- --------------------------------------------------------------------------------


                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   ---------

                                   Form 8-K

                                CURRENT REPORT

               Pursuant to Section 13 or 15(d) of the Securities
                             Exchange Act of 1934

                                 -------------

        Date of Report (Date of earliest event reported) August 20, 1998

                                   CULP, INC.

            (Exact name of registrant as specified in its charter)


        North Carolina                  0-12781                56-1001967

 (State or other jurisdiction    (Commission File No.)       (IRS Employer
       of incorporation)                                  Identification No.)



                             101 South Main Street
                       High Point, North Carolina  27260
                   (Address of principal executive offices)
                                (336) 889-5161
             (Registrant's telephone number, including area code)




                                                                              
         (Former name or former address, if changed since last report)





- --------------------------------------------------------------------------------







Item 5. Other Events

See  attached  Press  Release (2 pages) and  Financial  Information  Release (10
pages),  both dated  August 20, 1998,  related to the fiscal 1999 first  quarter
ended August 2, 1998.

Forward  Looking  Information.  This Report  contains  statements  that could be
deemed   "forward-looking   statements"   within  the  meaning  of  the  federal
securities  laws,   which  statements  are  inherently   subject  to  risks  and
uncertainties.   Forward-looking   statements   are   statements   that  include
projections,   expectations  or  beliefs  about  future  events  or  results  or
otherwise are not  statements  of historical  fact.  Such  statements  are often
characterized  by  qualifying  words such as  "expect,"  "believe,"  "estimate,"
"plan" and "project"  and their  derivatives.  Factors that could  influence the
matters  discussed in such  statements  include the level of housing  starts and
sales of existing homes,  consumer confidence,  trends in disposable income, and
general  economic  conditions.  Decreases  in these  economic  indicators  could
have a  negative  effect on the  Company's  business  and  prospects.  Likewise,
increases in interest rates,  particularly  home mortgage  rates,  and increases
in consumer  debt or the general  rate of  inflation,  could  affect the Company
adversely.  In  addition,  the  value  of the U. S.  dollar  relative  to  other
currencies  can  affect  the   competitiveness  of  the  Company's  products  in
international    markets.    Economic   and   political   instability   in   the
international area could also affect the demand for the Company's products.
 


                                  SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned hereunto duly authorized.

 
                                    CULP, INC.
                                    (Registrant)


                              By:    Phillip W. Wilson                  
                                     Vice President and
                                     Chief Financial Officer


 



Dated:   August 20, 1998



CULP Reports First Quarter Results
Aug. 20, 1998

FOR IMMEDIATE RELEASE

                       CULP REPORTS FIRST QUARTER RESULTS

HIGH POINT,  N. C. (Aug.  20,  1998) - Culp,  Inc.  (NYSE:  CFI) today  reported
results for the first quarter of its 1999 fiscal year.

      For the three months ended August 2, 1998,  Culp  reported  that net sales
were  $110.7  million  compared  with  $99.5  million  a year ago.  The  company
reported  a net loss for the  quarter  of $2.6  million,  or  $0.20  per  share,
compared with net income of $2.9  million,  or $0.22 per share  diluted,  in the
year-earlier quarter.

      "We had  previously  indicated  our  expectation  for a net  loss  for the
first  quarter,"  said  Robert G.  Culp,  III,  chief  executive  officer.  "The
principal  development  that  affected  our  performance  was an  industry  wide
pattern  of  weakness  in  international   sales  of  printed  flock  upholstery
fabrics.  We also  experienced  some  pressure on margins on other product lines
that  are  marketed  primarily  to  U.S.-based  manufacturers.  We  did  achieve
higher sales for the quarter;  but that gain was due to the  contributions  from
Phillips  Mills and Artee  Industries,  which were  acquired  subsequent  to the
year-earlier period."

      "The first fiscal  quarter is  historically  not the strongest  period for
our industry  due to vacations  and  seasonal  plant  closings.  The backdrop of
consumer  spending in the U.S. on home  furnishings  remains  favorable,  and we
are  encouraged  about  the  positive  response  by  manufacturers  to  our  new
patterns and  textures  that will be  introduced  to  retailers  this fall.  Our
immediate  focus  obviously  must be  restoring  Culp's  profitability.  We have
begun taking  actions to reduce costs,  especially  in those product  categories
that  typically have been marketed  internationally.  Although we are optimistic
about the  potential  for longer term gains in our  business  outside the United
States, we have moved to bring  manufacturing  capacity in line with the current
level of demand."

