UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 2, 2004
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
101 S. Main St., High Point, North Carolina 27261-2686
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
------------------- On Which Registered
-------------------
Common Stock, par value $.05/ Share New York Stock Exchange
Rights for Purchase of Series A New York Stock Exchange
Participating Preferred Shares
Securities registered pursuant to Section 12(g) of the Act: None
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO __
As of May 2, 2004, 11,546,634 shares of common stock were outstanding. As
of October 31, 2003, the aggregate market value of the voting stock held by
non-affiliates of the registrant on that date was $ 92,192,708 based on the
closing sales price of such stock as quoted on the New York Stock Exchange
(NYSE), assuming, for purposes of this report, that all executive officers and
directors of the registrant are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's Proxy Statement to be filed pursuant to Regulation 14A
of the Securities and Exchange Commission in connection with its Annual Meeting
of Shareholders to be held on September 21, 2004 are incorporated by reference
into Part III.
CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
Item No. Page
- ------- PART I ----
1. Business
Overview............................................................4
Segments............................................................5
Capital Expenditures................................................6
Overview of Industry and Markets....................................7
Overview of Bedding Furniture Industry..............................7
Overview of Residential Furniture Industry..........................8
Overview of Commercial Furniture Industry..........................10
Products...........................................................10
Manufacturing......................................................11
Product Design and Styling.........................................12
Distribution.......................................................12
Sources and Availability of Raw Materials..........................13
Seasonality........................................................13
Competition........................................................13
Technology.........................................................14
Environmental and Other Regulations................................14
Employees..........................................................15
Customers and Sales................................................15
Net Sales by Geographic Area.......................................16
Backlog............................................................16
2. Properties............................................................17
3. Legal Proceedings.....................................................18
4. Submission of Matters to a Vote of Security Holders...................18
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters.....................................18
6. Selected Financial Data...............................................19
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................20
7A. Quantitative and Qualitative Disclosures
About Market Risk...................................................30
8. Consolidated Financial Statements and Supplementary Data..............32
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................60
9A. Controls and Procedures...............................................60
PART III
10. Directors and Executive Officers of the
Registrant..........................................................60
11. Executive Compensation................................................60
12. Security Ownership of Certain
Beneficial Owners and Management....................................60
13. Certain Relationships and Related
Transactions........................................................60
14. Principal Accountant Fees and Services................................61
PART IV
15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.............................................61
Documents filed as part of this report................................61
Exhibits..............................................................62
Reports on Form 8-K...................................................65
Financial Statement Schedules.........................................65
Signatures ...........................................................66
Exhibit Index.........................................................67
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Parts I and II of this report contain statements that may be deemed
"forward-looking statements" within the meaning of the federal securities laws,
including the Private Securities Litigation Reform Act of 1995 (Section 27A of
the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of
1934). Such statements are inherently subject to risks and uncertainties.
Further, forward looking statements are intended to speak only as of the date on
which they are made. 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 but not always
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives, and include but are not limited to
statements about expectations for the company's future operations or success,
sales, gross profit margins, SG&A or other expenses, and earnings, as well as
any statements regarding future economic or industry trends or future
developments. Factors that could influence the matters discussed in such
statements include the level of housing starts and sales of existing homes,
consumer confidence, trends in disposable income, and general economic
conditions. Decreases in these economic indicators could have a negative effect
on the company's business and prospects. Likewise, increases in interest rates,
particularly home mortgage rates, and increases in consumer debt or the general
rate of inflation, could affect the company adversely. In addition,
strengthening of the U. S. dollar against other currencies could make the
company's products less competitive on the basis of price in markets outside the
United States. Also, economic and political instability in international areas
could affect the company's operations or sources of goods in those areas, as
well as demand for the company's products in international markets. Finally,
unanticipated delays or costs in executing restructuring actions could cause the
cumulative effect of restructuring actions to fail to meet the objectives set
forth by management. Other factors that could affect the matters discussed in
forward looking statements are included in the company's other periodic reports
filed with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
Overview
Culp, Inc., which we sometimes refer to as the company, manufactures and markets
mattress fabrics (known as mattress ticking and used for covering mattresses and
box springs) and upholstery fabrics primarily for use in the furniture
(residential and commercial). The company's executive offices are located in
High Point, North Carolina. The company was organized as a North Carolina
corporation in 1972 and made its initial public offering in 1983. Since 1997,
the company has been listed on the New York Stock Exchange and traded under the
symbol "CFI."
Management believes that Culp is one of the two largest producers of mattress
fabrics in North America as measured by total sales and one of the three largest
marketers of furniture upholstery fabrics in North America, again measured by
total sales. The company's fabrics are used principally in the production of
residential and commercial furniture and bedding products, including sofas,
recliners, chairs, loveseats, sectionals, sofa-beds, office seating, panel
systems and mattress sets. Culp markets one of the broadest product lines in its
industry, with a wide range of fabric constructions, patterns, colors, textures
and finishes. This breadth is made possible by Culp's extensive manufacturing
capabilities, which include a variety of weaving, printing and finishing
operations and the ability to produce various yarns and unfinished base fabrics
(known as greige goods) used in its products. Although most of the company's
competitors emphasize one particular type of fabric, Culp competes in every
major category except leather. Culp's extensive staff of designers and support
personnel utilize computer aided design (CAD) systems to develop the company's
own patterns and styles. Although Culp markets fabrics at most price levels, the
company has emphasized fabrics that have a broad appeal in the "good" and
"better" price categories of furniture and bedding.
Culp markets its products worldwide, with sales to customers in over 50
countries. Total net sales were $318.1 million in fiscal 2004, and the company's
international sales totaled $35.3 million during fiscal 2004. Shipments to
U.S.-based customers continue to account for most of the company's sales.
International sales accounted for 11% of net sales for fiscal 2004 compared to
12% of net sales in fiscal 2003.
Culp has eleven (11) active manufacturing facilities, with a combined total of
approximately 2.0 million square feet, which are located in North Carolina (7),
South Carolina (2), Quebec, Canada (1) and Shanghai, China (1). The company's
distribution system is designed to offer customers fast, responsive delivery.
Products are shipped directly to customers from the company's manufacturing
facilities, as well as from three regional distribution facilities strategically
located in High Point, North Carolina, Los Angeles, California, and Tupelo,
Mississippi, which are areas with a high concentration of furniture
manufacturing.
Culp maintains an Internet website at www.culpinc.com. The company will make
this annual report, in addition to its other annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
these reports, available free of charge on its Internet site as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission. Information included on
the company's website is not incorporated by reference into this annual report.
Segments
The company's operating segments are mattress fabrics and upholstery fabrics,
with related divisions organized within those segments. The division within
mattress fabrics is Culp Home Fashions. The divisions within upholstery fabrics
are Culp Decorative Fabrics (including the company's yarn manufacturing
facilities and the operation located in China) and Culp Velvets/Prints. Each
division is accorded considerable autonomy and is responsible for designing,
manufacturing and marketing its respective product lines. Significant synergies
exist among the divisions, including the sharing of common raw materials made
internally, such as polypropylene yarns, certain dyed and spun yarns and greige
goods. Products manufactured at one division's facility are commonly transferred
to another division's facility for additional value-added processing steps. The
following table sets forth certain information for each of the company's
segments/divisions.
Culp's Segments/Divisions
-------------------------
FISCAL 2004 PRODUCT LINES
NET SALES (BASE CLOTH, IF
SEGMENT DIVISION (in millions) APPLICABLE)
------- -------- ------------- -----------
Mattress Fabrics Culp Home Fashions $ 106.3 Woven and damask jacquards
Pigment prints(jacquard,
knit, sheeting, non-woven)
Knitted ticking
Upholstery Fabrics Culp Decorative Fabrics (1) $ 124.3 Woven jacquards
Woven dobbies
Culp Velvets/Prints $ 87.5 Heat-transfer prints
(jacquard, flock)
Woven velvets
Tufted velvets
(woven polyester)
Suede fabrics
(1) Includes the company's yarn manufacturing operations and the operation
located in China
Culp Home Fashions. Culp Home Fashions markets mattress ticking to bedding
manufacturers. These fabrics encompass woven jacquard ticking and
pigment-printed ticking on a variety of base fabrics, including jacquard, knit,
poly/cotton sheeting and non-woven materials. Additionally, the division has
begun to source knitted ticking from an outside supplier. Culp Home Fashions
blends its finishing capabilities with its access to a variety of base fabrics
to offer innovative designs to bedding manufacturers for mattress products. Culp
Home Fashions' manufacturing facilities are located in Stokesdale, North
Carolina and St. Jerome, Quebec, Canada.
Culp Decorative Fabrics. Culp Decorative Fabrics manufactures and markets
jacquard and dobby woven fabrics used primarily for residential and commercial
furniture. For a description of the characteristics of these fabrics, see
"Products" below. Culp Decorative Fabrics' manufacturing facilities are located
in Burlington and Graham, North Carolina, and Pageland, South Carolina. The
designs marketed by Culp Decorative Fabrics range from intricate, complicated
patterns such as floral and abstract designs to more simple patterns associated
with casual living styles. During 2003, the company carried out a restructuring
plan, within this division, designed to increase efficiencies and eliminate
cost. The company consolidated the operations from its Chattanooga, Tennessee
facility into the other Culp Decorative Fabrics manufacturing facilities, which
resulted in the closure of the Chattanooga operation during fiscal 2003 (note
additional discussion of restructuring activity in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations").
Culp Decorative Fabrics is vertically integrated, complementing its extensive
weaving capabilities with the ability to extrude, dye and texturize yarn. Culp
Decorative Fabrics includes the company's yarn facilities, where the company
manufactures and markets a variety of pre-dyed spun yarns, including WrapSpun
(TM), open-end spun and chenille yarns. The company operates yarn manufacturing
facilities in Shelby, Cherryville, and Lincolnton, North Carolina. Most of the
production is used internally by Culp Decorative Fabrics and other Culp
divisions. The external sales, which totaled approximately $4.8 million,
representing less than 2.0% of the company's consolidated sales for fiscal 2004,
are directed primarily to the upholstery fabric market. Culp's yarn
manufacturing operations provide Culp more control over its supply of spun and
chenille yarns and complements the company's emphasis on developing new designs.
In March of 2003, the company announced a strategic marketing initiative to
establish manufacturing and distribution operations in China. The strategy is to
link the company's strong customer relationships, design expertise and
production technology with low-cost fabric manufacturers in China in order to
deliver enhanced value to its customers throughout the world. During the fourth
quarter of fiscal 2004, the company began incoming fabric inspection and testing
at its facility in China, and started shipping fabric to customers from that
location. Finishing operations in China also began in the fourth quarter of
fiscal 2004.
