" (as defined in  Section-3(3)  of the Employee  Retirement  Income
Security  Act  ("ERISA"))  to which  Seller  contributes  on behalf of Employees
(capitalized  terms used in this Section 3.10 and not otherwise  defined  herein
shall have the meanings specified in ERISA):

     (i) all  such  plans  comply  with  ERISA  and  other  applicable  laws and
regulations;

     (ii) all  contributions  which were due and  payable by Seller on or before
the date hereof to such plans have been made;
 
     (iii) none of the plans  subject to Title-IV of ERISA has been  terminated,
no proceeding to terminate any of such plans has been instituted,  and there has
been no complete or partial  withdrawal,  cessation  of facility  operations  or
occurrence  of any other event that would result in the  imposition of liability
on Seller under Title-IV of ERISA;

     (iv) The market value of assets under each such employee benefit plan which
is an Employee Pension Benefit Plan (other than any Multiemployer Plan) (as such
terms are defined in ERISA)  equals or exceeds  the present  value of all vested
and nonvested  liabilities  thereunder  determined  in  accordance  with Pension
Benefit  Guaranty  Corporation   ("PBGC")  methods,   factors,  and  assumptions
applicable  to an Employee  Pension  Benefit  Plan  terminating  on the date for
determination; and

     (v) Seller has delivered to Buyer  correct and complete  copies of the plan
documents and summary plan descriptions,  the most recent  determination  letter
received  from the Internal  Revenue  Service,  the most recent Form 5500 Annual
Report, and all related trust agreements, insurance contracts, and other funding
agreements which implement each such Employee Benefit Plan.

     (b) With  respect to each  employee  benefit plan that Seller or any entity
under common  control with Seller  maintains or ever has  maintained or to which
any of them  contributes,  ever has  contributed,  or ever has been  required to
contribute:

     (i) No such employee benefit plan which is an Employee Pension Benefit Plan
(other than any Multiemployer Plan) has been completely or partially  terminated
or been the subject of a Reportable  Event as to which notices would be required
to be filed  with the PBGC.  No  proceeding  by the PBGC to  terminate  any such
Employee  Pension  Benefit  Plan  (other than any  Multiemployer  Plan) has been
instituted or threatened.

     (ii) There have been no prohibited transactions (as defined in Section 4975
of the Internal  Revenue Code of 1986, as amended from time to time (the "Code")
or Section 406 of ERISA) with  respect to any such  employee  benefit  plan.  No
fiduciary has any liability for breach of fiduciary duty or any other failure to
act or comply in connection with the  administration or investment of the assets
of any such employee  benefit plan. No action,  suit,  proceeding,  hearing,  or
investigation with respect to the administration or the investment of the assets
of any such  employee  benefit plan (other than routine  claims for benefits) is
pending or threatened.

     (iii) Seller has not incurred, or has any reason to expect that Seller will
incur, any liability to the PBGC (other than PBGC premium payments) or otherwise
under Title IV of ERISA  (including any withdrawal  liability) or under the Code
with  respect to any such  employee  benefit  plan which is an Employee  Pension
Benefit Plan.

     (c)  Neither  Seller  nor any  entity  under  common  control  with  Seller
contributes to, ever has contributed to, or ever has been required to contribute
to any Multiemployer Plan or has any liability (including  withdrawal liability)
under any Multiemployer Plan.

     (d)  Neither  Seller  nor any  entity  under  common  control  with  Seller
maintains or ever has maintained or contributes,  ever has contributed,  or ever
has been required to contribute to any Employee Welfare Benefit Plan (as defined
in ERISA) providing  medical,  health,  or life insurance or other  welfare-type
benefits for current or future retired or terminated  employees,  their spouses,
or their dependents, other than in accordance with Code Sec. 4980B.

     (e) Without  limiting the generality of the  foregoing,  prior to and as of
the CIlosing Date, Seller sponsors the Artee Industries,  Incorporated  Employee
Benefit  Plan  ("Seller's  Health Care  Plan").  Seller's  Health Care Plan is a
self-insured  medical   reimbursement  plan  established  to  assist  Seller  in
providing  medical  benefits   ("Benefits")  to  Seller's  employees  and  their
dependents,  who meet the  eligibility  provisions of Seller's  Health Care Plan
("Participants"). Except for the Incurred But Unpaid Health Care Claims referred
to in Section  5.6(b)  hereof,  as of the  Closing  Date,  Seller  has paid,  or
provided  for the  payment  of, all health  care  expenses  incurred by Seller's
employees and their  dependents  that are covered under the Seller's Health Care
Plan in accordance with its terms.

     (f) As of the date hereof, seven individuals,  who were previously employed
by  Seller,  are  participating  in  Seller's  Health  Care Plan under the COBRA
continuation  coverage requirements of Section 4980B of the Code and Section 601
et seq. of ERISA, ("COBRA Participants").  Except for COBRA Participants,  as of
the Closing Date, the only  individuals  participating  in Seller's  Health Care
Plan are the individuals currently employed by Seller, and their dependents, who
meet the eligibility provisions of Seller's Health Care Plan.

     (g) The Seller has complied in all respects with the  provisions of Section
601 et seq.  of ERISA  and  Section  4980B of the  Code,  or  Proposed  Treasury
Regulation Section 1.162-26 (collectively, "COBRA Laws") that govern or apply to
Seller's Health Care Plan or to any other employee benefit plan sponsored by the
Seller at any time.

     (h) At all  times,  the Artee  Industries,  Incorporated  401(k)  Plan (the
"401(k) Plan") has been in compliance with ERISA and the Code.

     . (a) Seller and the Shareholders have timely filed or will timely file all
federal,  state and local tax returns  and reports  required to be filed for any
period  ending  before the  Closing  Date,  or if  applicable,  any period  that
includes  the  Closing  Date.  All such tax  returns  are or will be correct and
complete in all respects.  Seller or the Shareholders  have properly  calculated
and have timely paid or will timely pay or cause to be paid all income taxes and
other taxes of any kind of any taxing authority (whether or not shown on any tax
return) due to any taxing authority  ("Taxes") with respect to all such periods.
Except as set forth on  Schedule-3.8,  none of  Seller or the  Shareholders  has
received written notice that the Internal  Revenue Service,  or any other taxing
authority  has  asserted  against  any of them,  any  deficiency  or  claim  for
additional  Taxes in connection  therewith.  None of Seller or the  Shareholders
have been  granted or have given any waiver of any statute of  limitations  with
respect to, or any  extension of a period for the  assessment  or filing of, any
Tax. All deposits  required by law to be made by Seller or the Shareholders with
respect  to  employees'   withholding  taxes  have  been  made.  Seller  or  the
Shareholders have withheld and paid all Taxes required to have been withheld and
paid in connection  with the amounts paid or owing to any employee,  independent
contractor,  creditor,  stockholder or other third party. There are no tax liens
on any assets of Seller, except liens for Taxes not yet due. There are no claims
pending against Seller or any Shareholder for past due Taxes,  and Seller has no
knowledge of any such  threatened  claim or the basis for any such claim.  There
are not now any matters under discussion with any federal, state, local or other
authority  with  respect  to any  additional  Taxes  relating  to  Seller or any
Shareholder.  This  Section  3.11(a)  relates  only to Taxes  arising out of the
operation of the Business and the tax returns related thereto.

     (b) Since June-1987,  Seller has had in effect a valid election to be taxed
as a "small business  corporation" under Section 1361(l) of the Code. In no year
has the Company  incurred any tax  liability  under  Section 1374 or 1375 of the
Code. None of Seller or the  Shareholders is liable for the tax of any person or
entity under Section 1.1502-6 of the Treasury Regulations,  promulgated pursuant
to the Code (or any similar  provision  of state,  local or foreign  law),  as a
transferee or successor, by contract or otherwise.
 
     . Schedule 3.12 lists all  licenses,  permits and  authorizations  that are
held by Seller as of the date  hereof and are  required  for the  conduct of the
Business, as presently conducted. All such licenses, permits, and authorizations
are in full force and effect,  with no violations of any of them having occurred
or, to the  knowledge  of Seller  and each  Shareholder,  been  alleged  to have
occurred,  and with no  proceedings  pending or, to the  knowledge of Seller and
each Shareholder,  threatened,  that would have the effect of revoking, limiting
or affecting the transfer or renewal of any such licenses or permits.  Except as
set forth in Schedule 3.12 or otherwise  disclosed in this  Agreement:  (a) such
licenses and  authorizations  are not subject to any  restrictions or conditions
that would limit operation of the Business as presently conducted; (b) there are
no applications by Seller for any license, permit or authorization in connection
with the Business;  or (c) complaints by others pending or threatened in writing
as of the date hereof before any  governmental  agency  relating to the Business
other than proceedings that affect the industry generally.

     .  Seller,  in the  operation  of its  Business:  (i)-possesses  all of the
business licenses,  permits (including environmental permits) and authorizations
(collectively,  "Authorizations")  that are necessary for legally conducting its
Business as presently conducted, and has made such filings as may be required by
local, state or federal  governments;  (ii)-is in compliance with all applicable
laws, rules and regulations, including those relating to the employment of labor
(including   OSHA),   wages,   hours,   collective   bargaining,    immigration,
discrimination  and the  payment  of social  security  and  similar  taxes,  and
(iii)-is  not liable for any  arrears of wages or any  penalties  for failure to
comply with any of the foregoing.