     Culp added,  "During the first quarter, we significantly  strengthened our
management  structure.  We unified  related  products  and  marketing  programs,
thereby  reducing  the number of  business  units  from six to four.  We believe
that  grouping   related   business   operations  will  promote  better  working
communications  and  lead to  more  effective  customer  service  and  marketing
programs.   The  initial   momentum  for  this  realignment  in  our  management
structure was based on long range  planning,  but we believe the changes  should
also help the near term recovery in our bottom line."

      Culp,   Inc.  is  the  world's  largest   manufacturer   and  marketer  of
upholstery  fabrics for furniture and is a leading  producer of mattress ticking
for bedding.  The Company's  fabrics are used  principally  in the production of
residential and commercial furniture and bedding products.

                                   CULP, INC.
                         Condensed Financial Highlights
                                   (Unaudited)
                                                    Three Months Ended      
                                                August 2,         August 3,
                                                  1998              1997    
                                               (13 weeks)        (14 weeks)
Net sales                                    $ 110,667,000     $  99,498,000
Net income (loss)                            $  (2,640,000)    $   2,850,000
Net income (loss) per share:
  Basic                                      $       (0.20)    $        0.23
  Diluted                                    $       (0.20)    $        0.22
Average shares outstanding:
  Basic                                          13,000,000       12,631,000
  Diluted                                        13,203,000       12,929,000

This  release  contains   statements  that  could  be  deemed   "forward-looking
statements,"   within  the  meaning  of  the  federal   securities   laws.  Such
statements are inherently  subject to risks and  uncertainties.  Forward-looking
statements  are statements  that include  projections,  expectations  or beliefs
about future  events or results or otherwise  are not  statements  of historical
fact.  Such  statements  are often  characterized  by  qualifying  words such as
"expect,"  "believe,"  "estimate,"  "plan" and "project" and their  derivatives.
Factors that could influence the matters  discussed in such  statements  include
the level of housing starts and sales of existing  homes,  consumer  confidence,
trends in  disposable  income and  general  economic  conditions.  Decreases  in
these  economic  indicators  could  have a  negative  effect  on  the  company's
business and  prospects.  Likewise,  increases in interest  rates,  particularly
home  mortgage  rates,  and  increases  in consumer  debt or the general rate of
inflation,  could  affect  the  company  adversely.  Because  of the  increasing
percentage  of  the  company's   sales  derived  by   international   shipments,
strengthening  of the  U.S.  dollar  against  other  currencies  could  make the
company's  products less  competitive  on the basis of price in markets  outside
the United  States.  Additionally,  economic and  political  instability  in the
international area could affect the demand for the company's products.

                                      -END-



                       CULP, INC. FINANCIAL INFORMATION RELEASE
                       CONSOLIDATED STATEMENTS OF INCOME (LOSS)
               FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997