Culp Velvets/Prints. Culp Velvets/Prints manufactures and markets a broad range
of printed and velvet fabrics. These include heat-transfer prints on jacquard
and flock base fabrics, woven velvets and tufted velvets. For a description of
the characteristics of these fabrics, see "Products" below. These fabrics, which
are manufactured at Burlington, North Carolina and Anderson, South Carolina,
typically offer manufacturers richly colored patterns and textured surfaces. In
addition, with the company's offshore sourcing efforts, Culp Velvets/Prints is
experiencing higher sales of upholstery fabric products produced outside of the
company's U.S. manufacturing plants. These sales include microdenier suedes and
other sourced products to meet consumer preferences.
Capital Expenditures
The company spent approximately $6.7 million in capital expenditures during
fiscal 2004, compared with $12.2 million spent in fiscal 2003. Approximately
$3.0 million of amount spent in fiscal 2004 represents manufacturing equipment
and leasehold improvements for the China operation. For fiscal 2005, the
company's capital expenditure budget is $9.0 million.
The company's board of directors has approved the purchase and upfit of an
approximately 55,000 square foot building in High Point, North Carolina that
will serve as the company's new corporate offices and as new space for the
company's showrooms. This purchase will involve approximately $5.7 million of
the company's $9.0 million capital expenditure budget for fiscal 2005 and will
result in the company's headquarters and showroom space being in the same
facility for the first time. The move to the new space is expected to occur
during the fall of 2004, at which time the company will vacate leased space that
it currently occupies in downtown High Point. In connection with vacating these
leased premises, the company expects to take a charge related primarily to the
remaining lease obligations of approximately $600,000, or $0.03 per share,
during the second quarter of fiscal 2005. On an ongoing basis, however, the
company will avoid lease expenses of approximately $750,000 per year that are
currently being paid for rent and related expenses on its present office and
showroom space. The company expects the annual operating costs of the new
building to be significantly lower than the lease and related costs associated
with the current facilities.
Overview of Industry and Markets
Culp markets products worldwide to an array of manufacturers that operate in
three principal markets and several specialty markets. The mattress fabrics
segment supplies the bedding industry. This market includes mattress sets as
well as "top of the bed" (comforters and bedspreads). The upholstery fabrics
segment supplies the residential furniture industry and the commercial furniture
industry, in addition to smaller specialty markets. The residential furniture
market includes upholstered furniture sold to consumers. Products include sofas,
sleep sofas, chairs, motion/recliners, sectionals and occasional furniture
items. Commercial furniture includes upholstered office seating and modular
office systems sold primarily for use in offices (including home offices) and
other institutional settings. Specialty markets supplied by the company include
juvenile furniture (baby car seats and other baby items), hospitality (furniture
used in hotels and other lodging establishments), outdoor furniture,
recreational vehicle seating, automotive aftermarket (slip-on seat covers),
retail fabric stores and specialty yarn. Sales to specialty markets did not
constitute a material part of the company's revenues in fiscal 2003 or 2004. The
major markets into which the company sells products are described below.
Overview of Bedding Industry
According to the International Sleep Products Association (ISPA), the U. S.
wholesale bedding industry accounted for an estimated $5.0 billion in sales in
2003, a 5.8% increase over 2002. The industry is comprised of over 700
manufacturers, and in 2003 the largest four manufacturers, Sealy, Simmons, Serta
and Spring Air, accounted for $3.0 billion in wholesale shipments, or 58.7% of
the total shipments. The bedding industry has averaged approximately 6.0% annual
growth over the past twenty years, with only one year experiencing a decline in
sales volume. It has proven to be a stable and mature industry, and has grown
despite several economic downturns over the past twenty years. This stability
and resistance to economic downturns is due largely to replacement purchases,
which account for approximately 80% of bedding industry sales.
The bedding industry has faced limited competition from imports, due mainly to
1) short lead times demanded by mattress retailers, 2) the limited inventories
carried by retailers, 3) the customized nature of each retailer's product lines,
4) high shipping cost, 5) the relatively low domestic direct labor content in
mattresses and 6) strong brand recognition.
The company believes that several important demographic factors are helping to
support the bedding industry. In particular, the growth of the aging and
affluent segment of the population has a profound impact on the bedding
industry. The increasing size of homes and increase in the number of second
homes also play major roles in the demand for bedding in the United States. In
recent years, there has been an increase in consumer awareness of the health
benefits of sleep, driven by advertising by bedding manufacturers and studies
conducted by the Better Sleep Council. These trends have not only driven total
unit increases, they have also been a factor in the size of mattresses being
sold in the United States. According to ISPA, the queen and king-size mattress
categories combined to represent 46.5% of mattresses sold in 2003, up from 41.6%
of the market in 1999.
While a majority of bedding sales is traditional innerspring bedding, several
specialty bedding producers have posted impressive sales gains in recent years.
Select Comfort, now the nation's fifth largest bedding producer according to
Furniture/Today, is a producer, marketer and retailer of airbeds that
experienced a 32.2% increase in wholesale bedding shipments to $197 million in
2003. The sixth largest bedding producer according to Furniture/Today is
Tempur-Pedic, which had bedding shipments of $188 million in 2003, an 88%
increase over 2002. The specialty bedding segment has provided new growth
opportunities for bedding producers and those companies that supply components,
including fabric, to them.
A key trend in the bedding industry is the continued transition to selling
"one-sided" mattresses versus "two-sided" mattresses, which have been the
industry norm for many years. All of the four largest bedding manufacturers have
initiated this product in the vast majority of their product line. Currently,
most of the other bedding manufacturers are at various stages in the process of
transitioning to the sale of "one-sided" mattresses. While no industry data is
available, the company believes that a majority of the mattresses that are
currently being sold are "one-sided," and that the industry is trending towards
a very high percentage of mattresses sold being "one-sided." Since a "one-sided"
mattress uses 28% to 30% less mattress ticking, the company believes that the
overall industry demand for mattress ticking has been affected by this trend and
will continue to be affected until the transition to "one-sided" mattresses is
substantially complete, which is an estimated to be one year away, based upon
the company's knowledge of its customers.
A product trend within mattress ticking is the increasing popularity of knitted
mattress tickings, as opposed to woven and printed tickings. Knitted ticking is
currently being used on premium mattresses. The company believes knitted ticking
market share will continue to grow for the foreseeable future as these products
are starting to be placed on mattresses at lower retail price points. Since the
company does not manufacture knitted ticking, it began sourcing and marketing a
line of these products in fiscal 2003.
Another key product trend impacting the bedding industry is the focus on
producing flame-resistant material that is designed to be used between the
mattress foam and the mattress fabirc. When this fabric is properly integrated
into a sleep set, the bedding will meet the State of California's new open flame
mattress flammability standard, currently scheduled to go into effect on January
1, 2005. The company has entered into an agreement with a producer of flame
blocking non-woven material to distribute the product to its customers.
Overview of Residential Furniture Industry
According to the American Furniture Manufacturers Association (AFMA), a trade
association, the U.S. residential furniture industry has grown at a compound
annual growth rate of 3.7% over the last 20 years from $11.2 billion in
residential furniture wholesale shipments in 1983 to $23.1 billion in 2003.
However, during the last three years the residential furniture industry has been
negatively impacted by the general economic slowdown, as well as a structural
shift to offshore sourcing, primarily from China, which has led to deflation in
retail furniture prices. While the residential furniture industry recovered 3.5%
in 2002 from a 10.2% decline in 2001, the total level of residential furniture
wholesale shipments declined again in 2003 by 2.8%.
The upholstered furniture sector has been outperforming the wood sector in
recent years. According to the AFMA, upholstered furniture has grown from 40.0%
of total residential furniture wholesale shipments in 1997 to 47.3% in 2003. It
has appeared in recent years that the upholstered furniture segment is less
vulnerable to economic downturns and more responsive to economic recoveries than
the wood sector. The company believes that consumers are more willing to
postpone wooden casegoods purchases in deference to upholstered products, which
receive a higher priority. Furthermore, upholstered products have a shorter
average life, as they are more prone to everyday wear as well as changes in
design trends and home fashion. This phenomenon is apparent from recent
residential furniture industry trends. For example, during 2001, a year in which
residential furniture wholesale shipments declined, the upholstery segment
declined 9.3% while the wood segment decreased 10.9%. Amidst a recovery in the
residential furniture industry in 2002, the upholstery segment grew 10.9%
compared to a 1.8% decrease for the wood sector. In 2003, while total industry
shipments were slightly down, the upholstery segment was flat and wood shipments
were down by 4.4%.
There are several key issues facing the residential furniture industry:
- The sourcing of components and fully assembled furniture from overseas
continues to play a major role in the residential furniture industry,
although the pace of import growth slowed in 2003 relative to the previous
several years. According to Furniture/Today, imports of residential
furniture into the U.S. grew 8.0% to $15.6 billion in 2003 compared to a
gain of 14.3% in 2002. The main source for these imports continues to be
China, which accounted for 43.9% of total U.S. imports in 2003, up from
40.1% in 2002. In 2003, wood casegoods comprised 49.4% of the residential
furniture imports coming into the U.S, while upholstered furniture only
accounted for 16.2% of these imports, most of which was leather furniture.
However, many upholstered furniture manufacturers are now sourcing fabric
and leather from global sources, as well as outsourcing "cut-and-sew kits"
to factories overseas, particularly in China. Fabrics entering the U.S.
from China and other low labor cost countries are resulting in increased
price competition in the upholstery fabric and upholstered furniture
markets. In addition, competition in the U.S. domestic market is likely to
further intensify following the January 1, 2005 expiration of the quotas
imposed under the Uruguay Round Agreement on Textiles and Clothing on
textile and apparel products coming into the U.S.
- Leather upholstered furniture has been gaining market share over the last
ten years. This trend has increased over the last two to three years in
large part because selling prices of leather furniture have been declining
significantly over this time period.
- The residential furniture industry has been consolidating at the
manufacturing level for several years. Furniture/Today reports that the ten
largest residential furniture manufacturers (ranked by dollar value of
shipments in 2003) accounted for 42.2% of the industry's total wholesale
shipments in 2003, which is a significantly higher concentration than the
comparable proportion ten or twenty years ago. The result of this trend is
fewer, but larger, customers for upholstery fabric manufacturers. The
company believes that this consolidation favors larger upholstery fabric
manufacturers capable of supplying a broad range of product choices at the
volumes required by major furniture manufacturers on a timely basis.
- In recent years, several of the nation's larger furniture manufacturers
have opened retail outlets of their own. As top retailers shift more floor
space to private label imports, manufacturers are focused on distributing
their own products.