     . Seller is, and immediately  prior to Closing will be, the owner of all of
the  Purchased  Assets  and will  have good and  marketable  title to all of the
Purchased  Assets  (including  fee simple  marketable  title with  regard to the
Purchased  Property and a leasehold  estate with regard to the Leased  Property)
free and clear of all  liens,  pledges,  security  interests,  charges,  claims,
restrictions or other encumbrances and defects of title of any nature whatsoever
except as listed on Schedule 3.14(a). The Purchased Assets constitute all of the
assets used in  connection  with the  operation of the  Business  other than the
assets listed on Schedule-3.14(b) (the "Excluded Assets").

     . Seller  owns or leases all  buildings,  machinery,  equipment,  and other
tangible assets necessary for the conduct of the Business as presently conducted
and as presently  proposed to be conducted.  Each such  tangible  asset has been
well  maintained,  is in good operating  condition and repair (subject to normal
wear and tear),  and is suitable for the purposes for which it presently is used
and presently is proposed to be used.

     . With  respect  to the  Leased  Property:  (i) the Lease is legal,  valid,
binding,  enforceable,  and in full force and effect; (b) neither Seller nor any
other party is in default,  violation or breach in any respect  under the Lease,
and no event has occurred and is continuing that  constitutes or, with notice or
the passage of time or both, would constitute a default,  violation or breach in
any respect under the Lease; and (c) the Lease grants the tenant under the Lease
the exclusive right to use and occupy the demised premises thereunder.

     . Schedule  3.17 lists all bank  accounts and safe deposit  boxes of Seller
used in connection with the Business,  all powers of attorney in connection with
such  accounts,  and the names of all persons  authorized  to draw thereon or to
have access thereto.

     . Except as noted thereon, Schedule 3.18 lists the names and current salary
rates of all the salaried  Employees as of the date hereof  (complete list to be
provided to Buyer within 30 days of the date hereof).  The Business has complied
with all applicable  laws and  regulations  relating to the employment of labor,
including those related to wages,  hours,  collective  bargaining,  immigration,
discrimination,  and the payment of Social Security or similar taxes.  There are
no unfair labor practice claims or charges pending  involving Seller relating to
the operation of the Business.

     Schedule  3.19 lists all of  Seller's  insurance  policies  relating to the
Purchased Assets or the Business in effect as of the date hereof,  and indicates
the  insurer's  name,  policy  number,  expiration  date and  amount and type of
coverage.  With respect to each such insurance policy:  (a) the policy is legal,
valid,  binding,  enforceable,  and in full force and effect; (b) neither Seller
nor any  other  party to the  policy is in breach  or  default  (including  with
respect to the payment of premiums or the giving of  notices),  and no event has
occurred which, with notice or the lapse of time, would constitute such a breach
or default,  or permit  termination,  modification,  or acceleration,  under the
policy;  and (c)-no party to the policy has  repudiated  any provision  thereof.
Seller  has been  covered  during the past ten years by  insurance  in scope and
amount  customary and reasonable  for its Business.  Schedule 3.19 describes any
self-insurance arrangements affecting any of Seller.

     . Schedule 3.20 attached hereto lists each customer  representing  billings
by Seller in excess of $100,000 for the 12-month  period ended December 31, 1996
and for the nine-month  period ended September 30, 1997. Seller has not received
any notice and has no reason to believe that  Seller's  agreement  with any such
customer  is  being  terminated  or  is  being  considered  for  termination  or
nonrenewal,  whether  as a  result  of the  transactions  contemplated  by  this
Agreement or otherwise.

     . All  inventories  reflected in the  Financial  Statements do not, and the
inventories  of the  Business  at Closing  will not,  include any items that are
below standard quality, damaged, obsolete or of a quantity or quality not usable
or saleable in the  ordinary  course of  business,  subject  only to  applicable
reserves reflected on the Financial Statements.

     . Subject to any reserves on the Closing  Date  Balance  Sheet for doubtful
accounts  receivable,  all accounts receivable of Seller represent bona fide and
valid  claims by Seller  and are and will be fully  collectible  and are not and
will  not  be  subject  to any  counterclaim,  setoff  or  change  of  any  kind
whatsoever.

     . All  trademarks,  trade  names,  copyrights  or patents  owned or used by
Seller  in  connection   with  the  Business,   together  with  any   applicable
registrations, are disclosed in Schedule 3.23. Except as shown in such Schedule,
all such  trademarks,  trade names,  copyrights or patents,  and any  applicable
registrations  are owned by Seller  and are not the  subject  of any  proceeding
challenging  their use, or seeking to deny, modify or revoke any registration or
application  therefor  or renewal  thereof.  Seller is entitled to use all trade
names, trademarks,  patents, designs, processes, copyrights and licenses and all
other  industrial  property  or  intellectual  property  rights  used  by  it in
connection  with its  Business,  and Seller has not granted any right,  title or
interest  in or to any such  intellectual  property.  Seller has not  interfered
with, infringed upon, misappropriated,  or otherwise come into conflict with any
patents,  trademarks,  or  intellectual  property  rights of third parties,  and
Seller has not ever received any charge,  complaint,  claim,  demand,  or notice
alleging  any such  interference,  infringement,  misappropriation  or violation
(including  any claim that such  Seller must  license or refrain  from using any
patent,  copyright,  trademark  or  intellectual  property  rights  of any third
party).

 .  Except as specified on Schedule 3.24:

     (a) To the best of Seller's  knowledge and belief,  no Hazardous  Materials
(as  defined  in this  Section-3.24)  are  stored or  otherwise  located on real
property owned,  leased or otherwise  operated by Seller (the "Realty"),  and no
part of the  Realty,  including  the soil and  groundwater  located  thereon and
thereunder,  is  presently  contaminated  by any such  substance;  no  Hazardous
Materials have been released,  stored, treated or disposed of on, in or bout the
Realty;  and no  improvement  located on the Realty  contains  any  asbestos  or
substances containing asbestos;

     (b) No  portion  of the  Realty  has  ever  been  used as or for a mine,  a
landfill,  a dump or other disposal facility,  a gasoline service station,  or a
petroleum products storage facility;

     (c) There are no underground storage tanks situated on the Realty, nor have
any been removed from the Realty;

     (d) To the best of Seller's  knowledge  and  belief,  all  activities,  and
operations of the Business meet, and have in the past met, the  requirements  of
all applicable Environmental Laws (as defined in this Section-3.24);

     (e) To the best of Seller's  knowledge and belief,  in  connection  with or
arising  out of the  operation  of its  Business,  Seller  has  never  sent  any
Hazardous Materials to a site which,  pursuant to any Environmental Law, (i) has
been placed on the  "National  Priorities  List," the CERCLIS list, or any other
similar  federal  or state  list,  or  (ii)-which  is  subject  to a  claim,  an
administrative  order or other request to take any type of response action or to
pay for the costs of response action at such a site;

     (f) In connection with or arising out of the operation of its Business, (i)
Seller is not involved in any suit or proceeding, and no Seller has received any
notice or information  request from any governmental agency or other party, with
respect to any Hazardous Material or any violation of any Environmental Law, and
(ii) Seller has not  received  any notice of any claim from any person or entity
relating  to personal  injury,  death or  property  damage from  exposure to any
Hazardous Material or violation of any Environmental Law; and

     (g) In  connection  with or arising out of the  operation of its  Business,
Seller has timely  filed all reports  required  to be filed,  has  acquired  all
necessary  certificates,  approvals  and permits (none of which shall be lost or
adversely affected as a result of the transaction  contemplated herein), and has
generated and maintained all required data,  documentation and records under all
applicable Environmental Laws.

     As used herein, "Hazardous Materials" means any substances or materials (i)
which  are  defined  as  hazardous  wastes,  hazardous  substances,  pollutants,
contaminants or toxic  substances  under any  Environmental  Law; (ii) which are
toxic, explosive,  corrosive,  flammable,  infectious,  radioactive,  mutagenic,
dangerous  or  otherwise   hazardous;   (iii)  the  presence  of  which  require
investigation  or remediation  under any  Environmental  Law or common law; (iv)
which constitute a danger,  a nuisance,  a trespass or a health or safety hazard
to persons or property;  (v) which  include,  without  limiting  the  foregoing,
underground  storage tanks,  whether empty,  filled or partially filled with any
substance;  and/or (vi) which are or contain,  without  limiting the  foregoing,
asbestos,   polychlorinated   biphenyls,   urea  formaldehyde  foam  insulation,
petroleum hydrocarbons,  petroleum derived substances or waste, crude oil or any
fraction  thereof,  nuclear  fuel,  natural  gas  or  synthetic  gas  (excluding
petroleum or natural gas products for on-site use properly  stored in accordance
with all  Environmental  Laws in gas  pipelines  serving the  Realty,  vehicles,
machinery or above ground storage tanks).

     As used herein,  "Environmental Laws" shall mean any and all federal, state
and local laws, statutes,  ordinances, rules, regulations,  permits, directives,
licenses, approvals, guidances, interpretations, and orders, and all other legal
requirements  relating to the  protection  of human  health or the  environment,
including,  but not  limited to,  requirements  pertaining  to the  manufacture,
processing,  distribution,  use, treatment,  storage, disposal,  transportation,
handling,  reporting,  licensing,  permitting,  investigation  or remediation of
materials that are or may constitute a threat to the environment.  Environmental
Laws include,  without  limitation,  the Comprehensive  Environmental  Response,
Compensation,  and Liability  Act (42 U.S.C.  S-9601 et. seq.)  ("CERCLA"),  the
Hazardous Material  Transportation Act (49 U.S.C. S-1801 et. seq.), the Resource
Conservation and Recovery Act (42 U.S.C. S-6901 et. seq.) ("RCRA"),  the Federal
Water Pollution  Control Act (33 U.S.C.  S-1251 et. seq.), the Clean Air Act (42
U.S.C.  S-7401 et. seq.), the Toxic Substances Control Act (15 U.S.C. S-2601 et.
seq.),   the  Safe  Drinking  Water  Act  (42  U.S.C.   S-300,  et.  seq.),  the
Environmental  Protection Agency's  regulations  relating to underground storage
tanks (40 C.F.R. Parts 280 and 281), and the Occupational  Safety and Health Act
(29 U.S.C.  S-651 et. seq.)  ("OSHA"),  as such laws and  regulations  have been
amended or supplemented,  and applicable state and local statutes, and the rules
and regulations promulgated under such federal, state and local laws.