                   (Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED) -------------------------------------------------------- Amounts Percent of Sales --------------------- -------------------- August 2, August 3, % Over 1998 1997 (Under) 1999 1998 --------- ---------- ---------- --------- --------- Net sales $ 110,667 99,498 11.2 % 100.0 % 100.0 % Cost of sales 97,056 82,765 17.3 % 87.7 % 83.2 % --------- ---------- ---------- --------- --------- Gross profit 13,611 16,733 (18.7) % 12.3 % 16.8 % Selling, general and administrative expenses 14,473 10,916 32.6 % 13.1 % 11.0 % --------- ---------- ---------- --------- --------- Income (loss) from operations (862) 5,817 (114.8) % (0.8) % 5.8 % Interest expense 2,361 1,280 84.5 % 2.1 % 1.3 % Interest income (53) (90) (41.1) % (0.0)% (0.1)% Other expense (income), net 770 242 218.2 % 0.7 % 0.2 % --------- ---------- ---------- --------- --------- Income (loss) before income taxes (3,940) 4,385 (189.9) % (3.6)% 4.4 % Income taxes * (1,300) 1,535 (184.7) % 33.0 % 35.0 % --------- ---------- ---------- --------- --------- Net income (loss) $ (2,640) 2,850 (192.6) % (2.4)% 2.9 % ========= ========== ========== ========= ========= Net income (loss) per share ($0.20) $0.23 (187.0) % Net income (loss) per share, assuming dilution ($0.20) $0.22 (190.9) % Dividends per share $0.0350 $0.0350 0.0 % Average shares outstanding 13,000 12,631 2.9 % Average shares outstanding, assuming dilution 13,203 12,929 2.1 %
* Percent of sales column is calculated as a % of income (loss) before income taxes. CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED BALANCE SHEETS AUGUST 2, 1998, AUGUST 3, 1997 AND MAY 3, 1998 Unaudited (Amounts in Thousands)
Amounts Increase --------------------------- August 2, August 3, (Decrease) * ---------------------- May 3, 1998 1997 Dollars Percent 1998 ------------- ---------- ---------- --------- ------- Current assets Cash and cash investments $ 1,520 1,843 (323) (17.5) % 2,312 Accounts receivable 63,833 54,086 9,747 18.0 % 73,773 Inventories 79,358 60,715 18,643 30.7 % 78,594 Other current assets 7,511 6,126 1,385 22.6 % 7,808 ------------- ---------- ---------- --------- ------- Total current assets 152,222 122,770 29,452 24.0 % 162,487 Restricted investments 4,074 8,186 (4,112) (50.2) % 4,021 Property, plant & equipment, net 127,287 97,128 30,159 31.1 % 128,805 Goodwill 54,798 22,111 32,687 147.8 % 55,162 Other assets 4,317 3,124 1,193 38.2 % 4,340 ------------- ---------- ---------- --------- ------- Total assets $ 342,698 253,319 89,379 35.3 % 354,815 ============= ========== ========== ========= ======= Current liabilities Current maturities of long-term debt $ 3,250 100 3,150 3,150.0 % 3,325 Accounts payable 31,710 20,154 11,556 57.3 % 37,214 Accrued expenses 13,856 11,972 1,884 15.7 % 17,936 Income taxes payable 0 1,575 (1,575) (100.0)% 1,282 ------------- ---------- ---------- --------- ------- Total current liabilities 48,816 33,801 15,015 44.4 % 59,757 Long-term debt 154,383 96,016 58,367 60.8 % 152,312 Deferred income taxes 11,227 9,965 1,262 12.7 % 11,227 ------------- ---------- ---------- --------- ------- Total liabilities 214,426 139,782 74,644 53.4 % 223,296 Shareholders' equity 128,272 113,537 14,735 13.0 % 131,519 ------------- ---------- ---------- --------- ------- Total liabilities and shareholders' equity $ 342,698 253,319 89,379 35.3 % 354,815 ============= ========== ========== ========= ======= Shares outstanding 12,995 12,650 345 2.7 % 13,007 ============= ========== ========== ========= =======
* Derived from audited financial statements. CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997 Unaudited (Amounts in Thousands)
THREE MONTHS ENDED ------------------------ Amounts ---------------------- August 2, August 3, 1998 1997 ----------- ---------- Cash flows from operating activities: Net income (loss) $ (2,640) 2,850 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 4,376 3,256 Amortization of intangible assets 398 181 Changes in assets and liabilities: Accounts receivable 9,940 2,605 Inventories (764) (7,252) Other current assets 297 (676) Other assets (11) (147) Accounts payable (3,017) (5,852) Accrued expenses (4,080) (2,923) Income taxes payable (1,282) (5) --------- ---------- Net cash provided by (used in) operating activities 3,217 (7,963) --------- ---------- Cash flows from investing activities: Capital expenditures (2,858) (9,153) Purchases of restricted investments (53) (8,590) Sale of restricted investments 0 11,422 ----------- ---------- Net cash used in investing activities (2,911) (6,321) ----------- ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt 2,071 19,500 Principal payments on long-term debt (75) (25) Change in accounts payable-capital expenditures (2,487) (3,897) Dividends paid (455) (443) Common stock issued (purchased) (152) 162 ----------- ---------- Net cash provided by (used in)financing activities (1,098) 15,297 ----------- ---------- Increase (decrease) in cash and cash investments (792) 1,013 Cash and cash investments at beginning of period 2,312 830 ----------- ---------- Cash and cash investments at end of period $ 1,520 1,843 =========== ==========
CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL ANALYSIS AUGUST 2, 1998
FISCAL 98 FISCAL 99 -------- --------------------------------------- --------- Q1 Q1 Q2 Q3 Q4 LTM -------- --------------------------------------- --------- INVENTORIES Inventory turns 5.8 4.9 RECEIVABLES Days sales in receivables 50 48 Percent current & less than 30 days past due 95.0% 93.8% WORKING CAPITAL Current ratio 3.6 3.1 Working capital turnover (4) 5.1 4.5 Operating working capital (4) $94,647 $111,481 PROPERTY, PLANT & EQUIPMENT Depreciation rate 7.1% 7.7% Percent property, plant & equipment are depreciated 46.8% 43.8% Capital expenditures $35,879 (1) $2,858 PROFITABILITY Return on average total capital 7.6% (1.6%) 6.1% Return on average equity 10.2% (8.1%) 8.2% Net income (loss) per share $0.23 ($0.20) $0.79 Net income (loss) per share (diluted) $0.22 ($0.20) $0.77 LEVERAGE (3) Total liabilities/equity 123.1% 167.2% Funded debt/equity 77.4% 119.7% Funded debt/capital employed 43.6% 54.5% Funded debt $87,930 $153,559 Funded debt/EBITDA (LTM) (6) 2.18 3.75 EBITDA/Interest expense, net (LTM) 9.1 4.9 OTHER Book value per share $8.98 $9.87 Employees at quarter end 3,180 4,230 Sales per employee (annualized) $125,000 $103,000 Capital employed (3) $201,467 $281,831 Effective income tax rate 35.0% 33.0% EBITDA (2) $9,012 $3,142 $38,971 EBITDA/net sales 9.1% 2.8% 8.0%
(1) Expenditures for entire year (2) Earnings before interest, income taxes, and depreciation & amortization. (3) Long-term debt, funded debt and capital employed are all net of restricted investments. (4) Working capital for this calculation is accounts receivable,inventories and accounts payable. (5) LTM represents"Latest Twelve Months" (6) EBITDA includes capitalized interest and pro forma amounts for Wetumpka and Artee acquisitions. CULP, INC. FINANCIAL INFORMATION RELEASE SALES BY PRODUCT CATEGORY/BUSINESS UNIT FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
(Amounts in thousands) THREE MONTHS ENDED (UNAUDITED) --------------------------------------------------- Amounts Percent of Total Sales ------------------ ------------------- August 2, August 3, % Over 1998 1997 (Under) 1999 1998 Product Category/Business Unit - ------------------------- -------- -------- ---------- -------- --------- Upholstery Fabrics Culp Decorative Fabrics $ 51,445 39,814 29.2 % 46.5 % 40.0 % Culp Velvets/Prints 29,994 38,397 (21.9)% 27.1 % 38.6 % -------- -------- ---------- -------- --------- 81,439 78,211 4.1 % 73.6 % 78.6 % Mattress Ticking Culp Home Fashions 22,632 21,287 6.3 % 20.5 % 21.4 % Yarn Culp Yarn 6,596 0 100.0 % 6.0 % 0.0 % -------- -------- ---------- -------- --------- * $ 110,667 99,498 11.2 % 100.0% 100.0 % ======== ======== ========== ======== ========= * U.S. sales were $84,310 and $74,407 for the three months of fiscal 1999 and fiscal 1998, respectively. The percentage increase in U.S. sales was 13.3% for the three months.
CULP, INC. FINANCIAL INFORMATION RELEASE INTERNATIONAL SALES BY GEOGRAPHIC AREA FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
(Amounts in thousands) THREE MONTHS ENDED (UNAUDITED) ------------------------------------------------------- Amounts Percent of Total Sales --------------------- --------------------- August 2, August % Over 3, Geographic Area 1998 1997 (Under) 1999 1998 - ----------------------- ---------- --------- --------- --------- --------- North America (Excluding USA) $ 7,253 7,044 3.0 % 27.5 % 28.1 % Europe 3,683 4,440 (17.0)% 14.0 % 17.7 % Middle East 8,300 6,564 26.4 % 31.5 % 26.2 % Far East & Asia 4,868 5,464 (10.9)% 18.5 % 21.8 % South America 1,000 339 195.0 % 3.8 % 1.4 % All other areas 1,253 1,240 1.0 % 4.8 % 4.9 % ---------- --------- --------- --------- --------- $ 26,357 25,091 5.0 % 100.0 % 100.0 % ========== ========= ========= ========= =========
International sales, and the percentage of total sales, for each of the last seven fiscal years follows: fiscal 1992-$ 37,913 (20%); fiscal 1993-$ 41,471 (21%); fiscal 1994-$ 44,038 (18%); fiscal 1995-$ 57,971 (19%); fiscal 1996- $77,397 (22%); fiscal 1997-$ 101,571 (25%); and fiscal 1998-$ 137,223 (29%). International sales for the current quarter represented 23.8% and 25.2% for 1999 and 1998, respectively. Certain amounts for fiscal year 1998 have been reclassified to conform with the fiscal year 1999 presentation. Culp, Inc. SALES BY BUSINESS UNIT - TREND ANALYSIS 1997 vs 1998 vs 1999 Unaudited (Amounts in thousands)