- The company believes that demographic trends support the outlook for
continued long-term growth in the U.S. residential furniture. In
particular, "baby boomers" (people born between 1946 to 1964) are reaching
their highest earning power and are the most likely group to make a final
upgrade to their home decor. Consumers in these age groups tend to spend
more on home furnishings, and the increasing number of these individuals
favors higher demand for furniture and related home furnishings. Many of
these individuals are purchasing vacation and second homes, as evidenced by
the increasing number of such homes in the U.S. Additionally, the children
of the "baby boomers" are entering their college years and are expected to
drive the next wave of household formation in the U.S. According to the
U.S. Census Bureau, the home ownership rate is currently at an all-time
high in excess of 68%, and the average size of homes in the U.S. continues
to increase, further driving purchases of furniture.
Overview of Commercial Furniture Industry
According to the Business and Institutional Furniture Manufacturer's Association
(BIFMA), a trade association, the commercial furniture market in the U.S.
totaled approximately $8.5 billion in 2003 in wholesale shipments by
manufacturers. This represents a significant decrease from the industry's peak
of $13.3 billion in 2000. From 1990 to 2000, the commercial furniture industry
grew at a compound annual growth rate of 5.3%. However, the commercial furniture
industry is largely affected by economic trends. The commercial furniture
industry declined significantly in 2001 and 2002 in light of economic trends
affecting businesses, which are the ultimate customers in this industry. The
decrease was not as significant in 2003, with the total market declining by 4.3%
over 2002 figures. However, based on recent 2004 BIFMA data, the office
furniture industry appears to be improving, with positive growth in orders and
shipments.
Products
As described above, the company's products include mattress fabrics and
upholstery fabrics, which are the company's identified operating segments.
Mattress Fabrics Segment. The company manufactures and markets mattress fabrics
for sale to bedding manufacturers. Mattress fabrics segment sales constituted
33.4% of consolidated sales in fiscal 2004. The company has emphasized fabrics
and patterns that have broad appeal at prices generally ranging from $1.75 to
$5.00 per yard.
Upholstery Fabrics Segment. The company derives the majority of its revenues
from the sale of upholstery fabrics, primarily to the residential and commercial
(contract) furniture markets. Upholstery fabrics segment sales totaled 66.6% of
consolidated sales for fiscal 2004. The company has emphasized fabrics and
patterns that have broad appeal at "good" and "better" prices, generally ranging
from $3.00 per yard to $8.00 per yard.
The following table indicates the product lines within each segment and
division, and a brief description of their characteristics and identification of
their principal end-use market.
Culp Fabric Categories By Segment and Division
----------------------------------------------
Mattress Fabrics Characteristics Principal Markets
- ---------------- --------------- -----------------
Culp Home Fashions:
Woven jacquards Florals and other intricate designs. Woven Bedding
on complex looms using a variety of
synthetic and natural yarns.
Pigment prints Variety of designs produced economically by Bedding
screen printing pigments onto a variety of
base fabrics, including jacquards, knits,
poly/cotton sheeting and non-wovens.
Upholstery Fabrics
Culp
Decorative Fabrics:
Woven jacquards Elaborate, complex designs such as florals Residential
and tapestries in traditional, transitional furniture
and contemporary styles. Woven on Commercial
intricate looms using a wide variety of furniture
synthetic and natural yarns.
Woven dobbies Fabrics that use straight lines to produce Residential
geometric designs such as plaids, stripes furniture
and solids in traditional and country Commercial
styles. Woven on less complicated looms furniture
using a variety of weaving constructions
and primarily synthetic yarns.
Culp Velvet/ Prints:
Heat-transfer Sharp, intricate designs on flock or Residential
prints jacquard base fabrics. Plush feel furniture
(flocks), deep colors (jacquards) and Juvenile
excellent wearability. Produced by using furniture
heat and pressure to transfer color from
printed paper onto base fabric.
Woven velvets Basic designs such as plaids in traditional Residential
and contemporary styles with a plush feel. furniture
Woven with a short-cut pile using various
weaving methods and synthetic yarns.
Tufted velvets Lower cost production process of velvets in Residential
which synthetic yarns are punched into a furniture
base polyester fabric for texture. Similar
designs as woven velvets.
Suede fabrics Fabrics woven or knitted using microdenier Residential
yarns, which are piece dyed and finished, furniture
usually by sanding. The fabrics are
typically plain or with small jacquard
designs.
================================================================================
The company's products include all major types of coverings, except for leather,
that manufacturers use today for furniture and bedding. The company also markets
fabrics for certain specialty markets, but these do not currently represent a
material portion of the company's business. See "Overview of Industry."
Manufacturing
The company operates eleven (11) manufacturing facilities for the production and
finishing of its upholstery and mattress fabrics. These plants encompass a total
of approximately 2.0 million square feet and include yarn extrusion, spinning,
dyeing and texturizing equipment, narrow and wide-width jacquard looms, dobby
and woven velvet looms, tufting machines, printing equipment for pigment,
heat-transfer printing, fabric finishing equipment and various types of surface
finishing equipment (such as washing, softening and embossing).
The company's woven fabrics, which include jacquards, dobby, and velvet, are
made from various types of synthetic and natural yarn, such as polypropylene,
polyester, acrylic, rayon, nylon or cotton. Yarn is woven into various fabrics
on jacquard, dobby or velvet weaving equipment. Once the weaving is completed,
the fabric can be printed or finished using a variety of processes. The company
currently extrudes and spins a portion of its own needs for yarn and purchases
the remainder from outside suppliers. Culp produces internally a substantial
amount of its needs for spun and chenille yarns.
Tufted velvet fabrics are produced by tufting machines, which insert an acrylic
or polypropylene yarn through a polyester woven base fabric, creating loop pile
surface material that is then sheared to create a velvet surface. Tufted velvet
fabrics are typically lower-cost fabrics utilized in the company's lower-priced
product mix.
The company's printing operations include pigment and heat-transfer methods. The
company also produces its own printed heat-transfer paper, another component of
vertical integration.
Product Design and Styling
Consumer tastes and preferences related to upholstered furniture and bedding
change, although gradually, over time. The use of new fabrics and designs
remains an important consideration for manufacturers to distinguish their
products at retail and to capitalize on changes in preferred colors, patterns
and textures. Culp's success is largely dependent on the company's ability to
market fabrics with appealing designs and patterns. Culp has an extensive staff
of designers and support personnel involved in the design and development of new
patterns and styles. Culp uses computer aided design (CAD) systems in the
development of new fabrics, which assists the company in providing a flexible
design program. These systems have enabled the company's designers to experiment
with new ideas and involve customers more actively in the process. The use of
CAD systems also has supported the company's emphasis on integrating
manufacturing considerations into the early phase of a new design. The company's
designers are located in the Howard L. Dunn, Jr. Design Center to support the
sharing of design ideas and CAD and other technologies. The Design Center has
enhanced the company's merchandising and marketing efforts by providing an
environment in which customers can be shown new products as well as participate
in product development initiatives.
The process of developing new designs involves maintaining an awareness of broad
fashion and color trends both in the United States and internationally. These
concepts are blended with input from the company's customers to develop new
fabric designs and styles. These upholstery fabric designs are introduced by
Culp at major fabric trade conferences that occur twice a year in the United
States (January and July).
The mattress ticking designs are introduced, once annually, during the summer to
fall timeframe. Every other year, the designs are introduced twice during the
year in conjunction with events associated with the International Sleep Products
Association (ISPA). Additionally, the company works closely with its customers,
throughout the year, on new line introductions.
Distribution
Mattress Fabrics Segment
Substantially all of the company's shipments of mattress ticking originate from
its manufacturing facilities in Stokesdale, North Carolina and St. Jerome,
Quebec, Canada.
Upholstery Fabrics Segment
The majority of the company's products are shipped directly from its two
distribution centers at or near manufacturing facilities. This "direct ship"
program is primarily utilized by large manufacturers. Generally, small and
medium-size residential furniture manufacturers use one of the company's three
regional distribution facilities, which have been strategically positioned in
areas that have a high concentration of residential furniture manufacturers -
High Point, North Carolina, Los Angeles, California and Tupelo, Mississippi. The
company closely monitors demand in each distribution territory to decide which
patterns and styles to hold in inventory. These products are generally available
on demand by customers and are usually shipped within 48 hours of receipt of an
order.
Sources and Availability of Raw Materials
Raw materials account for more than half of the company's total production
costs. The company purchases various types of synthetic and natural yarns
(polypropylene, polyester, acrylic, rayon and cotton), synthetic staple fibers
(acrylic, rayon, polyester), various types of greige goods (poly/cotton wovens
and flocks, polyester wovens, poly/rayon and poly/cotton jacquard wovens,
polyester knits, poly/cotton sheeting and non-wovens), polypropylene resins,
latex adhesives, dyes and chemicals from a variety of suppliers. The company is
generally vertically integrated and produces internally a significant portion of
raw materials, such as chenille, pile and other filling yarns, polypropylene
yarns and printed heat-transfer paper. As a result, a large portion of its raw
materials are comprised of more basic commodities such as rayon staple, undyed
yarns, polypropylene resin chips, polyester warp yarns, unprinted heat-transfer
paper and polyester woven substrates. The prices of such materials fluctuate
depending upon current supply and demand conditions and the general rate of
inflation. Many of the company's basic raw materials are petrochemical products
or are produced from such products; and therefore, the company's raw material
costs are sensitive to changes in petrochemical prices, as has been the case
with the recent increase in oil prices. Generally, the company has not had
significant difficulty in obtaining raw materials.
Most of the company's raw materials are available from more than one primary
source, but the company is currently depending primarily on one supplier for
acrylic staple. In fiscal 2004, this supplier of acrylic staple filed for
reorganization under Chapter 11 of the federal bankruptcy laws. While the
actions taken by this supplier have generally not had an adverse effect on
supplies to Culp, the company has identified alternate suppliers.
Seasonality
Mattress Fabrics Segment
The ticking business and the bedding industry in general are slightly seasonal,
with sales being the highest in the company's first and fourth fiscal quarters.
Upholstery Fabrics Segment
The company's upholstery fabrics business is 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 company's
first and third fiscal quarters for the holiday weeks of July 4th and Christmas.
Competition
Competition for the company's products is based primarily on price, design,
quality, timing of delivery and service.
Mattress Fabrics Segment
The mattress ticking market is concentrated in a few relatively large suppliers.
The company believes its principal mattress ticking competitors are Bekaert
Textiles B.V., Blumenthal Print Works, Inc., Burlington Industries and Tietex,
Inc.
Upholstery Fabrics Segment
In spite of the trend toward consolidation in the upholstery fabric market, the
company competes against a large number of producers, ranging from a few large
manufacturers comparable in size to the company to small producers and
converters of fabrics. The company believes its principal domestic upholstery
fabric competitors are Joan Fabrics Corporation (including its Mastercraft
division), Richloom Fabrics, Microfibres, S.T.I. and Quaker Fabric Corporation.