     Seller has  previously  delivered to Buyer  copies of all  reports,  files,
surveys, records, licenses, certificates,  orders and all other documents in its
possession of any type relating to the matters described in this Section 3.24.

     . Each product manufactured,  sold, leased, or delivered by Seller has been
in conformity  with all applicable  contractual  commitments and all express and
implied  warranties,  and Seller has no liability (and there is no basis for any
present or future action,  suit,  proceeding,  hearing,  investigation,  charge,
complaint,  claim,  or demand  against any of them giving rise to any liability)
for  replacement  or repair  thereof or other damages in  connection  therewith,
subject  only  to any  reserve  for  product  warranty  claims  included  in the
Financial  Statements.  No product  manufactured,  sold, leased, or delivered by
Seller is subject  to any  guaranty,  warranty,  or other  indemnity  beyond the
applicable  standard terms and conditions of sale or lease.  Seller has provided
to Buyer  copies  of the  standard  terms  and  conditions  of sale or lease for
Seller.

     . Seller has no liability  (and there is no basis for any present or future
action, suit, proceeding, hearing,  investigation,  charge, complaint, claim, or
demand  against  any of them giving  rise to any  liability)  arising out of any
injury to individuals or property as a result of the ownership,  possession,  or
use of any product manufactured, sold, leased, or delivered by Seller.

     . Seller has and will have no  liability  arising  out of sales of products
occurring  prior to the  Closing  Date for any  claims,  charges  or  allowances
against, to or in respect of such products.

     . The representations and warranties  contained in this Article III and all
other  information  or documents  (including  the  Schedules to this  Agreement)
delivered by Seller to Buyer in connection with the transaction described herein
do not  contain  any untrue  statement  of a material  fact or omit to state any
material  fact  necessary  in  order  to make  the  statements  and  information
contained  therein  not  misleading.  There  is no fact  known  to  Seller  that
materially  adversely affects, or that could in the future materially  adversely
affect, the operations,  business, assets, properties or condition (financial or
otherwise)  of  Seller  that  has not been set  forth in this  Agreement  or the
Schedules hereto.



                                          ARTICLE IV
                            REPRESENTATIONS AND WARRANTIES OF BUYER

     Buyer  represents  and  warrants  to  Seller  as  follows:  .  Buyer  is  a
corporation duly organized, validly existing and in good standing under the laws
of the State of North Carolina and has the requisite power and authority to own,
lease and  operate  its  properties  and to carry on its  business  as now being
conducted.

     . Buyer has the power and  authority to execute and deliver this  Agreement
and to  consummate  the  transactions  contemplated  hereby.  The  execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly  authorized by Buyer and no other  proceedings
on the part of Buyer are necessary to authorize this  Agreement.  This Agreement
has been duly and validly  executed and delivered by Buyer and  constitutes  the
legal,  valid and  binding  agreement  of Buyer,  enforceable  against  Buyer in
accordance with its terms.

     . Neither the  execution,  delivery and  performance  of this  Agreement by
Buyer will (a)  conflict  with or result in any breach of any  provision  of the
Articles of  Incorporation  or bylaws of Buyer, (b) result in a default (or give
rise to any right of  termination,  cancellation  or acceleration or creation of
liens)  under any of the terms,  conditions  or  provisions  of any note,  bond,
mortgage, indenture, agreement, lease or other instrument or obligation to which
Buyer is a party or by which any of its  assets  may be bound,  except  for such
defaults (or rights of termination,  cancellation or acceleration or creation of
liens)  as to which  requisite  waivers  or  consents  have  been  obtained,  or
(c)-violate any law,  statute,  rule,  regulation,  order,  writ,  injunction or
decree  of  any  federal,  state  or  local  governmental  authority  or  agency
applicable to Buyer, any of its subsidiaries or any of their respective assets.

     IV.4. Litigation. There are no legal, administrative,  arbitration or other
proceedings  or  governmental  investigations  pending or, to the  knowledge  of
Buyer,  threatened  against Buyer or any of its subsidiaries that would give any
third  party  the  right to  enjoin or  rescind  the  transactions  contemplated
hereunder.



                                           ARTICLE V
                                   COVENANTS OF THE PARTIES

     V.1. Conduct of Business. Except as contemplated by this Agreement,  during
the period  from the date of this  Agreement  to the Closing  Date,  Seller will
conduct  its  Business in a manner  consistent  with prior  practice  and in the
ordinary and usual course.  Without  limiting the  generality of the  foregoing,
except as otherwise  expressly  provided in or  contemplated  by this Agreement,
prior to the Closing Date,  without the prior written  consent of Buyer,  Seller
will not and the Shareholders will not cause or permit Seller to:

     (a) make any distributions of any kind to shareholders of Seller;

     (b) enter into any contract or commitment  relating to the operation of its
Business except in the ordinary course of business;

     (c) amend,  modify or waive any  provision of any  Contract,  except in the
ordinary course of business;

     (d) fail to maintain and keep  Seller's  properties  and  equipment in good
repair, working order and condition, except for ordinary wear and tear;

     (e) fail to keep in full force and effect Seller's insurance  comparable in
amount and scope of coverage to that now maintained by Seller;

     (f) fail to perform Seller's obligations under all Contracts to which it is
a party;

     (g) fail to use Seller's best efforts to maintain and preserve its business
organizations,  retain its present  employees and maintain its relationship with
suppliers, customers and others having business dealings with such Seller;

     (h) fail to maintain Seller's books of account and records in the usual and
regular manner and not make any changes in its accounting practices;

     (i) fail to comply with all laws and  regulations  applicable to Seller and
to the conduct of its Business;

     (j) amend Seller's Articles of Incorporation or Bylaws;

     (k) take,  or agree in writing or otherwise to take,  any action that would
make any of the  representations  of Seller or any Shareholder set forth in this
Agreement untrue or incorrect or would result in any of the conditions set forth
in this Agreement not being satisfied;

     (l) create or assume any mortgage,  pledge, lien, or other encumbrance with
respect to the Purchased Assets, whether now owned or hereafter acquired; or

     (m) sell,  assign,  lease,  transfer,  or  otherwise  dispose of any of the
Purchased  Assets,  except for sales of finished goods inventory in the ordinary
course of business.

     (n) take any action,  or fail to take action,  that would cause revenues of
Seller to be  recorded  for  accounting  purposes in the  Measurement  Period or
pre-Closing  period rather than in any period prior to the Measurement Period or
pre-Closing  period for the purpose of increasing the likelihood of receiving or
the amount of any Contingent Payment pursuant to Section 1.7 of this Agreement.

     . During the period from the date hereof  until the  Closing,  Seller shall
furnish to Buyer monthly unaudited financial statements relating to the Business
prepared in accordance with Generally  Accepted  Accounting  Principles.  Seller
shall  deliver  to Buyer no  later  than  March-31,  1998  financial  statements
(including a balance sheet and income  statement)  for the year ending and as of
December-28, 1997 reviewed by its independent public accountants.

 .        V.3.     Access to Information; Confidentiality

     (a)  Prior  to  Closing,  Seller  will (i) give  Buyer  and its  authorized
representatives  full access to the Purchased Assets and to all books,  records,
offices and other  facilities  and  properties  relating to the  Business,  (ii)
permit Buyer to make such  inspections  thereof as Buyer may reasonably  request
(including, without limitation,  examinations incident to environmental audits),
and (iii) cause its officers or other  appropriate  officials  to furnish  Buyer
with such financial and operating data and other information with respect to the
Business as Buyer may from time to time reasonably  request.  In connection with
its due  diligence  relating to the  transactions  contemplated  hereby,  Seller
acknowledges that Buyer's  independent  public accountants will be reviewing and
evaluating  Seller's Financial  Statements and records and information  relating
thereto  and,  accordingly,   Seller  will  provide  full  cooperation  to  such
accountants in such review and evaluation.  Notwithstanding the foregoing,  this
Section  5.3(a)  shall not apply  with  respect  to the  matters  covered by the
Confidentiality Agreement dated as of August 31, 1994 between Seller and Lantor,
Inc.

     (b) Without the prior  consent of Buyer,  no other party hereto shall issue
any news  release or other public  announcement  or  disclosure,  or any general
public  announcement  to its employees,  suppliers or customers,  regarding this
Agreement or the transactions  contemplated hereby, except as may be required by
law, but in which case the disclosing  party shall provide Buyer with reasonable
advance  notice  of the  timing  and  substance  of any such  disclosure.  After
consultation with Seller, Buyer will issue a public press release announcing the
planned transaction and containing certain other related information.