Fiscal 1997 Fiscal 1998 ---------------------------------------------- ---------------------------------------------- Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3 Q4 TOTAL --------------------------- Upholstery Fabrics Culp Decorative Fabrics 38,966 45,723 39,342 43,699 167,730 39,814 56,781 53,415 60,155 210,165 Culp Velvets/Prints 34,867 40,233 40,387 40,980 156,467 38,397 43,928 44,020 45,044 171,389 ---------------------------------------------- ---------------------------------------------- 73,833 85,956 79,729 84,679 324,197 78,211 100,709 97,435 105,199 381,554 Mattress Ticking Culp Home Fashions 16,696 19,248 17,739 20,999 74,682 21,287 22,217 20,261 23,520 87,285 Yarn Culp Yarn - - - - - - - 761 7,115 7,876 ---------------------------------------------- ---------------------------------------------- 90,529 105,204 97,468 105,678 398,879 99,498 122,926 118,457 135,834 476,715 ============================================== ============================================== Culp, Inc. SALES BY BUSINESS UNIT - TREND ANALYSIS 1997 vs 1998 vs 1999 Unaudited (Amounts in thousands) Fiscal 1999 ----------------------------------------------- Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL --------------------------- Upholstery Fabrics Culp Decorative Fabrics 51,445 Culp Velvets/Prints 29,994 ----------------------------------------------- 81,439 Mattress Ticking Culp Home Fashions 22,632 Yarn Culp Yarn 6,596 ----------------------------------------------- 110,667 ===============================================
Percent increase(decrease) from prior year: ---------------------------------------------------------------------------------------------------------------------------- Fiscal 1997 Fiscal 1998 ---------------------------------------------- ---------------------------------------------- Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3 Q4 TOTAL --------------------------- Upholstery Fabrics Culp Decorative Fabrics 18.3 12.4 0.2 (4.4) 5.8 2.2 24.2 35.8 37.7 25.3 Culp Velvets/Prints 48.2 25.4 26.9 7.1 24.5 10.1 9.2 9.0 9.9 9.5 ---------------------------------------------- ---------------------------------------------- 30.8 18.1 12.2 0.8 14.0 5.9 17.2 22.2 24.2 17.7 Mattress Ticking Culp Home Fashions 5.1 7.4 15.3 15.5 10.8 27.5 15.4 14.2 12.0 16.9 Yarn Culp Yarn - - - - - - - 100.0 100.0 100.0 ---------------------------------------------- ---------------------------------------------- 25.1 16.0 12.7 3.4 13.4 9.9 16.8 21.5 28.5 19.5 ============================================== ============================================== Overall Growth Rate Internal(without acquisitions) 25.1 16.0 12.7 3.4 13.4 9.9 6.6 9.2 11.6 9.3 External - - - - - - 10.2 12.3 16.9 10.2 ---------------------------------------------- ---------------------------------------------- 25.1 16.0 12.7 3.4 13.4 9.9 16.8 21.5 28.5 19.5 ============================================== ============================================== Percent increase(decrease) from prior year: - ---------------------------------------------------------------------------- Fiscal 1999 ----------------------------------------------- Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL --------------------------- Upholstery Fabrics Culp Decorative Fabrics 29.2 Culp Velvets/Prints (21.9) ---------------------------------------------- 4.1 Mattress Ticking Culp Home Fashions 6.3 Yarn Culp Yarn 100.0 ---------------------------------------------- 11.2 ============================================== Overall Growth Rate Internal(without acquisitions) (4.6) External 15.8 =============================================== 11.2 ===============================================
CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three month periods ended August 2, 1998 and August 3, 1997 INCOME STATEMENT COMMENTS GENERAL - Net sales increased 11.2% to $110.7 million, and the company reported a net loss of $2.6 million compared with net income of $2.9 million for the first quarter of last year. The first quarter included 13 weeks versus 14 weeks in the year-earlier period. The company has compiled a longer term record of growth based on several key competitive strengths: Broad Product Offering - marketing one of the broadest product lines in the upholstery fabrics and mattress ticking industry. Through its extensive manufacturing capabilities, the company competes in every major category