Overseas producers had not historically been a source of significant competition
for the company, but recent trends have shown significant increased competition
in U.S. markets by foreign producers of upholstery fabric, furniture components
and finished upholstery furniture, as well as increased sales in the U.S. of
leather furniture produced overseas (which competes with upholstered furniture
for market share). Foreign manufacturers often are able to produce upholstery
fabric and other components of furniture with significantly lower raw material
and production costs than those of the company and other U.S.-based
manufacturers. The company competes with lower cost foreign goods on the basis
of design, quality, reliability and speed of delivery. In addition, the company
has established an operation in China to facilitate the sourcing (and finishing)
of goods produced in Asia, and the company has other overseas sourcing efforts
underway as well.
Technology
Culp views the proper use of technology as an integral part of an effective and
responsive business. The company employs technology that will help to achieve
higher levels of service to customers and bring operating efficiencies to the
manufacturing process. Some key areas include:
- Use of the Internet has continued to be an important component of the
company's work. CulpLink provides real-time information for the company's
customers, including order status, shipping and invoice documentation,
sales history, and inventory availability.
- Culp has invested in technology to aid the design process. CAD, digital
printing, digital imaging, and electronic interfaces to the production
equipment have allowed significant savings in terms of speed and ease of
development.
- Culp utilizes shop floor systems, including the use of scanners, radio
frequency devices, bar-coding, and process documentation throughout the
company's manufacturing and distribution systems. Inventories and
manufacturing processes are tracked by these systems to provide customer
service and operational management with real time information for better
customer service and a more efficient operation. All of these systems
operate on redundant computer hardware and fiber optic backbones to
effectively minimize downtime to the company's production processes.
Additionally, the company recently moved its major computer systems offsite to
an organization which specializes in system security, long range business
continuity planning, network monitoring and data storage. The goals for this
move were to strengthen system monitoring and security and to enhance the
company's disaster recovery plan.
Environmental and Other Regulations
The company is subject to various federal and state laws and regulations,
including the Occupational Safety and Health Act and federal and state
environmental laws, as well as similar laws governing its manufacturing facility
in Canada, which is sometimes referred to as the Rayonese facility. The company
periodically reviews its compliance with such laws and regulations in an attempt
to minimize the risk of violations.
The company's operations involve a variety of materials and processes that are
subject to environmental regulation. Under current law, environmental liability
can arise from previously owned properties, leased properties and properties
owned by third parties, as well as from properties currently owned and leased by
the company. Environmental liabilities can also be asserted by adjacent
landowners or other third parties in toxic tort litigation.
In addition, under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), and analogous state statutes,
liability can be imposed for the disposal of waste at sites targeted for cleanup
by federal and state regulatory authorities. Liability under CERCLA is strict as
well as joint and several.
The company provides for environmental matters based on information presently
available. Based on this information, the company does not believe that
environmental matters will have a material adverse effect on either the
company's financial condition or results of operations. However, there can be no
assurance that the costs associated with environmental matters will not increase
in the future.
Employees
As of May 2, 2004, the company had approximately 2,300 employees, compared to
approximately 2,500 at the end of fiscal 2003. All of the hourly employees at
the Rayonese facility in Canada (approximately 9% of the company's workforce)
are represented by a local, unaffiliated union. The collective bargaining
agreement for the Rayonese hourly employees was renewed in 2002 and expires on
February 1, 2005. The company is not aware of any efforts to organize any more
of its employees and believes its relations with its employees are good.
Customers and Sales
Mattress Fabrics Segment
During fiscal 2004, 90% of mattress fabrics sales were concentrated among
approximately 75 customers. Major customers include the leading bedding
manufacturers: Sealy, Serta (National Bedding), Simmons, Denver Mattress and
Spring Air (various licensees). The loss of one or more of these customers would
have a material adverse effect on the company. Culp's mattress ticking customers
also include many small and medium-size bedding manufacturers.
In international markets outside North America, Culp sells mattress ticking
primarily to distributors that maintain inventories for resale to bedding
manufacturers.
Upholstery Fabrics Segment
For fiscal 2004, 90% of upholstery fabrics sales were concentrated among
approximately 175 customers. Major customers are leading manufacturers of
upholstered furniture, including Bassett, Furniture Brands International
(Broyhill, Thomasville, and Lane /Action), Berkline, Benchcraft, Flexsteel and
La-Z-Boy (La-Z-Boy Residential, Bauhaus, England, and Clayton Marcus).
Representative customers for the company's fabrics for commercial furniture
include Herman Miller, HON Industries, Global Upholstery and Steelcase. The
company's two largest customers in this segment are La-Z-Boy Incorporated and
Furniture Brands International, Inc., the loss of either of which would have a
material adverse effect on the company. The company's sales to La-Z-Boy
accounted for approximately 13% of the company's total sales in fiscal 2004.
Patrick H. Norton, Chairman of La-Z-Boy, serves on the company's board of
directors.
In international markets, Culp sells upholstery fabrics to distributors that
maintain inventories for resale to furniture manufacturers. In addition, the
company has established an operation in China to facilitate the sourcing (and
finishing) of goods produced in Asia.
The following table sets forth the company's net sales by geographic area by
amount and percentage of total net sales for the three most recent fiscal years.
Net Sales by Geographic Area
----------------------------
(dollars in thousands)
Fiscal 2004 Fiscal 2003 Fiscal 2002
----------- ---------- -----------
United States $282,865 88.8% $299,768 88.3% $329,073 86.0%
North America
(Excluding USA) 26,740 8.4 30,375 8.9 32,033 8.4
Far East and Asia 6,954 2.2 4,926 1.5 10,703 2.8
All other areas 1,557 0.6 4,577 1.3 10,765 2.8
-------- ------ -------- ------ -------- ------
Subtotal (International) 35,251 11.2 39,878 11.7 53,501 14.0
-------- ------ -------- ------ -------- ------
Total $318,116 100.0% $339,646 100.0% $382,574 100.0%
======== ====== ======== ====== ======== ======
For additional segment information, see note 16 in the consolidated financial
statements.
Backlog
Mattress Ticking Segment
The backlog for mattress ticking is not a reliable predictor of future shipments
because the majority of sales are on a just-in-time basis.
Upholstery Fabrics Segment
Because many of the company's upholstery fabric customers have an opportunity to
cancle orders, and because the company makes a significant portion of its
upholstery sales through in-stock positions, it is difficult to predict the
amount of backlog that is "firm." For this reason, the company has reported the
portion of the upholstery fabric backlog from customers (excluding orders to
replenish warehouses) with confirmed shipping dates within five weeks of the end
of the fiscal year. On May 2, 2004, the portion of the upholstery fabric backlog
from customers with confirmed shipping dates prior to June 6, 2004 was $9.6
million, all of which are expected to be filled during the current fiscal year,
as compared to $10.9 million as of the end of fiscal 2003 (for confirmed
shipping dates prior to June 1, 2003).
ITEM 2. PROPERTIES
The company's headquarters are located in High Point, North Carolina, and the
company currently owns or leases eleven (11) active and two (2) inactive
manufacturing facilities, a design center and three (3) regional distribution
facilities. The following is a list of the company's principal administrative,
manufacturing and distribution facilities. The manufacturing facilities and
distribution centers are organized by segment.
Approx.
Total Area Expiration
Location Principal Use (Sq. Ft.) of Lease (1)
- ---------------------------------------- ------------------------------ -------- -------------
o Administrative and Design Facilities:
High Point, North Carolina (2) Corporate headquarters 40,000 2015
Burlington, North Carolina (2) Design center 30,000 Owned
o Mattress Fabrics:
Stokesdale, North Carolina Manufacturing and distribution 220,000 Owned
St. Jerome, Quebec, Canada Manufacturing and distribution 202,500 Owned
o Upholstery Fabrics:
Graham, North Carolina (2) Manufacturing 341,000 Owned
Burlington, North Carolina Manufacturing 302,000 Owned
Pageland, South Carolina Manufacturing 204,000 Owned
Cherryville, North Carolina Manufacturing 135,000 Owned
Shelby, North Carolina Manufacturing 101,000 Owned
Anderson, South Carolina Manufacturing 99,000 Owned
Lincolnton, North Carolina Manufacturing 78,000 Owned
Burlington, North Carolina Manufacturing and distribution 275,000 2006
Burlington, North Carolina Distribution and yarn warehouse 112,500 Owned
High Point, North Carolina Regional distribution 65,000 Monthly
Tupelo, Mississippi Regional distribution 57,000 2018
Los Angeles, California Regional distribution 33,000 2007
Shanghai, China Manufacturing 65,000 2006
Chattanooga, Tennessee (3) Inactive 290,000 2008
Lumberton, North Carolina (4) Inactive 107,000 Owned
___________________________________________
(1) Includes all options to renew, except for inactive properties
(2) Properties are used jointly by Upholstery Fabrics and Mattress Fabrics
(3) The company has a sublease agreement for a portion of this property
(4) The company is seeking to sell this property
The company believes that its facilities are in good condition, well maintained
and suitable and adequate for present utilization. In the mattress fabrics
segment, the company has manufacturing capacity to produce approximately 5.0%
more products (measured in yards) than it manufactured in fiscal 2004. In the
upholstery fabrics segment, the company has manufacturing capacity to produce
approximately 22.0% more products (measured in yards) than it sold during fiscal
2004. In addition, the company has the ability to source additional mattress
ticking and upholstery fabrics from outside suppliers, further increasing its
ultimate output of finished goods.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the company, or its subsidiaries,
is a party or of which any of their property is the subject that are required to
be disclosed under this item.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter ended May 2, 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Registrar and Transfer Agent
EquiServe Trust Company, N.A.
Post Office Box 43023
Providence, Rhode Island 02940-3023
(800) 633-4236
(816) 843-4293 (Foreign shareholders)
www.equiserve.com
Stock Listing
Culp, Inc. common stock is traded on the New York Stock Exchange under the
symbol CFI. As of May 2, 2004, Culp, Inc. had approximately 1,800 shareholders
based on the number of holders of record and an estimate of individual
participants represented by security position listings.
Analyst Coverage
These analysts cover Culp, Inc.:
BB&T Capital Markets - Joel Havard
Morgan Keegan - Laura Champine, CFA
Raymond, James & Associates - Budd Bugatch, CFA
Sidoti & Company, LLC - Todd A. Schwartzman, CFA
Value Line - Craig Sirois
See Item 6, Selected Financial Data, for market and dividend information
regarding the company's common stock.