     (c) After the Closing,  Seller and each  Shareholder  will hold, and Seller
will use its best efforts to cause its officers, directors,  employees, lenders,
counsel, accountants, representatives, agents, consultants and advisors to hold,
in strict  confidence all  confidential  information of the Business,  including
without limitation  customer lists,  details of client or consultant  contracts,
pricing policies,  operational methods,  marketing plans or strategies,  product
development  techniques  or plans,  business  acquisition  plans,  new personnel
acquisition  plans,  methods of manufacture,  technical  processes,  designs and
design projects, inventions and research projects of any Business learned by any
employee of Seller heretofore or hereafter, unless the same information:  (i) is
currently  publicly  available or becomes publicly available through no fault of
Seller or any Shareholder,  or their agents,  advisors or other representatives,
or another person that Seller or the Shareholders know or have reason to know is
subject to confidentiality obligations with respect to such information; or (ii)
such information is required by applicable law to be disclosed, but then only to
the extent (A) disclosure is required and after giving Buyer such notice of such
obligation  so  that  it  may  seek a  protective  order  or  other  similar  or
appropriate  relief and (B) Seller and the Shareholders  have undertaken in good
faith to have such confidential  information treated  confidentially  consistent
with the terms of this Agreement.

     . On the Closing Date or as soon as  practicable  thereafter,  Seller shall
change its corporate name to a new name, which does not include the words making
up  its  existing  name  (or  any  existing  trade  names)  or  the  acronym  or
abbreviation or any variations,  translations or combinations thereof or similar
names and otherwise is not likely to be confused with its present names so as to
make  Seller's  present  name  available  to Buyer.  From and after the Closing,
neither  Seller  nor any  Shareholder  shall  use the words  making up  Seller's
existing name (or any existing  trade names) or the acronym or  abbreviation  or
any  variations,  translations  or  combinations  thereof  or  similar  names in
connection with the Business.

     . Buyer  and  Seller  will  make or cause to be made all such  filings  and
submissions  under  applicable  laws and  regulations as may be required for the
consummation  of the  transactions  contemplated  hereunder,  including  without
limitation  any  filings  required  under  the HSR Act.  Buyer and  Seller  will
cooperate and coordinate with one another in connection with any such filings or
submissions. Buyer and Seller will each pay one-half of the HSR Act filing fee.

 .        V.6.     Employees and Employee Benefits

     (a) For  purposes of employee  benefits  under  Seller's  employee  benefit
plans, all of the Employees who accept employment with Buyer shall be considered
terminated  employees  and shall have no further  rights to accrue to them under
any of  Seller's  employee  benefit  plans  after the  Closing  Date,  except as
provided in Section  5.6(b),  (c), (d), (e) and (f). While Buyer intends to hire
the employees of Seller as of the Closing Date, it is agreed by the parties that
Buyer is not  obligated to hire any of the  employees of Seller.  The  employees
hired by Buyer will be given  credit for prior  service with Seller for purposes
of  eligibility  to  participate  in  Buyer's  health  benefit  plan and  401(k)
profit-sharing plan, but will not receive credit for service with Seller for any
other purpose (including but not limited to vacation or severance policies).

     (b)  Notwithstanding  anything herein to the contrary,  Seller will pay, or
Seller will  maintain an insurance  policy that will pay, the  following  unpaid
claims for medical expenses incurred by Participants  under Seller's Health Care
Plan that exist at the Closing  Date  ("Incurred  But Unpaid  Claims"):  (i) any
unpaid claim for the payment of Benefits for health care expenses  incurred by a
participant  which was submitted for payment prior to the Closing Date; (ii) any
unpaid claim for the payment of Benefits for health care expenses  incurred by a
Participant  on or before the Closing  Date;  and (iii) any claim for payment of
Benefits  for an accident or illness  suffered or incurred  prior to Closing for
which no health care expenses have been incurred; provided, however, that Seller
and the  Shareholders  shall be  responsible  or  liable  only  for such  claims
resulting  in  liabilities  in excess  of any  reserves  that may  appear on the
Closing Balance Sheet.

     All  Incurred  But  Unpaid  Claims  will  be paid in  accordance  with  the
provisions  of Seller's  Health  Care Plan.  Subject to the next  sentence,  all
Incurred  But  Unpaid  Claims  will be paid  within 60 days  following  Seller's
receipt thereof. If the amount of Benefits payable under any Incurred But Unpaid
Claim cannot be  determined  within 60 days of Seller's  receipt of the Incurred
But Unpaid Claim, Seller will not be required to pay such Claim until the amount
payable is determined, as long as prior to the expiration of such 60-day period,
Seller  notifies the  Participant  who submitted  such Incurred But Unpaid Claim
that  Benefits  will not be paid  until the  amount of the  Benefit  payable  is
determined.  It is agreed that the Culp, Inc. Health Care Plan ("Buyer's  Health
Care Plan") and Buyer are not  obligated to pay any Incurred But Unpaid  Claims.
It is  further  agreed,  however,  that if  Seller  does  not  comply  with  the
provisions  of this Section 5.6,  either Buyer or Buyer's  Health Care Plan,  at
Buyer's sole and absolute discretion,  may pay the entire amount of any Incurred
But Unpaid Claim;  and, in such event,  Buyer shall be indemnified,  pursuant to
Section 7.2, for the entire amount paid by Buyer or Buyer's Health Care Plan for
Incurred  But Unpaid  Claims.  Any  Incurred  But Unpaid  Claim  existing  under
Seller's Health Care Plan at the Closing Date that are submitted by Participants
to Buyer or to the third party  administrator  of Buyer's Health Care Plan shall
be forwarded to the following person at the following address:

                         Robert L. Davis
                         P.O. Box 1509
                         Shelby, North Carolina  28151

     (c) If a covered  employee or qualified  beneficiary  under Seller's Health
Care Plan incurred a qualifying  event prior to the Closing  Date,  Seller shall
timely notify those individuals of their rights to COBRA  continuation  coverage
under Seller's Health Care Plan in accordance with the COBRA laws. Neither Buyer
nor Buyer's  Health Care Plan,  as a successor to Seller's  Health Care Plan, is
responsible  for  providing  any notice  about COBRA to any covered  employee or
qualified  beneficiary under Seller's Health Care Plan who incurred a qualifying
event prior to the Closing Date.

     (d) Seller and Seller's Health Care Plan shall be responsible for providing
COBRA continuation  coverage to the COBRA Participants for the period prescribed
under the COBRA Laws. Furthermore, Seller and Seller's Health Care Plan shall be
responsible for providing COBRA  continuation  coverage,  if any, to any covered
employee or qualified beneficiary under Seller's Health Care Plan who incurred a
qualifying  event prior to the Closing Date.  Neither Buyer,  nor Buyer's Health
Care  Plan,  as a  successor  plan  to  Seller's  Health  Care  Plan,  shall  be
responsible  for  providing  any  COBRA  continuation   coverage  to  the  COBRA
Participants or to any covered employee or qualified  beneficiary under Seller's
Health Care Plan who incurred a qualifying event prior to the Closing Date.

     (e) Buyer shall offer health  insurance  coverage under Buyer's Health Care
Plan to Seller's  employees  hired by Buyer on the Closing Date as long as those
employees  are eligible to  participate  in Seller's  Health Care Plan as of the
Closing Date.  Buyer's  Health Care Plan shall not exclude from  coverage,  as a
preexisting  condition,  any  existing  health  care  condition  of  any  of the
aforementioned employees for which Benefits were paid under Seller's Health Care
Plan.

     (f)  Seller  shall  terminate  its  401(k)  Plan  prior  to  Closing.  Upon
termination of the 401(k) Plan,  Seller shall apply for and use its best efforts
to obtain a favorable  determination  letter with the Internal  Revenue  Service
stating that the  termination  of the 401(k) Plan will not affect its  qualified
status under Section 401(a) of the Code.

     . For a period of three years following the Closing Date, each of Robert-T.
Davis,  Robert L.  Davis,  Louis W.  Davis and J.  Marshall  Bradley  shall not,
directly or indirectly:

     (a) (i) engage or invest in, (ii) own, manage, operate, finance, control or
participate in the ownership,  management,  operation,  financing or control of,
(iii) be employed by,  associated  with, or in any manner  connected  with, (iv)
lend his name or credit to, or render  services  or advice to, any  business  or
venture  involved in the  manufacturing  or  marketing of wrapped spun yarns for
uses related to upholstery  fabrics anywhere in the State of Georgia,  the State
of Pennsylvania,  the State of North Carolina,  the State of South Carolina, the
State of Tennessee, the State of Mississippi, the State of California, the State
of Illinois,  the State of Michigan, the State of New Jersey, or any other State
in the United States,  Mexico and Canada, or directly or indirectly  acquire any
ownership  interest  in an entity  that  engages  in such  business  in any such
location; provided, however, that the ownership of less than two percent (2%) of
the  outstanding  securities of a class of securities  that is registered by the
issuer thereof under the Securities  Exchange Act of 1934 shall not constitute a
violation of the provisions of this Section 5.7;

     (b) In any way, solicit,  induce or attempt to induce any customer to cease
or diminish its dealings or relationship with Buyer; and

     (c) In any way,  solicit,  induce or  attempt  to induce  any  employee  or
exclusive independent  contractor of the Business upon the Closing or any future
time to leave his or her employ or contract with Buyer or any affiliate  thereof
to become  associated in any way with a business or venture that competes in any
way with Buyer or any affiliate thereof;

     provided,  however,  that  upon  the  termination  of any of such  person's
employment  other than for Cause (as defined  below),  the  foregoing  covenants
shall no longer apply.