of the industry except leather; Diverse Global Customer Base - penetrating other end-use markets in addition to U. S. residential furniture, such as bedding, international, commercial furniture and juvenile furniture; sales to these other markets accounted for approximately 53% of net sales during the first quarter; additionally, no one customer accounted for more than 7% of sales during the first quarter of fiscal 1999; Design Innovation - investing in the design of new patterns and textures. The company has significantly increased resources (both designers and computer-aided design (CAD) systems) in the design and product development areas in each business unit. In January 1998, the company opened its state-of-the-art design center in Burlington, North Carolina. The facility has consolidated most of the company's design resources in one facility which offers advanced CAD systems for the design process; Vertical Integration - realizing additional manufacturing integration by producing various raw material components that are used in the manufacture of its products; and Ability to Integrate Acquisitions - investing in selective acquisitions that strengthen existing marketing positions. NET SALES - Compared with the first quarter of last year, upholstery fabric sales increased 4.1% to $81.4 million; mattress ticking sales increased 6.3% to $22.6 million; and yarn sales contributed $6.6 million for the quarter (See Sales by Business Unit schedule on Page 5 and Sales by Business Unit - Trend Analysis on Page 7). The growth in upholstery fabric sales for the first quarter was due to the contribution of $9.1 million from Phillips Mills which was acquired after the close of the quarter a year ago. Excluding that incremental volume, upholstery fabric sales were down 7.5% from a year ago. International sales were up 5.0% for the quarter. A significant decline in sales to Europe and the Far East/Asia (principally Russia) was offset by higher shipments to the Middle East. CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three month periods ended August 2, 1998 and August 3, 1997 The decline in sales of upholstery fabrics was due principally to a pronounced slowdown in international sales of wet and heat-transfer printed flock fabrics. This trend, which the company believes has affected other manufacturers of upholstery fabrics, became apparent after the close of fiscal 1998 and has been persistent thus far in fiscal 1999. A large percentage of the company's sales of this product line were being shipped directly or indirectly to customers in the emerging markets of Russia and other former Soviet countries, India and Eastern Europe. All of these areas are generally experiencing very weak economic conditions which, in turn, have affected demand for furniture and other home furnishings. The company has significantly curtailed production schedules for these fabrics and has shifted its marketing focus for this product category to geographic areas where demand remains favorable. The company is seeking to build a diversified geographic base of customers internationally to minimize the exposure to economic uncertainties in any single geographic area. Lower international sales also affected the company's sales of other upholstery fabrics during the first quarter. The year-to-year comparisons were also influenced by the fact that there was one less week in the period (13) versus a year ago (14). Because of industry wide vacations and scheduled plant shutdowns, the first quarter is historically the lowest period of the year for net sales. The increased sales by Culp Home Fashions during the first quarter marks a continuation of the expansion that this business unit has experienced in recent years. Sales are benefiting from the introduction of new designs and fabric constructions as well as the company's vertical integration. Culp's ability to manufacture the jacquard greige, or unfinished, goods that are then printed to produce mattress ticking has aided the company in meeting faster delivery schedules and providing improved overall customer service. GROSS PROFIT - Gross profit declined 18.7% for the quarter versus a year ago. The decline was due principally to lower margins at the Culp Decorative Fabrics and Culp Velvets/Prints units. Culp Decorative Fabrics experienced considerable unfavorable manufacturing variances during the quarter. Factors contributing to these variances included lower than expected sales and competitive pressure on pricing, especially in the jacquard product category. The lower gross profit at Culp Velvets/Prints was due to the unexpectedly sharp decline in international sales of printed