ITEM 6 - SELECTED ANNUAL FINANCIAL DATA
percent five-year
fiscal fiscal fiscal fiscal fiscal change growth
(amounts in thousands, except per share amounts) 2004 2003 2002 2001 2000 2004/2003 rate (4)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 318,116 339,646 382,574 410,609 488,079 (6.3) % (8.0)
cost of sales (6) 259,794 282,073 319,717 354,622 403,414 (7.9) (8.6)
- ----------------------------------------------------------------------------------------------------------------------------------
gross profit 58,322 57,573 62,857 55,987 84,665 1.3 (5.2)
S G & A expenses 41,019 40,040 48,059 50,366 59,935 2.4 (7.3)
goodwill amortization 0 0 1,395 1,395 1,395 0 (100.0)
restructuring (credit) expense and asset impairment (6) (1,047) 12,981 10,368 5,625 0 (108.1) 100.0
- ----------------------------------------------------------------------------------------------------------------------------------
income (loss) from operations 18,350 4,552 3,035 (1,399) 23,335 303.1 4.4
interest expense 5,528 6,636 7,907 9,114 9,521 (16.7) (10.5)
interest income (376) (596) (176) (46) (51) (36.9) 14.0
early extinguishment of debt 1,672 0 0 0 0 100.0 100.0
other expense 750 805 1,444 1,941 171 (6.8) 8.7
- ----------------------------------------------------------------------------------------------------------------------------------
income (loss) before income taxes 10,776 (2,293) (6,140) (12,408) 13,694 570.0 17.3
income taxes 3,556 (1,557) (2,700) (4,097) 4,314 328.4 24.1
- ----------------------------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of
accounting change 7,220 (736) (3,440) (8,311) 9,380 1,081.0 14.6
cumulative effect of accounting change, net
of income tax (7) 0 (24,151) 0 0 0 100.0 0
- ----------------------------------------------------------------------------------------------------------------------------------
net income (loss) $ 7,220 (24,887) (3,440) (8,311) 9,380 129.0 14.6
- ----------------------------------------------------------------------------------------------------------------------------------
depreciation $ 13,642 13,990 17,274 19,391 19,462 (2.5) (6.0)
cash dividends 0 0 0 1,177 1,611 0 (100.0)
- ----------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,525 11,462 11,230 11,210 11,580 0.5 (2.2)
weighted average shares outstanding,
assuming dilution 11,777 11,462 11,230 11,210 11,681 2.7 (2.1)
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
basic income (loss) per share:
income (loss) before cumulative effect
of accounting change $ 0.63 (0.06) (0.31) (0.74) 0.81 1,150.0 17.6
cumulative effect of accounting change (7) 0 (2.11) 0 0 0 100.0 0.0
- ----------------------------------------------------------------------------------------------------------------------------------
net income (loss) $ 0.63 (2.17) (0.31) (0.74) 0.81 129.0 17.6
- ----------------------------------------------------------------------------------------------------------------------------------
diluted income (loss) per share:
income (loss) before cumulative effect
of accounting change $ 0.61 (0.06) (0.31) (0.74) 0.81 1,116.7 16.9
cumulative effect of accounting change (7) 0 (2.11) 0 0 0 100.0 0.0
- ----------------------------------------------------------------------------------------------------------------------------------
net income (loss) $ 0.61 (2.17) (0.31) (0.74) 0.81 128.1 16.9
- ----------------------------------------------------------------------------------------------------------------------------------
cash dividends $ 0.00 0.00 0.00 0.105 0.14 0.0 (100.0)
book value 8.95 8.33 10.52 10.85 11.57 7.4 (3.4)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (5) $ 64,441 61,937 76,938 90,475 112,407 4.0 % (10.4)
property, plant and equipment, net 77,770 84,962 89,772 112,322 126,407 (8.5) (8.8)
total assets 193,728 218,153 287,713 289,580 343,980 (11.2) (10.2)
capital expenditures 6,747 12,229 4,729 8,050 22,559 (44.8) (8.8)
long-term debt (1) 51,030 76,500 108,484 111,656 137,486 (33.3) (18.1)
shareholders' equity 103,391 95,765 119,065 121,802 129,640 8.0 (4.2)
capital employed (3) 154,421 172,265 227,549 233,458 267,126 (10.4) (10.4)
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA
gross profit margin 18.3% 17.0% 16.4% 13.6% 17.3%
operating income (loss) margin 5.8 1.3 0.8 (0.3) 4.8
net income (loss) margin before cumulative
effect of accounting change 2.3 (0.2) (0.9) (2.0) 1.9
effective income tax rate 33.0 67.9 44.0 33.0 31.5
long-term debt-to-total capital employed ratio (1) 33.0 44.4 47.7 47.8 51.5
operating working capital turnover (5) 5.2 5.0 4.5 4.0 4.4
days sales in receivables 35 35 41 51 49
inventory turnover 5.6 5.3 5.4 5.3 5.4
- ---------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 12.28 17.89 10.74 7.25 11.06
low 5.05 3.75 2.12 1.63 5.00
close 8.61 5.00 9.30 4.95 5.81
P/E ratio (2)
high (4) 20.1 N.M. N.M. N.M. 13.7
low (4) 8.3 N.M. N.M. N.M. 6.2
daily average trading volume (shares) 55.9 92.3 24.9 16.2 15.8
- -----------------------------------------------------------------------------------------------------
(1) Long-term debt includes long- and short-term debt
(2) P/E ratios based on trailing 12-month net income (loss) per share
(3) Capital employed includes long-term debt and shareholders' equity
(4) N.M - Not meaningful
(5) Operating working capital for this calculation is accounts receivable,
inventories and accounts payable
(6) The company incurred restructuring and related charges in fiscal 2003, 2002
and 2001. See note 2 of the company's consolidated financial statements
(7) See note 19 of the company's consolidated financial statements
ITEM 7. 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 attached
thereto.
Overview
Management believes that Culp is one of the two largest producers of mattress
fabrics (known as mattress ticking) in North America, as measured by total
sales, and one of the three largest marketers of upholstery fabrics for
furniture in North America, again measured by total sales. The company's fabrics
are used primarily in the production of bedding products and residential and
commercial upholstered furniture, including sofas, recliners, chairs, love
seats, sectionals, sofa-beds, office seating and mattress sets. Although Culp
markets fabrics at most price levels, the company emphasizes fabrics that have
broad appeal in the "good" and "better" priced categories of furniture and
bedding.
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. Fiscal 2004 included 53 weeks. Fiscal years 2003 and 2002
included 52 weeks. The company's operating segments are mattress fabrics and
upholstery fabrics, with related divisions organized within those segments. In
mattress fabrics, Culp Home Fashions markets a broad array of fabrics used by
bedding manufacturers. In upholstery fabrics, Culp Decorative Fabrics markets
jacquard and dobby woven fabrics for residential and commercial furniture and
yarn for use primarily by the company, with some outside sales. Culp
Velvets/Prints markets velvet and printed fabrics used primarily for residential
furniture.
Results of Operations
The following table sets forth certain items in the company's consolidated
statements of income (loss) as a percentage of net sales.
2004 2003 2002
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 81.7 83.0 83.5
------ ------ ------
Gross profit 18.3 17.0 16.5
Selling, general and administrative
expenses 12.9 11.8 12.6
Goodwill amortization 0.0 0.0 0.4
Restructuring (credit) expense and asset
impairments (0.3) 3.8 2.7
------ ------ ------
Income from operations 5.8 1.3 0.8
Interest expense, net 1.6 1.8 2.1
Early extinguishment of debt 0.5 0.0 0.0
Other expense 0.2 0.2 0.4
------ ------ ------
Income (loss) before income taxes 3.4 (0.7) (1.7)
Income taxes * 33.0 67.9 44.0
------ ------ ------
Income (loss) before cumulative effect
of accounting change 2.3% (0.2)% (0.9)%
====== ====== ======
* Calculated as a percent of income (loss) before income taxes
2004 Compared with 2003
The company's net sales for fiscal 2004 decreased 6.3% to $318.1 million; and
the company reported net income of $7.2 million, or $0.61 per share diluted,
versus a net loss before cumulative effect of accounting change of $736,000, or
$0.06 per share diluted, a year ago. Including the cumulative effect of
accounting change, the company reported a loss of $2.17 per share for fiscal
2003. Restructuring credits of $701,000, net of tax (or $0.06 per share), and an
early extinguishment of debt charge of $1.1 million, net of tax (or $0.10 per
share) were included in net income for fiscal 2004. In addition, restructuring
and related charges and credits of $9.7 million, net of tax (or $0.85 per share)
were included in net loss for fiscal 2003.
The company reported substantial improvement in its consolidated balance sheet
by reducing long-term debt by $25.5 million during fiscal 2004, and ended the
year with $14.6 million in cash and cash equivalents.
Mattress Fabrics Segment
Net Sales. Mattress ticking sales for fiscal 2004 increased $6.7 million, or
6.7%, to $106.3 million from $99.7 million in fiscal 2003, due principally to
overall improved industry demand and continued gains with key customers. The
6.7% fiscal year sales gain in this segment is especially noteworthy because it
occurred during the bedding industry's transition to selling predominantly
one-sided mattresses, which utilize approximately 28% to 30% less mattress
ticking. This transition at retail began in late calendar year 2002 and is
expected to continue through early calendar year 2005.
Mattress ticking yards sold during fiscal 2004 were 43.0 million compared with
39.9 million yards in the previous year, an increase of 7.8%. The average
selling price was $2.45 per yard for fiscal 2004, compared to $2.48 per yard in
the same period last year. This slight reduction in average selling price was
due primarily to greater participation in cash discount terms.
Gross Profit. For fiscal 2004, the mattress fabric segment reported gross profit
dollars and margins of $23.4 million and 22.0%, respectively, compared with
$22.8 million and 22.9% for fiscal 2003. The loss in margin, which was due to a
lower average sales price, was offset by improved operating efficiencies.
Upholstery Fabrics Segment
Net Sales. Upholstery fabric sales for fiscal 2004 decreased $28.2 million, or
11.7%, to $211.8 million from $240.0 million in fiscal 2003, primarily
reflecting a decline in sales in the Culp Decorative Fabrics (CDF) division
related to consumer preference for leather and competition from imported
fabrics, including cut and sewn kits. Management continues to monitor and assess
sales trends in this division. If sales declines continue, management may need
to take further actions to adjust cost structures and capacity, in addition to
those taken in recent years.
Upholstery fabric yards sold during fiscal 2004 were 49.1 million versus 57.7
million in fiscal 2003, a decline of 14.9%. Average selling price was $4.19 per
yard for fiscal 2004 compared with $4.04 per yard last year, an increase of
3.7%, due primarily to higher average selling prices in the Culp Decorative
Fabrics division.
Gross Profit. In spite of weak furniture demand and increased competition from
imported fabrics, the upholstery fabric segment experienced a slight improvement
in gross profit dollars and a more significant improvement in gross margin.