     "Cause" means (i)-the  conviction of (or its procedural  equivalent) or the
entering of a guilty plea or no contest with respect to a crime involving an act
of moral  turpitude;  (ii)-chronic  or terminal  illness,  disability or failing
health which prevents any such person from  performing  the essential  duties of
his position;  (iii)-any  material act of willful dishonesty or malicious action
against Buyer or any affiliate thereof by any of such persons; or (iv)-a failure
to satisfy any of such person's payment  obligations under or in connection with
this Agreement.

     Seller and each  Shareholder  will also refrain from using any of the Trade
Names at any time after the Closing Date.

     Seller  and the  Shareholders  acknowledge  and agree  that the  provisions
contained in this Section 5.7 are reasonable  and valid in geographic  scope and
duration and in all other respects.  If Seller or any Shareholder  shall breach,
or threaten to breach,  this Section 5.7, Buyer shall have (i) the right to have
the provisions of this Section 5.7 specifically enforced by a court of competent
jurisdiction, it being agreed that a breach or threatened breach of this Section
5.7 would cause  irreparable  injury to Buyer and that money  damages  would not
provide an adequate remedy to Buyer; or (ii)-the right to require Seller and the
Shareholders  to account  for and pay over to Buyer all  compensation,  profits,
monies,  accruals,  increments or other  benefits  derived or received by any of
them as the result of any actions or transactions  constituting a breach of this
Section 5.7; and each such right and remedy shall be  independent  of the others
and severally enforceable,  and each of which is in addition to, and not in lieu
of, any other rights and remedies  available to Buyer under law or in equity. If
any  court   determines  that  this  Section  5.7,  or  any  part  thereof,   is
unenforceable  because of the duration or  geographic  scope of such  provision,
such  court  shall  have  the  power to  reduce  the  duration  or scope of such
provision,  as the case may be, and, in its reduced form,  such provision  shall
then be enforceable.  Seller and the Shareholders  agree that the Final Purchase
Price  paid to Seller as  provided  hereby  shall  serve as  consideration,  the
adequacy  and  sufficiency  of which is  hereby  acknowledged,  to  support  the
obligations of Seller and the Shareholders under this Section 5.7.

     . Prior to Closing,  Seller at its expense shall obtain and deliver Uniform
Commercial Code and tax lien search results  covering the Purchased  Assets from
each  jurisdiction in which Purchased Assets are located.  The searches shall be
accurate as of a date not earlier than 20 days prior to the Closing Date.

     . Buyer,  on the one hand,  and Seller and the  Shareholders,  on the other
hand, hereby agree that (subject to the provisions of Section 9.2 hereof), shall
at its own expense use its best efforts and shall cooperate fully with the other
in preparing,  filing, prosecuting, and taking any other actions with respect to
any  applications,  requests,  or  actions  that  are or may be  reasonable  and
necessary to obtain the consent of any governmental instrumentality or any third
party or to accomplish the transactions contemplated by this Agreement.

     . Seller  shall,  and the  Shareholders  shall  cause  Seller to,  take all
corporate  action  necessary to consummate  this Agreement and the  transactions
contemplated  hereby.  Buyer  shall  take  all  corporate  action  necessary  to
consummate this Agreement and the transactions contemplated hereby.

     . In  recognition  of the time that will be expended  and the expense  that
will be  incurred  by Buyer in  connection  with the  transactions  contemplated
hereby,  Seller and the  Shareholders  will not,  and  Seller  will use its best
efforts  so that its  officers,  employees  and  agents  will not,  directly  or
indirectly  or through  agents,  brokers or otherwise,  until this  Agreement is
closed or is  terminated  as provided  in this  Agreement,  encourage,  solicit,
engage in negotiations or discussions or provide information with respect to any
inquiries  or  proposals   relating  to  (a)-the  possible  direct  or  indirect
acquisition  of all or a portion  of  Seller's  capital  stock or its  assets or
(b)-any business  combination  involving  Seller.  Additionally,  Seller and the
Shareholders agree to promptly notify Buyer upon any inquiries by a third person
or entity relating to the foregoing subclauses (a) and (b).

     . After  Closing,  Buyer  will use its best  efforts,  consistent  with its
fiduciary  duties,  to cause  Robert T.  Davis to be  elected as a member of the
Board of Directors of Buyer.

     V.13.  Resale of Buyer's Stock.  Seller and each  Shareholder  agree not to
transfer, assign or sell any shares of Buyer's Stock received in connection with
this Agreement in violation of the federal and any applicable  state  securities
laws,   including  without  limitation  the  limitations  imposed  by  Rule  145
promulgated by the Securities and Exchange  Commission  under the Securities Act
of 1933,  as amended.  Seller and each  Shareholder  further agree to effect any
transfer or sale of shares of Buyer's Stock through Wheat First Securities, Inc.
(or its successor).

     . Seller  and Buyer  agree to execute  and  deliver to each other a secured
equipment  lease,  substantially  in the form  attached  hereto  as  Exhibit  C,
pursuant to which Seller will lease four (4) chenille machines,  which Buyer has
previously  ordered for  purchase,  the terms and  conditions of which Buyer and
Seller  shall  negotiate  in good  faith.  Seller and Buyer agree to execute and
deliver such lease by the time of the  delivery  from the  manufacturer  of such
machines.

                                          ARTICLE VI
                                      CLOSING CONDITIONS

     VI.1.  Conditions to Each Party's  Obligations  to Effect the  Transactions
Contemplated  Hereby.  The  respective  obligations  of each party to effect the
transactions contemplated hereby shall be subject to the fulfillment at or prior
to Closing (subject to Article VIII hereof) of the following conditions:

     (a)  Neither  Seller  nor Buyer  shall be  subject at Closing to any order,
decree or  injunction  of a court of  competent  jurisdiction  that  enjoins  or
prohibits the consummation of this Agreement,  nor shall there be pending a suit
or  proceeding  by any  governmental  authority  that seeks  injunctive or other
relief in connection with the transactions contemplated hereby.

     (b) The waiting period under the HSR Act, and all extensions thereof, shall
have expired or been terminated by the appropriate regulatory authorities.

     VI.2.  Conditions to the Obligations of Seller to Effect the Transactions .
The obligations of Seller to effect the transactions  contemplated  hereby shall
be further  subject to the  fulfillment at or prior to the Closing Date (subject
to Article VIII hereof) of the  following  conditions,  any one or more of which
may be waived by Seller and the Shareholders:

     (a) All representations and warranties of Buyer contained in this Agreement
shall be true and correct in all  material  respects as of the Closing as though
made as of  such  time  (except  as  otherwise  expressly  contemplated  by this
Agreement).  Buyer shall have  performed  and complied in all material  respects
with all covenants and  agreements  contained in this  Agreement  required to be
performed  and  complied  with by it at or prior to Closing.  Seller  shall have
received a certificate to the matters set forth in this  subparagraph (a) signed
on behalf of Buyer by its duly authorized officer.

     (b) All  documents  required  hereunder to have been  delivered by Buyer to
Seller,  and all actions  required  hereunder to have been taken by Buyer, at or
prior to the Closing Date, shall have been delivered or taken.

     (c) Seller  shall have  received  from Buyer  certificates  executed by the
Secretary or an Assistant  Secretary of Buyer certifying and attaching copies of
the following:  (i)-resolutions  of the Board of Directors of Buyer  authorizing
the execution,  delivery and  performance of this Agreement and all  instruments
and  documents  to be  delivered in  connection  herewith  and the  transactions
contemplated  hereby by Buyer;  (ii)-Articles of Incorporation of Buyer recently
certified  by the  North  Carolina  Secretary  of State  and  Bylaws  of  Buyer;
(iii)-the  incumbency and signatures of any of Buyer's officers who will execute
or have executed documents in connection with this Agreement; (iv)-a Certificate
of Existence of Buyer issued as of a recent date by the North Carolina Secretary
of State.  Such  certificate  shall  further  certify that  Buyer's  Articles of
Incorporation have not been amended since their  certification by such Secretary
of State  and that  nothing  has  occurred  since  the date of  issuance  of the
Certificate  of  Existence  that  would  adversely   affect  Buyer's   corporate
existence.

     VI.3.  Conditions to the Obligations of Buyer to Effect the  Transactions .
The obligations of Buyer to effect any transaction  contemplated hereby shall be
further  subject to the  fulfillment at or prior to the Closing Date (subject to
Article VIII hereof) of the following  conditions,  any one or more of which may
be waived by Buyer:

     (a) All  representations  and  warranties  of  Seller  or the  Shareholders
contained in this Agreement  shall be true and correct in all material  respects
as of the Closing as though made as of such time (except as otherwise  expressly
contemplated by this Agreement). Seller shall have performed and complied in all
material respects with all covenants and agreements  contained in this Agreement
required to be performed and complied  with by it at or prior to Closing.  Buyer
shall  have   received  a   certificate   to  the  matters  set  forth  in  this
subparagraph-(a)  signed on behalf of each  Seller and each  Shareholder  by its
duly authorized officer.

     (b) All required  consents from third parties and governmental  authorities
to permit the transfer of the Purchased Assets,  the assumption of the Contracts
and the  Lease,  and the  operation  of the  Business  by Buyer  shall have been
obtained.

     (c) All documents  required  hereunder to have been  delivered by Seller or
the Shareholders to Buyer, and all actions required hereunder to have been taken
by Seller or the Shareholders,  at or prior to the Closing Date, shall have been
delivered or taken.

     (d) Buyer  shall have  received  an opinion  from  Seller's  legal  counsel
reasonably  satisfactory  to Buyer,  dated as of the Closing Date and opining to
the matters listed on Exhibit C attached hereto.