flock fabrics. The lower sales led to excess manufacturing capacity and lower absorption of fixed costs. The gross margins are expected to remain under pressure, but the company has instituted a number of actions to improve profitability. A reorganization from six to four business units during the first quarter has grouped related operations together and has been accompanied by several changes in managerial positions. Steps underway related to this realignment include a significant reduction in the capacity for manufacturing printed flock fabrics, comprehensive programs to reduce inventories and an intense effort to reduce operating expenses and raise productivity. S,G&A EXPENSES - S,G&A expenses for the first quarter rose as a percentage of sales to 13.1% from 11.0 % for the same period of last year. The higher proportion of SG&A expenses was also affected by the lower than expected sales. The increase in absolute dollars from a year ago resulted from the Phillips Mills and Artee acquisitions, investment in additional design resources, increased costs in sampling new product and higher costs for marketing programs. CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three month periods ended August 2, 1998 and August 3, 1997 INTEREST EXPENSE - Interest expense increased 85% compared with the year-earlier period due to higher average borrowings outstanding. The increased borrowings related principally to the acquisitions during fiscal 1998 of Phillips Mills and Artee Industries and the relatively high level of capital expenditures in fiscal 1998. OTHER EXPENSE (INCOME), NET - Other expense (income) increased to $770,000 from $242,000 in the year-earlier quarter. A major factor contributing to the increase was amortization of goodwill due to the acquisitions during fiscal 1998. Additionally, a non-recurring charge of $311,000 was incurred to writeoff certain fixed assets. INCOME TAXES - The effective tax rate for the quarter was 33.0% compared with 35.0% for the prior year. EBITDA - EBITDA for the quarter decreased to $3.1 million from $9.0 million for last year's first quarter and represented 2.8% of net sales compared with 9.1% of net sales for the same period of last year. BALANCE SHEET COMMENTS WORKING CAPITAL - Accounts receivable increased 18.0 % from August 3, 1997, while sales increased 11.2 % for the first quarter. Days sales outstanding represented 48 days, down from 50 days at August 3, 1997, and 49 days at May 3, 1998. Accounts receivable increased at a faster rate than sales because of the increasing mix of international sales and mattress ticking sales, which carry longer payment terms than U.S. upholstery fabric sales. Additionally, the aging of accounts receivable was 93.8 % current and less than 30 days past due versus 95.0% at August 3, 1997. Inventories increased 30.7 % from August 3, 1997, and inventory turns were 4.9 versus 5.8 for last year's first quarter. The inventory increase is partly due to the prior year acquisitions and a build up of yarn in the Culp Decorative Fabrics business unit. Operating working capital (comprised of accounts receivable, inventory and accounts payable) increased to $111.5 million at August 2, 1998, for the reasons mentioned above, from $94.6 million at August 3, 1997. The balance at May 3, 1998 was $115.2 million. PROPERTY, PLANT AND EQUIPMENT - For fiscal 1999, the company is planning to significantly reduce its capital spending to $10-$15 million, and concentrate its efforts on improving the results of the investments made during fiscal 1997 and fiscal 1998. The two largest projects that are currently planned for fiscal 1999 are: (a) completion of the polypropylene yarn extrusion expansion, which began in early fiscal 1998; and (b) building expansions in the Culp Home Fashions business unit to accommodate the significant growth in the company's sales of mattress ticking over the last several years. Depreciation for fiscal 1999 is currently estimated to be approximately $19 million. LONG-TERM DEBT - The company's funded debt-to-capital ratio was 54.5% at August 2, 1998, up from 43.6% at August 3, 1997, and up from 53.5% at May 3, 1998. Funded debt was $153.6 million at August 2, 1998, up from $87.9 million at August 3, 1997 and up from $151.6 million at May 3, 1998. (Funded debt equals long-term debt, including current maturities, less restricted investments, which represent unspent IRB funds). The increase in funded debt from May 3, 1998 resulted primarily from capital expenditures of $2.9 million and a decrease in accounts payable related to capital expenditures of $2.5 million, which were partially offset by operating cash flow of $3.2 million.