Gross profit for fiscal 2004 was $34.9 million, or 16.5%, versus $34.7 million,
or 14.5%, for fiscal 2003. The increase in gross profit margins primarily
reflects significant gains in manufacturing operating efficiencies within the
CDF division.
Offshore Upholstery Fabric Sourcing
The company has undertaken several initiatives to source and market upholstery
fabrics produced internationally, primarily in Asia. These measures are part of
the company's continuing efforts to meet consumer preferences for certain types
of fabrics, as well as to serve the growing segment of the company's customer
base that is establishing or expanding furniture production in international
areas. In fiscal 2004, the company sourced 7.5% of its upholstery fabrics
offshore, a figure that nearly tripled from 2.6% for fiscal 2002. During the
fourth quarter of fiscal 2004, 11.1% of the company's upholstery fabrics were
sourced outside the United States. The growth in offshore sourcing is a trend
that is expected to continue.
A major component of the company's offshore sourcing effort is its China
operation, which was announced in March 2003 and began operations during the
fourth quarter of fiscal 2004. This initiative involves a strategy to link the
company's existing customer relationships, design expertise and production
technology with low-cost fabric manufacturing in China, while continuing to
maintain high quality standards. The company has leased and upfitted a 65,000
square foot facility in the Shanghai region of China, where fabrics sourced in
Asia will be inspected and tested to assure compliance with the company's
quality standards before shipment to customers. In most cases, additional
value-added finishing steps are applied to the fabrics in China before shipment.
Incoming fabric inspection, testing and finishing operations began during the
fourth quarter. As expected, the company has experienced moderate operating
losses in its China operations in fiscal 2004, and some level of operating loss
may continue until some time in fiscal 2005.
Other Corporate Expenses
Selling, General and Administrative Expenses. SG&A expenses were $41.0 million
for fiscal 2004 and increased $1.0 million, or 2.4%, from fiscal 2003. As a
percent of net sales, SG&A expenses increased to 12.9% from 11.8% the previous
year. This increase over the prior year was due primarily to higher professional
fees coupled with lower sales. Additionally, SG&A expenses in fiscal 2003
included a credit to bad debt expense in the amount of $571,000 due to a
significant decrease in past due receivable balances.
Restructuring (Credit) Expense. The $1.0 million restructuring credit represents
the adjustment of accrued employee benefit and other plant closing costs related
to the shutdown of the Chattanooga and Lumberton operations. See additional
discussion of restructuring activity in the "2003 Compared with 2002,
Restructuring Actions" section below.
Interest Expense. Interest expense for fiscal 2004 declined to $5.5 million from
$6.6 million due to significantly lower borrowings outstanding.
Interest Income. Interest income decreased to $376,000 from $596,000 due to
lower interest rates earned in fiscal 2004 and lower invested balances.
Early Extinguishment of Debt. The $1.7 million charge represents premium and
fees paid to reduce the $75 million term loan balance. See "Financing" for
additional discussion.
Other Expense. Other expense for the fiscal 2004 totaled $750,000, compared with
$805,000 in the prior year. The decrease was principally due to lower debt issue
amortization expenses.
Income Taxes. The effective tax rate (taxes as a percentage of pretax income
(loss)) for fiscal 2004 was 33.0% compared with 67.9% for fiscal 2003. The
higher rate for the prior period reflects the increased tax benefits related to
the company's loss in the U.S. resulting from the restructuring charges recorded
in the second quarter of fiscal 2003.
2003 Compared with 2002
Restructuring Actions
The financial results for fiscal 2003 include a total of $15.9 million in
restructuring and related charges. As reflected in the consolidated financial
statements for fiscal 2003, restructuring and related charges were recorded as
$13.0 million in the line item "restructuring expense" and $2.9 million in "cost
of sales," reducing net income by $9.7 million, net of taxes (or $0.85 per
share). The $15.9 million is made up of the following: (1) $12.1 million of
restructuring expenses related to the Culp Decorative Fabrics ("CDF") division,
the largest items of which are lease termination expenses and personnel costs;
(2) $2.9 million of "restructuring related" costs for CDF, which include
inventory mark-downs and equipment moving expense (charged to "cost of sales");
and (3) $1.3 million of restructuring expenses related to further write-downs of
equipment in connection with the exit from the wet printed flock business by the
Culp Velvets/Prints ("CVP") division, offset by a restructuring credit of
$354,000 related to employee benefit and plant security costs. The additional
write-down of equipment, which is a non cash item, was recorded to more closely
estimate the current market value of this equipment, which continued to
deteriorate after April 2002, the date of the original write-down. Of the
charges related to CDF, approximately $4.1 million are non-cash items, which
relate to write-downs of equipment and inventory mark-downs, while the remaining
$10.9 million relates to cash expenditures.
Fiscal 2003 CDF Restructuring. The restructuring and related charges for CDF
reflect the restructuring initiative announced in August 2002. The objectives of
this initiative were to lower manufacturing costs, simplify the dobby fabric
upholstery line, increase asset utilization and enhance the division's
manufacturing competitive position. This restructuring plan principally involved
(1) consolidation of the division's weaving, finishing, yarn making and
distribution operations by closing the facility located in Chattanooga,
Tennessee and integrating these functions into CDF's Pageland, South Carolina,
Graham, North Carolina and Burlington, North Carolina plants; (2) a significant
reduction in the number of stock keeping units (SKUs) offered in the dobby
product line, representing about 70% of the finished goods SKUs (but only 10% of
sales); and (3) a net reduction in workforce of approximately 300 positions.
Exit of Wet Printed Flock Product Line. During March 2002, the company announced
that it was evaluating strategic alternatives for the capital invested in its
wet printed flock upholstery fabrics product line. Management took this action
because of the significant decline in sales and profitability of wet printed
flocks in recent years, a decline related principally to the strength of the
U.S. dollar relative to foreign currencies as well as a shift in consumer
preferences to other styles of upholstery fabrics. In April 2002, management
approved a plan to exit the wet printed flock upholstery fabric business and has
been actively seeking to sell the assets related to this product line. The exit
plan involved closing a printing facility and flocking operation within the Culp
Velvets/Prints division, a reduction in related selling and administrative
expenses, and termination of 86 employees. The company also recognized certain
inventory write-downs related to this product line. The total charge from the
exit plan and inventory write-down was $9.7 million, of which approximately $8.2
million represented non-cash items, consisting of a $7.6 million write-down of
property, plant and equipment and a $619,000 write-down of inventory. The
company recorded the total charge in the fourth quarter of fiscal 2002. Of this
total, $9.1 million was recorded in the line item "restructuring expense" and
$619,000, related to the inventory write-downs, was recorded in "cost of sales,"
reducing net income by $5.8 million, net of taxes (or $0.51 per share). For
fiscal 2003, additional restructuring charges related to wet printed flocks were
recorded as explained earlier in this report. During the fiscal year ended April
28, 2002, sales of wet printed flocks contributed $17.1 million, or 4.5%, of the
company's total sales and resulted in an operating loss of $2.1 million. The
company estimates that the net loss attributable to these operations on an
after-tax basis was approximately $0.12 per share during fiscal 2002.
Other Restructuring Actions. During fiscal 2001 and continuing into fiscal 2002,
the company undertook a restructuring plan in its upholstery fabric segment
intended to lower operating expenses, increase manufacturing utilization, raise
productivity and position the company to operate profitably on a lower level of
sales. The plan involved (1) the consolidation of certain fabric manufacturing
capacity within the Culp Decorative Fabrics (CDF) division, (2) closing one of
the company's four yarn manufacturing plants within Culp Yarn, (3) an extensive
reduction in selling, general and administrative expenses including the
termination of 110 employees and (4) a comprehensive stock keeping unit (SKU)
reduction initiative related to finished goods and raw materials in CDF.
Additionally, the plan included consolidation of the CDF design operation into
the company's Design Center and the implementation of a common set of raw
material components for CDF. The company also recognized certain inventory
write-downs related to the closed facilities as part of this initiative. The
total charge from the restructuring, cost reduction and inventory write-down
initiatives was $9.9 million, about $3.6 million of which represented non-cash
items. In fiscal 2002 the company recognized $2.5 million of restructuring and
related charges recorded as $1.3 million in the line item "restructuring
expense" and $1.2 million in "cost of sales." These restructuring and related
charges reduced net income by $1.5 million, net of taxes (or $0.14 per share).
The costs reflected in "cost of sales" were principally related to the
relocation of manufacturing equipment. Due to this restructuring plan, the
company has realized annualized reductions of at least $14 million in fixed
manufacturing costs and SG&A expenses.
Fiscal 2003 vs. 2002 - Overview
The company's net sales for fiscal 2003 decreased 11.2% to $339.6 million as
compared with fiscal 2002; and the company reported a net loss before cumulative
effect of accounting change of $736,000, or $0.06 per share diluted, versus a
net loss $3.4 million, or $0.31 share diluted for fiscal 2002. Including the
cumulative effect of accounting change, the company reported a loss of $2.17 per
share for fiscal 2003. Restructuring and related charges and credits of $9.7
million, net of tax (or $0.85 per share) and $7.5 million, net of tax (or $0.66
per share) were included in net loss for fiscal 2003 and fiscal 2002,
respectively.
The company reported substantial improvement in its consolidated balance sheet
by reducing long-term debt by $32 million during fiscal 2003 and ended the year
with $24.4 million in cash and cash equivalents and short-term investments.
As of April 29, 2002, Culp adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." As a result, the company recorded during the first quarter of fiscal
2003 a non-operating non-cash goodwill impairment charge of $37.6 million ($24.2
million net of taxes of $13.4 million), or $2.11 per share diluted, related to
the goodwill associated with the Culp Decorative Fabrics division.
Mattress Fabrics Segment
Net Sales. Mattress ticking sales for fiscal 2003 decreased 5.5% to $99.6
million. Sales to U.S. bedding manufacturers fell 7.2% to $85.5 million, while
sales to international customers increased by 6.8% to $14.1 million. The overall
sales decrease was principally due to the weakness in consumer demand for
mattresses. Additional factors that could have affected ticking demand for the
company's products from bedding manufacturers are: (1) the gradual shift by many
customers to "one-sided" mattresses, which generally require one-third less
mattress ticking and (2) a growing consumer preference at the higher end of the
bedding market for knitted tickings (which the company does not manufacture)
rather than woven or printed tickings (although the company has begun to source
knitted tickings from an outside supplier).