     (e) Buyer  shall have  received  from Seller  certificates  executed by the
Secretary or an Assistant Secretary of Seller certifying and attaching copies of
the following:  (i)-resolutions  of the Board of Directors of Seller authorizing
the execution,  delivery and  performance of this Agreement and all  instruments
and  documents  to be  delivered in  connection  herewith  and the  transactions
contemplated hereby by Seller; (ii)-Articles of Incorporation of Seller recently
certified  by the  North  Carolina  Secretary  of State and  Bylaws  of  Seller;
(iii)-the incumbency and signatures of any of Seller's officers who will execute
or have executed documents in connection with this Agreement; (iv)-a Certificate
of  Existence  of  Seller  issued  as of a  recent  date by the  North  Carolina
Secretary  of State.  Such  certificate  shall  further  certify  that  Seller's
Articles of  Incorporation  have not been amended since their  certification  by
such Secretary of State and that nothing has occurred since the date of issuance
of the Certificate of Existence that would adversely  affect Seller's  corporate
existence.

     (f) Seller shall have delivered to Buyer all financial  statements required
by Section 5.2 hereof.

     (g) The amount of the debt to be paid by Buyer upon Closing as described on
Schedule 1.8 shall not exceed $9,000,000.

     (h) The amount of  Stockholders'  Equity of Seller,  as determined from the
most recent  balance sheet of Seller  provided  under Section 5.2 as of Closing,
shall not be less than $5,500,000.

     (i) Buyer shall have  completed its due diligence  review of Seller and the
Business (which Buyer agrees to complete by March 20, 1998),  and the results of
such review shall have been satisfactory to Buyer in its discretion.


                                          ARTICLE VII
                         SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION

     VII.1.  Survival of Representations.  All  representations,  warranties and
agreements  made by the  parties to this  Agreement  or  pursuant  hereto  shall
survive  the  Closing,  but all claims  made by virtue of such  representations,
warranties and agreements  shall be made under,  and subject to the  limitations
set forth in, this Article VII.

 .        VII.2.   Seller's Agreement to Indemnify

     (a) Subject to the  conditions  and  provisions  set forth herein,  each of
Seller and the  Shareholders  will jointly and severally  defend,  indemnify and
hold harmless Buyer, its directors,  officers,  employees,  agents, subsidiaries
and shareholders  (collectively,  the "Buyer Affiliates") against and in respect
of:

     (i)  Any  and  all  loss,   damage  or   deficiency   resulting   from  any
misrepresentation,  breach  of  warranty,  or  other  violation  of  any  of the
covenants,  warranties  or  representations  contained in this  Agreement or any
documents  executed  herewith  or  the  transactions   contemplated  hereby,  or
nonfulfillment  of any agreement,  on the part of Seller under this Agreement or
any documents executed herewith or the transactions contemplated hereby, or from
any  misrepresentation  in or omission from any certificate or other  instrument
furnished to Buyer in connection herewith;

     (ii) Any and all  liabilities or  obligations of Buyer or obligations  with
respect to or arising out of the ownership or operation of the Purchased  Assets
or the Business on or prior to the Closing  Date,  whether  accrued,  unaccrued,
known,  unknown,  fixed,  contingent,  absolute or  otherwise,  and that are not
expressly  assumed  by Buyer  hereunder,  including  the  matters  disclosed  on
Schedule-3.5;

     (iii) all claims (including  without  limitation claims for personal injury
Ior death,  claims for property  damages and all other  private party claims and
claims by governmental authorities or entities of any type), damages, pending or
threatened  actions,  administrative  proceedings  (whether  formal or  informal
proceedings),  investigation costs, monitoring costs, assessment costs, response
costs,   remedial  costs,   removal  costs,   restoration  costs,   governmental
requirements,  judgments, losses of or damages to natural resources,  penalties,
liens, fines,  settlements,  punitive damages,  interest and other losses, costs
and liabilities of any kind (including  without  limitation  attorneys' fees and
court costs,  and  consultant and expert witness fees) arising in any manner out
of or by reason of (1)-breach of the warranties and  representations  in Section
3.24,  (2)-any  violation  or alleged  violation  of any  Environmental  Law, as
interpreted  and in effect on the Closing Date, by Seller or with respect to the
Realty (as  defined in Section  3.24) that first  occurs or  commences  prior to
Closing or results from  Seller's  acts or omissions  prior to Closing,  (3)-any
contamination  or  threatened or suspected  contamination  of the Realty (or any
part thereof including without  limitation the soil and groundwater  thereunder)
by  Hazardous  Materials  that  first  occurs or  commences  prior to Closing or
results from Seller's acts or omissions  prior to Closing,  or (4) any presence,
generation,  treatment,  storage, disposal, transport release, suspected release
or threatened releasee of Hazardous Materials on or from the Realty (or any part
thereof including without  limitation the soil and groundwater  thereunder) that
first occurs or  commences  prior to Closing or results  from  Seller's  acts or
omissions prior to Closing. Notwithstanding any of the foregoing, Seller and the
Shareholders shall be required to indemnify a Buyer Affiliate under this Section
7.2(a)(iii)  (and to the extent related  thereto,  Section  7.2(a)(v))  only for
claims of which  notice  has been given to Seller or the  Shareholders  within 5
years after the Closing Date and only for damages  under such claims that do not
exceed in the aggregate  $2,500,000  less any amounts paid to a Buyer  Affiliate
for  or in  connection  with a  breach  of the  representations  and  warranties
contained in Section 3.24. Further notwithstanding any of the foregoing,  Seller
and the Shareholders  shall not be required to indemnify a Buyer Affiliate under
this Section 7.2(a)(iii) (and to the extent related thereto, Section 7.2(a)(v)):

     (A) for any costs  incurred by a Buyer  Affiliate  in  undertaking  work to
remediate Hazardous  Materials in, on, under or about any of the Realty,  unless
(w) a governmental  authority of any kind has issued an order or other directive
requiring that such remediation  work be undertaken,  (x) such work is necessary
to allow  the full and safe use of the  Realty  for  manufacturing  and  related
purposes,  (y) a third party has asserted or  threatened a claim against a Buyer
Affiliate  that relates to or arises out of the presence of Hazardous  Materials
or (z) Buyer  reasonably  believes that it is in imminent  danger of incurring a
liability if such work in not performed; or

     (B)  for  any  claims  if  Seller  has  caused,  prior  to  Closing,   such
environmental  testing to be  conducted  and  reports to be  prepared to satisfy
Buyer in its reasonable  discretion that no further  conditions or circumstances
exist that (a) could give rise to any claim or liability in connection  with the
presence of  Hazardous  Materials  or a violation  or alleged  violation  of any
Environmental  Law, or (b) could be required to be set forth on Schedule 3.24 as
if the  representations and warranties in Section 3.24 were being made after the
completion of such tests and reports.

     (iv) Any and all claims,  losses,  liabilities  or expenses  resulting from
noncompliance   with  any  bulk  sale  laws  resulting  from  the   transactions
contemplated by this Agreement; and

     (v) Any and all claims, costs, damages, liabilities,  deficiencies,  losses
or expenses suffered or incurred by any such party (whether as a result of third
party  claims  (whether  valid  or  not),  demands,  suits,  causes  of  action,
proceedings, investigations,  judgments, assessments, liabilities or otherwise),
including  costs of  investigation  and defense and  attorneys'  fees  assessed,
incurred or sustained by or against any of them, arising out of or in connection
with any of the foregoing in respect of which indemnification rights exist.

     (b) No indemnification  shall be required to be made under this Section 7.2
for breaches of  representations  and warranties  until the aggregate  amount of
damages  incurred  by the  Buyer  Affiliates  under  this  Section  7.2 for such
breaches exceeds $50,000,  and if such damages arising from such breaches exceed
such  amount  then  Seller  and  the  Shareholders  shall  indemnify  the  Buyer
Affiliates  for the full  amount  of such  damages  up to and in  excess  of the
initial  $50,000.  It is further  agreed  that the  liability  of Seller and the
Shareholders  pursuant to this Section 7.2 for such breaches of  representations
and  warranties  shall be limited to Claims (as defined  below)  asserted by the
Buyer Affiliates  within two years after the Closing Date.  Notwithstanding  the
foregoing,  this Section 7.2(b) and the limitations  contained  herein shall not
apply to Claims arising under or in connection with:

     (i) Section  7.2(a)(iii)  (or Section  7.2(a)(v) to the extent related to a
claim under Section 7.2(a)(iii));

     (ii) Section 7.2(d) (relating to product-related claims);
 
     (iii) Section 3.11 (relating to Taxes) or otherwise relating to taxes;

     (iv)- Section 3.10 (relating to Employee Benefit Plans; ERISA);

     (v)- Section 3.14 (relating to Title to Purchased Assets);

     (vi)- Section 3.15 (relating to Tangible Purchased Assets);

     (vii)- Section 3.16 (relating to Leased Property); and

     (viii) Section 3.24 (relating to Environmental Matters);

     provided, however, that with respect to:

     (A) Claims  covered by the foregoing  clauses (iii) and (iv), the liability
of Seller and the Shareholders  pursuant to this Section 7.2 shall be limited to
Claims of which a Buyer Affiliate has given notice to Seller or the Shareholders
within the applicable statute of limitation; and

     (B) Claims covered by the foregoing clause (viii),  the liability of Seller
and the Shareholders pursuant to this Section 7.2 (x) shall be limited to Claims
of which a Buyer Affiliate has given notice to Seller or the Shareholders within
5 years  after  the  Closing  Date and (y) shall  not  exceed  in the  aggregate
$2,500,000 less any amounts paid to a Buyer Affiliate under Section  7.2(a)(iii)
(and  Section  7.2(a)(v)  to  the  extent  related  to  a  claim  under  Section
7.2(a)(iii)).