Gross Profit. For fiscal 2003, the mattress fabric segment reported gross profit
dollars and margins of $22.8 million and 22.9%, respectively, compared with
$29.2 million and 27.7 % for fiscal 2002. The principal reasons for the decline
were (1) lower sales volume and reduced production schedules, which resulted in
less absorption of fixed costs; (2) pricing pressures related to the overall
competitive situation in the bedding industry; and (3) the high cost of a
European sourcing agreement. Culp Home Fashions entered into an agreement with a
European supplier in October 2001 as part of the termination of a long-term
supply relationship. The agreement required, among other things, that the
company maintain a certain level of weekly purchases through the end of the
second quarter of fiscal 2003. Consequently, during the first and second
quarters of fiscal 2003, the company was required to source products from this
supplier that were significantly more expensive than products manufactured at
the company's U.S. and Canadian plants in order to meet the agreement's minimum
purchase levels. This supply agreement was concluded on October 31, 2002.
Upholstery Fabrics Segment
Net Sales. Upholstery fabric sales for fiscal 2003 decreased 13.4% to $240.1
million. Domestic upholstery fabric sales decreased $22.7 million, or 9.6%, to
$214.3 million, due primarily to overall weakness in consumer demand for
upholstered furniture, and other factors discussed below. International sales
decreased 36.0% to $25.8 million, due primarily to the exiting of the wet
printed flock fabric business in April 2002.
In addition to the overall softness in demand during fiscal 2003, the sales
decrease in upholstery fabrics was attributable to the company's strategy to
focus on improving the profitability of its sales mix by reducing or eliminating
products generating little or no profit. In the Culp Velvets/Prints division,
the company discontinued its unprofitable wet printed flock business at the end
of fiscal 2002. This product line produced annual sales in fiscal 2002 of
approximately $17.0 million with approximately $2.0 million in operating losses.
The company believes upholstery fabric sales were also impacted in fiscal 2003
by (1) an increasing market share of leather furniture being sold in the U.S.;
and (2) an increase in imported fabrics, both in "piece goods" and "cut and sewn
kits."
Gross Profit. In spite of weak furniture demand and the operational disruption
in connection with the fiscal 2003 CDF restructuring, the upholstery fabric
segment improved its gross profit dollars and margins in fiscal 2003. Gross
profit for fiscal 2003 was $34.7 million, or 14.5%, versus $33.6 million, or
12.1%, for fiscal 2002. Restructuring related charges of $2.9 million and $1.8
million were included in gross profit for fiscal 2003 and fiscal 2002,
respectively. The key factors behind this improvement were (1) a more profitable
sales mix; (2) the elimination of losses related to the wet printed flock
business; (3) the increasing productivity benefits from the CDF 2001
restructuring; and (4) the fixed cost reduction benefits from the closing of the
Chattanooga plant as part of the fiscal 2003 CDF restructuring.
Other Corporate Expenses
Selling, General and Administrative Expenses. SG&A expenses were $40.0 million
for fiscal 2003 and decreased $8.0 million, or 16.7%, from fiscal 2002. As a
percent of net sales, SG&A expenses decreased to 11.8% from 12.6% for fiscal
2002. SG&A expenses for fiscal 2003 included a credit to bad debt expense in the
amount of $571,000 due to a significant decrease in past due receivable
balances. This amount compares with bad debt expense of $4.2 million for fiscal
2002. Additionally, SG&A expenses for fiscal 2003 were lower due to reduced
sampling charges and reduced sales expenses due to lower sales volume.
Goodwill Amortization. At the beginning of fiscal 2003, the company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that
goodwill no longer be amortized.
Interest Expense. Interest expense for fiscal 2003 declined to $6.6 million from
$7.9 million for fiscal 2002 due to significantly lower borrowings outstanding,
offset somewhat by a $750,000 increase in interest expense associated with the
company's $75 million term loan, as a result of an amendment in February 2002.
Interest Income. Interest income for fiscal 2003 increased to $596,000 from
$176,000 for fiscal 2002 due to significantly higher average invested cash for
the year as compared with the average for fiscal 2002.
Other Expense. Other expense for the fiscal 2003 totaled $805,000, compared with
$1.4 million for fiscal 2002. The decrease was principally due to lower legal
and debt issue expenses.
Income Taxes. The effective tax rate for fiscal 2003 was 67.9% compared with
44.0% for fiscal 2002. The higher rate on the pretax loss in each period
reflects the benefit from a reduction in estimated accruals as well as a lower
proportion of earnings in fiscal 2003 from the company's Canadian subsidiary
that is taxed at a lower effective rate.
Handling Costs
The company records warehousing costs in Selling, General & Administrative
expenses. These costs were $4.6 million, $4.9 million and $5.0 million in fiscal
2004, fiscal 2003 and fiscal 2002, respectively. Warehousing costs include the
operating expenses of the company's various finished goods distribution centers,
such as personnel costs, utilities, building rent and material handling
equipment lease expense. Had these costs been included in cost of sales, gross
profit would have been $53.7 million, or 16.8% in fiscal 2004, $52.7 million, or
15.5% in fiscal 2003 and $57.9 million, or 15.1% in fiscal 2002.
Liquidity and Capital Resources
The company's sources of liquidity include cash, cash equivalents, cash flow
from operations and amounts available under its revolving credit line. These
sources have been adequate for day-to-day operating purposes and capital
expenditures. The company expects these sources of liquidity to continue to be
adequate for the foreseeable future. Cash, cash equivalents and short-term
investments as of May 2, 2004 decreased to $14.6 million from $24.4 million at
the end of fiscal 2003, reflecting cash flow from operations of $25.4 million
for fiscal 2004, proceeds from the sale of short-term investments of $10.0
million, capital expenditures of $6.0 million, payments on vendor-financed
capital expenditures of $3.9 million, debt repayment of $25.5 million and stock
issuance from the exercise of stock options of $.2 million. Cash flow from
operations totaled $25.4 million for fiscal 2004, $31.1 million for fiscal 2003
and $42.2 million for fiscal 2002, for a three-year total of $98.7 million.
Working Capital
Accounts receivable as of May 2, 2004 decreased 4.8% from the year-earlier
level, principally due to lower sales volume. Days sales outstanding totaled 33
days at May 2, 2004, the same as for the same period last fiscal year.
Inventories at the close of the fourth quarter decreased 1.0% from a year ago.
Inventory turns for the fourth quarter were 5.5 versus 5.7 for the year-earlier
period. Operating working capital (comprised of accounts receivable, inventories
and trade accounts payable) was $64.4 million at May 2, 2004, up from $61.9
million a year ago.
Financing Arrangements
Strengthening the consolidated balance sheet was an important focus for the
company in fiscal 2004. During the third quarter of fiscal 2004, the company
made a $25.0 million prepayment on its $75.0 million of outstanding senior
notes. As part of the transaction, the company negotiated a five percent, or
$1.25 million, premium to be paid to the current note holders for the prepayment
of this principal amount. This premium amount, along with other related
transaction costs, resulted in a charge of $1.7 million, or $0.10 per share, in
the third quarter of fiscal 2004. As a result of this prepayment, the company
will realize annualized savings of approximately $1.7 million, or $0.09 per
share, in net interest expense in each of the next two years, and a declining
amount over the reminder of the notes' term until 2010. In addition, the
company's long-term debt to capital ratio improved to 33.0% at May 2, 2004
compared with 44.4% at the end of fiscal 2003. During the past four years, the
company has generated sufficient cash flow from operations to reduce long-term
debt by $86.0 million.
The company's remaining $51.0 million in long-term debt is unsecured and is
comprised of $50 million in outstanding senior notes from several insurance
companies, with a fixed interest rate of 7.76%, and a $1.0 million, non-interest
bearing term loan with the Canadian government. Additionally, the company has a
$15.0 million revolving credit line with a bank, including letters of credit up
to $2.5 million. Borrowings under the credit facility generally bear interest at
the London Interbank Offered Rate plus an adjustable margin based on the
company's debt/EBITDA ratio, as defined by the agreement. As of May 2, 2004,
there were $1.4 million in outstanding letters of credit in support of inventory
purchases, and no borrowings outstanding under the agreement. The bank agreement
expires in August 2004. The first scheduled principal payment on the $50 million
senior notes is due March 2006 in the amount of $7.5 million. The Canadian
government loan is repaid in annual installments of approximately $500,000 per
year. The company was in compliance with all financial covenants in its loan
agreements as of May 2, 2004.
Commitments
The following table summarizes the company's contractual payment obligations and
commitments (in thousands):
2005 2006 2007 2008 2009 Thereafter Total
- -------------------------------------------------------------------------------
Capital expenditure
Commitments $ 4,724 $ - $ - $ - $ - $ - $ 4,724
Accounts payable -
capital expenditures 1,816 69 - - - - 1,885
Operating leases 4,753 3,265 2,067 1,217 235 1 11,538
Long-term debt 528 8,062 7,535 19,835 7,535 7,535 51,030
- --------------------------------------------------------------------------------
Total $11,821 $11,396 $9,602 $21,052 $7,770 $7,536 $69,177
- --------------------------------------------------------------------------------
Note: Payment Obligations by Fiscal Year Ending April
Capital Expenditures
Capital spending for fiscal 2004 was $6.7 million. This compares with $12.2
million in fiscal 2003. The larger projects for fiscal 2004 included
approximately $3.0 million for manufacturing equipment and leasehold
improvements related to the company's China operation. Depreciation expense for
fiscal 2004 was $13.6 million. For fiscal 2005, the company's capital
expenditure budget is $9.0 million, of which $5.7 million is related to the
company's purchase and renovation of a new corporate headquarters building.
Depreciation expense for fiscal 2005 is estimated to be comparable with fiscal
2004.
Inflation
The cost of certain of the company's raw materials, principally fibers from
petroleum derivatives, and utility/energy costs, have increased during the past
few months due to rising oil prices; but overall operating expenses are
remaining generally stable. Factors that reasonably can be expected to influence
margins in the future include changes in raw material prices, trends in other
operating costs and overall competitive conditions.
Critical Accounting Policies
U.S. generally accepted accounting principles require the company to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters that are inherently
uncertain, and as a result actual results could differ significantly from those
estimates. Due to the estimation processes involved, management considers the
following summarized accounting policies and their application to be critical to
understanding the company's business operations, financial condition and results
of operations.
Accounts Receivable - Allowance for Doubtful Accounts. Substantially all of the
company's accounts receivable are due from residential and commercial furniture
and bedding manufacturers. Ownership of these manufacturers is increasingly
concentrated and certain bedding manufacturers have a high degree of leverage.
As of May 2, 2004, accounts receivable from furniture manufacturers totaled
approximately $22.8 million and from bedding manufacturers approximately $10.3
million. Approximately $5.8 million of the company's total accounts receivable
was due from international customers. Additionally, as of May 2, 2004, the
aggregate accounts receivable balance of the company's ten largest customers was
$12.8 million, or 38.8% of trade accounts receivable.