     (c) Claims.

     (i) Except as otherwise  provided in Section  7.2(d),  within 30 days after
receiving  written notice thereof,  Buyer will give Seller and the  Shareholders
notice of any claims, demands,  assessments,  suits,  judgments,  proceedings or
other  actions (for  purposes of this  Section and  Section-7.3,  any  "Claims")
asserted  against (by third  parties,  governmental  entities,  or otherwise) or
incurred by any of the Buyer  Affiliates  with respect to which Buyer intends to
claim  indemnification  from  Seller and the  Shareholders  pursuant  to Section
7.2(a),  and Seller and the  Shareholders  may undertake the response or defense
thereof by counsel of their own  choosing,  provided  that such counsel shall be
reasonably  acceptable to Buyer,  but only if the following  conditions are met:
(A)-Seller  and the  Shareholders  provide  written  notice to Buyer that Seller
intends to undertake such defense and agree that (x)-any  damages or liabilities
resulting  from  any  Claims  are or  will  be  damages  incurred  by the  Buyer
Affiliates  and (y)-Seller  and the  Shareholders  will be jointly and severally
liable  for  and  indemnify  the  Buyer  Affiliates  against  such  damages  and
liabilities in accordance with this Section 7.2, (B)-Seller and the Shareholders
provide Buyer with evidence acceptable to Buyer that Seller and the Shareholders
have the  financial  resources  to defend  against the Claim and  fulfill  their
indemnification obligations hereunder, (C)-the Claim involves only money damages
and does not seek an injunction or other equitable relief, (D)-settlement of, or
an  adverse  judgment  with  respect  to,  the Claim is not,  in the good  faith
judgment of Buyer,  likely to  establish a precedent  adverse to the  continuing
business  interests of Buyer and  (E)-Seller  and the  Shareholders  conduct the
defense of the third-party  claim actively and  diligently.  Any Buyer Affiliate
may, by counsel, participate in such proceedings, negotiations or defense at its
own expense (notwithstanding Section 7.2(a)(v)), but Seller and the Shareholders
shall retain control over such proceedings,  negotiation or litigation except as
set forth in this Agreement.  In all such cases, the Buyer Affiliates shall give
reasonable  assistance to Seller and the  Shareholders,  including  making their
employees available without charge as reasonably requested.

     (ii) In the event  that  within 20 days  after  written  notice of any such
Claim,  Seller or the  Shareholders  fail to notify Buyer of their  intention to
respond or defend,  the Buyer  Affiliates  will have the right to undertake  the
defense,  compromise  or settlement of such Claim for the accounts of Seller and
the Shareholders, subject to the right of Seller or the Shareholders, so long as
the  conditions  above in Section  7.2(c)(i)  are met,  to assume  the  defense,
compromise or  settlement  of such Claim at any time prior to final  settlement,
compromise or determination thereof.

     (d)  Product-Related  Claims.  Any  claims,  demands,  assessments,  suits,
judgment  proceedings or other actions relating to or brought in connection with
defective,  substandard or nonconforming products,  other than product-liability
claims involving injury to individuals or damage to property,  ("Product-Related
Claims")   shall  not  be  subject  to  the   provisions   and   limitations  of
Section-7.2(b)  or Section 7.2(c) but instead shall be subject to the provisions
of this  Section  7.2(d).  Any Buyer  Affiliate  may settle any  Product-Related
Claims  on terms as it may  determine  in its  reasonable  discretion  ("Product
Settlements"),  and upon request by such Buyer Affiliate,  Seller agrees to make
prompt  payment to that Buyer  Affiliate in  immediately  available  funds of an
amount  equal  to  any  Product  Settlements.   Notwithstanding  the  foregoing,
indemnification  shall be required to be made under this Section 7.2(d) only for
(i)  Product-Related  Claims of which any Buyer  Affiliate  has given  notice to
Seller or the  Shareholders by or on the Contingent  Payment Date (as defined in
Section 1.7) and (ii) damages under Product-Related Claims that are in excess of
$50,000 in the aggregate.

        VII.3. Buyer's Agreement to Indemnify.

     (a) Subject to the conditions  and provisions set forth herein,  Buyer will
defend,  indemnify  and  hold  harmless  Seller,  and its  directors,  officers,
employees and agents, and Ieach of the Shareholders  (collectively,  the "Seller
Affiliates") against and in respect of:

     (i)  Any  and  all  loss,   damage  or   deficiency   resulting   from  any
misrepresentation,  breach  of  warranty,  or  other  violation  of  any  of the
covenants,  warranties  or  representations  contained in this  Agreement or any
documents  executed  herewith  or  the  transactions   contemplated  hereby,  or
nonfulfillment  of any  agreement  or any  documents  executed  herewith  or the
transactions  contemplated  hereby, on the part of Buyer under this Agreement or
from any  misrepresentation  in or omission  from any  certificate  furnished to
Seller or the Shareholders required in connection herewith.

     (ii) Any and all liabilities  and obligations  assumed by Buyer as provided
herein as well as those  liabilities  and  obligations of Buyer that arise after
the Closing with respect to the operation of the Business after that date; and

     (iii) Any and all claims, costs, damages, liabilities, deficiencies, losses
or expenses suffered or incurred by any such party (whether as a result of third
party  claims  (whether  valid  or  not),  demands,  suits,  causes  of  action,
proceedings, investigations,  judgments, assessments, liabilities or otherwise),
including  costs of  investigation  and defense and  attorneys'  fees  assessed,
incurred or sustained by or against any of them,  with respect to or arising out
of any of the foregoing.

     (b) No indemnification  shall be required to be made under this Section 7.3
for breaches of  representations  and warranties  until the aggregate  amount of
damages  incurred  by the  Seller  Affiliates  under this  Section  7.3 for such
breaches exceeds $35,000,  and if such damages arising from such breaches exceed
such amount then Buyer shall indemnify the Seller Affiliates for the full amount
of such damages up to and in excess of the initial $35,000. It is further agreed
that the  liability of Buyer  pursuant to this Section 7.3 for such  breaches of
representations  and  warranties  shall be limited to Claims (as defined  below)
asserted by the Seller Affiliates within two years after the Closing Date.

     (c) Claims.

     (i) Within 30 days after receiving  written notice  thereof,  Seller or the
Shareholders  will give Buyer  notice of any Claims  asserted  against (by third
parties,  governmental  entities,  or  otherwise)  or  incurred  by  the  Seller
Affiliates  with  respect  to  which  any  Seller  Affiliate  intends  to  claim
indemnification  from Buyer,  and Buyer may  undertake  the  response or defense
thereof by counsel of its own  choosing,  provided  that such  counsel  shall be
reasonably acceptable to Seller and the Shareholders,  but only if the following
conditions  are  met:  (A)-Buyer  provides  written  notice  to  Seller  or  the
Shareholders  that Buyer  intends to  undertake  such  defense  and agrees  that
(x)-any damages or liabilities  resulting from any Claims are or will be damages
incurred by the Seller Affiliates and (y)-Buyer will be liable for and indemnify
the Seller  Affiliates  against such damages and  liabilities in accordance with
this Section 7.3, (b)-the Claim involves only money damages and does not seek an
injunction or other equitable relief,  and (C)-Buyer conducts the defense of the
Claim actively and diligently. Any Seller Affiliate may, by counsel, participate
in such proceedings, negotiations or defense at its own expense (notwithstanding
Section  7.3(a)(iii)),  but Buyer shall retain  control  over such  proceedings,
negotiation  or litigation  except as set forth in this  Agreement.  In all such
cases,  the  Seller  Affiliates  shall  give  reasonable  assistance  to  Buyer,
including  making  their  employees   available  without  charge  as  reasonably
requested.

     (ii) In the event  that  within 20 days  after  written  notice of any such
Claim,  Buyer fails to notify  Seller or the  Shareholders  of its  intention to
respond or defend,  the Seller  Affiliates  will have the right to undertake the
defense,  compromise  or  settlement  of such  Claim for the  account  of Buyer,
subject  to the  right of  Buyer,  so long as the  conditions  above in  Section
7.3(c)(i) are met, to assume the defense, compromise or settlement of such Claim
at any time prior to final settlement, compromise or determination thereof.



                                       1


                                         ARTICLE VIII
                                          TERMINATION

     VIII.1.Termination. This Agreement may be terminated:

     (a) at any time by mutual consent of Seller and Buyer;

     (b) by either party, if Closing  hereunder has not taken place on or before
May-4, 1998.

     (c) by Seller if all the  conditions  in Section  6.1 and 6.2 have not been
satisfied or waived by the Closing Date; and

     (d) by Buyer if all the  conditions  set forth in Section  6.1 and 6.3 have
not been satisfied or waived by the Closing Date.

        VIII.2.Procedure and Effect of Termination or Failure to Close.

     (a) In the event of termination  of this  Agreement and  abandonment of the
transactions  contemplated  hereby  by any or all  of the  parties  pursuant  to
Section 8.1,  prompt  written notice thereof shall be given to the other parties
and this Agreement  shall  terminate and the  transactions  contemplated  hereby
shall be abandoned, without further action by any of the parties hereto. If this
Agreement is terminated as provided herein:

     (i)  None of the  parties  hereto  nor any of  their  partners,  directors,
officers,  members,  managers,  shareholders,  employees,  agents, or affiliates
shall have any liability or further  obligation to the other party or any of its
partners,  directors,  officers,  members,  managers,  shareholders,  employees,
agents,  or  affiliates  pursuant  to  this  Agreement  with  respect  to  which
termination  has occurred,  except as stated in Article VII or in Section 8.2(b)
and in Sections 9.1 and 9.2 hereof; and

     (ii) All  filings,  applications  and  other  submissions  relating  to the
transfer of the Purchased Assets shall, to the extent practicable,  be withdrawn
from the agency or other person to which made.

     (b)  Notwithstanding  anything to the contrary contained in this Agreement,
including without  limitation  Article-VII,  in the event of termination of this
Agreement,  or if pursuant to the terms of this  Agreement  (i) Seller  shall be
obligated to sell the Purchased  Assets and Buyer shall be obligated to purchase
the Purchased Assets,  (ii) Buyer or Seller, as the case may be, shall have duly
satisfied  each of the conditions set forth in Article VI hereof to be satisfied
by it or them (or in the case of any  condition  that is to be  satisfied at the
Closing,  shall have  demonstrated  a  willingness  and ability to satisfy  such
condition if the Closing were to take place),  and the  conditions  set forth in
Section 6.1 have been satisfied,  and (iii) Seller or Buyer, as the case may be,
shall  nevertheless fail to sell or purchase the Purchased  Assets,  then and in
that event,  Buyer and Seller, as the case may be, shall be entitled to seek any
remedy  to which  they may be  entitled  at law or in  equity  in the event of a
violation or breach of any agreement,  representation  or warranty  contained in
this Agreement (which remedies shall include without  limitation with respect to
both Buyer and Seller,  an injunction or injunctions to prevent  breaches of, or
to obtain specific performance of any obligation hereunder, without limiting any
monetary  damages  to which  Buyer  or  Seller,  as the  case  may be,  shall be
entitled).


                                          ARTICLE IX
                                   MISCELLANEOUS PROVISIONS

     IX.1.  Commissions.  Each of Seller and the Shareholders,  on the one hand,
and Buyer, on the other hand, represent and warrant to the other that no broker,
finder  or other  person is  entitled  to any  brokerage  fees,  commissions  or
finder's fees in connection with the transactions  contemplated hereby by reason
of any action taken by the party making such representation.  Each of Seller and
the  Shareholders,  on the one hand, and Buyer,  on the other hand,  will pay or
otherwise  discharge,  and will  indemnify and hold the other  harmless from and
against,  any and all claims or liabilities for all brokerage fees,  commissions
and finder's fees incurred by reason of any action taken by such party.

     .  Whether or not the  transactions  contemplated  hereby are  consummated,
except  as  otherwise  provided  herein,  all  costs and  expenses  incurred  in
connection with this Agreement and the transactions  contemplated hereby will be
paid by the party  incurring such costs and expenses;  provided,  however,  that
Buyer and Seller will each bear one-half of the filing fee incurred in complying
with the HSR Act and the rules and  regulations  promulgated  thereunder  by the
Federal Trade Commission.  With regard to costs associated with transferring the
Purchased Assets to Buyer pursuant to this Agreement,  Seller will pay any sales
or use taxes and transfer taxes or fees, and Buyer will pay any recording fees.

     .  Subject  to the  terms and  conditions  of this  Agreement,  each of the
parties  hereto will use all  reasonable  efforts to take, or cause to be taken,
all actions,  and to do, or cause to be done,  all things  necessary,  proper or
advisable under applicable laws and regulations to consummate and make effective
the  transactions  contemplated by this  Agreement.  From time to time after the
Closing  Date,  without  further  consideration,  Seller  will,  at its expense,
execute and deliver,  or cause to be executed and  delivered,  such documents to
Buyer as Buyer may reasonably request in order to more effectively vest in Buyer
good title to the  Purchased  Assets.  From time to time after the Closing Date,
without  further  consideration,  Buyer will,  at Buyer's  expense,  execute and
deliver such documents to Seller as Seller may reasonably  request in order more
effectively to consummate the transactions contemplated by this Agreement.

     . This Agreement may be amended,  modified or supplemented  only by written
agreement executed by all of the parties hereto.

     . Except as otherwise provided in this Agreement, any failure of any of the
parties  to comply  with any  obligation,  representation,  warranty,  covenant,
agreement  or  condition  herein  may be  waived by the  party  entitled  to the
benefits thereof only by a written  instrument signed by the party granting such
waiver,  but such waiver or failure to insist upon strict  compliance  with such
obligation, representation, warranty, covenant, agreement or condition shall not
operate as a waiver of, or estoppel  with  respect to, any  subsequent  or other
failure.  Whenever this Agreement requires or permits consent by or on behalf of
any party hereto,  such consent shall be given in writing in a manner consistent
with the  requirements  for a waiver of  compliance as set forth in this Section
9.5.

     . All notices and other  communications  hereunder  shall be in writing and
shall be deemed given when  delivered by hand or by  facsimile  transmission  or
mailed by  registered  or certified  mail (return  receipt  requested),  postage
prepaid, to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice;  provided that notices of a change
of address shall be effective only upon receipt thereof):

                  (a)    If to Buyer, to:

                         Culp, Inc.
                         P.O. Box 2686
                         101 South Main Street
                         High Point, North Carolina  27261-2686
                         Attention:  Franklin N. Saxon
                         Facsimile:  (910) 887-7089

                         Copies to:

                         Robinson, Bradshaw-& Hinson, P.A.
                         1900 Independence Center
                         101 North Tryon Street
                         Charlotte, North Carolina  28246
                         Attention:  Henry H. Ralston
                         Facsimile:  (704) 378-4000

                  (b)    If to Seller, to:

                         Artee Industries, Incorporated
                         P.O. Box 1509
                         Shelby, North Carolina  28151
                         Attention:  Robert L. Davis
                         Facsimile:  (704) 482-0735

                         Copies to:

                         Alala Mullen Holland & Cooper P.A.
                         P.O. Box 488
                         301 South York Street
                         Gastonia, North Carolina  28053
                         Attention:  J. Mark Heavner
                         Facsimile:  (704) 861-8394


                  (c)    If to Shareholders, to:

                         Robert T. Davis
                         3721 Eaglebrook Drive
                         Gastonia, North Carolina  28056

     . Except as  otherwise  expressly  provided in this  Agreement,  any act or
decision  by  the  Shareholders  hereunder  (including  without  limitation  any
decision relating to termination,  waiver of conditions and indemnification that
could be applicable)  shall require the consent or approval of the  Shareholders
who then hold a majority of voting shares of Seller (if prior to Closing) or who
held a majority of such voting shares (if at or subsequent to Closing),  and any
act or decision  approved or consented to by the  Shareholders  shall be binding
upon all of the Shareholders.

     . The parties  agree that Buyer may, at its  election,  satisfy and set-off
any payments due Buyer from Seller or the  Shareholders  under this Agreement or
in connection  herewith  against any payments due from Buyer to Seller or to the
Shareholders under this Agreement or in connection therewith.

     . This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their  respective  successors and
permitted assigns.

     . The execution,  interpretation and performance of this Agreement shall be
governed  by the  internal  laws and  judicial  decisions  of the State of North
Carolina.

     . This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original,  but all of which together shall constitute one and
the same instrument.

     . The article and section  headings  contained in this Agreement are solely
for the purpose of  reference,  are not part of the agreement of the parties and
shall not in any way affect the meaning or interpretation of this Agreement.

     . This  Agreement,  including  the  Exhibits and  Schedules  hereto and the
documents delivered pursuant to this Agreement,  embody the entire agreement and
understanding of the parties hereto in respect of the subject matter hereof. The
Exhibits and  Schedules  hereto are an integral  part of this  Agreement and are
incorporated by reference herein. This Agreement supersedes all prior agreements
and  understandings,  whether written,  oral, or otherwise,  between the parties
with respect to the transactions contemplated by this Agreement.







                                [Signatures on Following Page]



                                       2


     IN WITNESS  WHEREOF,  Seller and Buyer have  caused  this  Agreement  to be
signed by their  respective duly authorized  officers,  and each Shareholder has
signed this Agreement, as of the date first above written.


                                      SELLER:

                                      ARTEE INDUSTRIES, INCORPORATED


                                      By:    __________________________________
                                             Robert T. Davis, Chairman
 

                                      SHAREHOLDERS:



                                      _________________________________________
                                      Robert T. Davis



                                      __________________________________________
                                      Robert L Davis, Trustee of Robert T. Davis
                                      Irrevocable Trust under agreement dated
                                      8/25/94



                                      _________________________________________
                                      Robert L. Davis



                                      __________________________________________
                                      Louis W. Davis



                                      __________________________________________
                                      Kelly D. England



                                      __________________________________________
                                      J. Marshall Bradley



                                      _________________________________________
                                      Frankie S. Bradley



                                      __________________________________________
                                      Micky R. Bradley




                                      BUYER:

                                      CULP, INC.


                                      By:                                       
                                        Franklin N. Saxon, Senior Vice President
 



 

5 1,000 APR-28-1997 6-MOS MAY-3-1998 NOV-2-1997 1,209 0 76,270 (1,956) 70,192 151,851 196,440 (89,063) 320,979 53,018 0 634 0 0 117,371 320,979 222,424 222,424 182,956 182,956 667 0 3,100 11,315 3,960 0 0 0 0 7,355 0.58 0.58