The company continuously performs credit evaluations of its customers,
considering numerous inputs including customers' financial position, past
payment history, cash flows and management capability; historical loss
experience; and economic conditions and prospects. Once evaluated, each customer
is assigned a credit grade. Credit grades are adjusted as warranted. While
management believes that adequate allowances for doubtful accounts have been
provided in the consolidated financial statements, it is possible that the
company could experience additional unexpected credit losses.
Inventory Valuation. The company operates as a "make-to-order" and
"make-to-stock" business. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
gradual shifts in consumer preferences expose the company to write-downs of
inventory.
Management continually examines inventory to determine if there are indicators
that the carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory write-downs is the
age of the inventory. As a result, the company provides inventory valuation
write-downs based upon set percentages for inventory aging categories, generally
using six, nine and twelve month categories. While management believes that
adequate write-downs for excess and obsolete inventory have been made in the
consolidated financial statements, significant unanticipated changes in demand
or changes in consumer tastes and preferences could result in additional excess
and obsolete inventory in the future.
Long-lived Assets. The company adopted the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective April
29, 2002. SFAS No. 144 establishes a single accounting model for long-lived
assets to be disposed of by sale, and also resolves implementation issues
related to SFAS 121. Adoption of SFAS No. 144 did not have a significant impact
on the company's financial position, results of operations or cash flows.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Unforeseen events and
changes in circumstances and market conditions could negatively affect the value
of assets and result in an impairment charge.
The company's assessment at May 2, 2004 indicated that the net undiscounted
future operating cash flows of the company's businesses were sufficient to
recover the carrying amount of the long-lived assets under SFAS No. 144. The
determination of future operating cash flows involves considerable estimation
and judgment about future market conditions and future sales and profitability.
Although the company believes it has based the impairment testing on reasonable
estimates and assumptions, the use of different estimates and assumptions could
result in materially different results.
Goodwill. As of April 29, 2002, Culp adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." For the initial application of SFAS No. 142, an independent
business valuation specialist was engaged to assist the company in the
determination of the fair market value of Culp Decorative Fabrics, one of the
company's two divisions within the upholstery fabric segment, because of the
significance of the goodwill associated with the division and due to its
operating performance. As a result of the adoption of SFAS No. 142, during the
first quarter of fiscal 2003, the company recorded a non-operating, non-cash
goodwill impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million), or $2.11 per share diluted, related to the goodwill associated with
the Culp Decorative Fabrics division. After the goodwill impairment charge, the
company's remaining goodwill relates to the following divisions: Culp Decorative
Fabrics - $5.1 million and Culp Home Fashions - $4.1 million.
The company updated its goodwill impairment test as of May 2, 2004. This
impairment test, which was prepared by the company with assistance from an
independent business valuation specialist, did not indicate any further
impairment of goodwill. The determination of fair value involves considerable
estimation and judgment. In particular, determining the fair value of a business
unit involves, among other things, developing forecasts of future cash flows and
appropriate discount rates. Although the company believes it has based the
impairment testing on reasonable estimates and assumptions, the use of different
estimates and assumptions could result in materially different results. As a
result of a continuing difficult business environment, there is a potential for
further impairment of the goodwill of Culp Decorative Fabrics.
Restructuring Charges. The upholstery fabric industry continues to be under
significant pressure from a variety of external forces, such as an increase in
the market share of leather furniture, an increase in customers buying fabric
and "cut and sew" fabric kits from China, increasing pricing demands, global
competition and the overall weakness of the economy. In an effort to reduce
operating expenses and increase manufacturing utilization, the company has
undertaken four restructuring initiatives, three within Culp Decorative Fabrics,
and one related to the exit of the wet printed flock product line, which was
part of the Culp Velvets/Prints division within the upholstery fabric segment,
which have resulted in restructuring charges related to the remaining lease
costs of the closed facilities, the write-down of property, plant and equipment
and workforce reduction. Severance and related charges and facility exit costs,
including those related to leases, were accounted for under EITF 94-3, the then
currently effective accounting literature. Asset impairment charges related to
the consolidation or closure of manufacturing facilities are based on an
estimate of expected sales prices for the real estate and equipment.
The company reassesses the individual accrual requirements at the end of each
reporting period. If circumstances change, causing current estimates to differ
from original estimates, adjustments are recorded in the period of change.
Restructuring charges, and adjustments of those charges, are summarized in note
2 to the consolidated financial statements. Management continues to monitor and
assess sales trends in the Culp Decorative Fabrics division. If sales declines
continue, management may need to take further actions to adjust cost structures
and capacity, in addition to those taken in recent years.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." A liability for
a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for certain qualifying employee termination benefits. This
Statement became effective for exit or disposal activities initiated after
December 31, 2002.
Income Taxes. The company is required to estimate its actual current tax
exposure and to assess temporary differences resulting from differing treatment
of items for tax and accounting purposes. No valuation allowance has been
recorded to reduce the company's deferred tax assets. Management has concluded
that it is more likely than not that the company will be able to realize the
benefit of the deferred tax assets. Considerable judgment is involved in this
process as ultimate realization of benefits is dependent on the generation of
future taxable income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The company is exposed to market risk from changes in foreign currency exchange
rates. The company's market risk sensitive instruments are not entered into for
trading purposes. The company's exposure to floating debt interest rate risk was
eliminated in the fourth quarter of fiscal 2003 after the remaining industrial
revenue bonds were paid.
The company's exposure to fluctuations in foreign currency exchange rates is due
primarily to a foreign subsidiary domiciled in Canada and firmly committed and
anticipated purchases of certain machinery, equipment and raw materials in
foreign currencies. The company's Canadian subsidiary uses the United States
dollar as its functional currency. The company generally does not use financial
derivative instruments to hedge foreign currency exchange rate risks associated
with the Canadian subsidiary. However, the company generally enters into foreign
exchange forward and option contracts as a hedge against its exposure to
currency fluctuations on firmly committed and anticipated purchases of certain
machinery, equipment and raw materials. The amount of Canadian-denominated sales
and manufacturing costs is not material to the company's consolidated results of
operations; therefore, a 10% change in the exchange rate at May 2, 2004 would
not have a significant impact on the company's results of operations or
financial position. Additionally, as the company utilizes foreign currency
instruments for hedging anticipated and firmly committed transactions, a loss in
fair value for those instruments is generally offset by increases in the value
of the underlying exposure.
Due to the start up of operations in China, the company does have exposure to
fluctuations in currency rates if China allows their currency to float since it
has been essentially fixed in relation to the U.S. dollar. Currently, the risk
cannot be hedged. The amount of sales and manufacturing costs denominated in
Chinese currency is not material to the company's consolidated results of
operations; therefore, a 10% change in the exchange rate at May 2, 2004 would
not have a significant impact on the company's results of operations or
financial position.
CULP, INC.
SALES / GROSS PROFIT BY SEGMENT/DIVISION
FOR THE TWELVE MONTHS ENDED MAY 2, 2004, APRIL 27, 2003 AND APRIL 28, 2002
(Amounts in thousands)
TWELVE MONTHS ENDED
---------------------------------------------------------------------------
Amounts Percent of Total Sales
---------------------------- ----------------------------
May 2, April 27, % Over
Segment/Division Sales 2004 2003 (Under) 2004 2003
- ----------------------------- ------------- ------------ ------------ ----------- -----------
Upholstery Fabrics
Culp Decorative Fabrics $ 119,514 137,479 (13.1) % 37.6 % 40.5 %
Culp Velvets/Prints 87,522 96,049 (8.9) % 27.5 % 28.3 %
Culp Yarn 4,758 6,459 (26.3) % 1.5 % 1.9 %
------------- ------------ ------------ ----------- -----------
211,794 239,987 (11.7) % 66.6 % 70.7 %
Mattress Ticking
Culp Home Fashions 106,322 99,659 6.7 % 33.4 % 29.3 %
------------- ------------ ------------ ----------- -----------
$ 318,116 339,646 (6.3) % 100.0 % 100.0 %
============= ============ ============ =========== ===========
Segment Gross Profit Gross Profit Margin
- ----------------------------- --------------------------
Upholstery Fabrics (1) $ 34,946 34,737 0.6 % 16.5 % 14.5 %
Mattress Ticking 23,376 22,836 2.4 % 22.0 % 22.9 %
------------- ------------ ------------ ----------- -----------
Gross Profit $ 58,322 57,573 1.3 % 18.3 % 17.0 %
============= ============ ============ =========== ===========
TWELVE MONTHS ENDED
---------------------------------------------------------------------------
Amounts Percent of Total Sales
---------------------------- --------------------------
April 27, April 28, % Over
Segment/Division Sales 2003 2002 (Under) 2003 2002
- ----------------------------- ------------- ------------ ------------ ----------- -----------
Upholstery Fabrics
Culp Decorative Fabrics $ 137,479 152,783 (10.0) % 40.5 % 39.9 %
Culp Velvets/Prints 96,049 119,180 (19.4) % 28.3 % 31.2 %
Culp Yarn 6,459 5,309 21.7 % 1.9 % 1.4 %
------------- ------------ ------------ ----------- -----------
239,987 277,272 (13.4) % 70.7 % 72.5 %
Mattress Ticking
Culp Home Fashions 99,659 105,302 (5.4) % 29.3 % 27.5 %
------------- ------------ ------------ ----------- -----------
$ 339,646 382,574 (11.2) % 100.0 % 100.0 %
============= ============ ============ =========== ===========
Segment Gross Profit Gross Profit Margin
- ----------------------------- --------------------------
Upholstery Fabrics (2) $ 34,737 33,648 3.2 % 14.5 % 12.1 %
Mattress Ticking 22,836 29,209 (21.8) % 22.9 % 27.7 %
------------- ------------ ------------ ----------- -----------
Gross Profit $ 57,573 62,857 (8.4) % 17.0 % 16.4 %
============= ============ ============ =========== ===========
(1) Gross profit includes $2.9 million of restructuring related charges for fiscal 2003
(2) Gross profit includes $1.8 million of restructuring related charges for fiscal 2002
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Management's Statement of Responsibility
The management of Culp, Inc. is responsible for the accuracy and consistency of
all the information contained in this annual report on Form 10-K, including the
financial statements. These statements have been prepared to conform with U.S.
generally accepted accounting principles. The preparation of financial
statements and related data involves estimates and the use of judgment.
Culp, Inc. maintains internal controls designed to provide reasonable assurance
that the financial records are accurate, that the assets of the company are
safeguarded, and that the consolidated financial statements present fairly the
financial position and results of operations of the company.
KPMG LLP, the company's independent registered public accountants, conducts an
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and provides an opinion on the consolidated
financial statements prepared by management. Their report for 2004 is presented
on the following page.
The Audit Committee of the Board of Directors reviews the scope of the audit and
the findings of the independent registered public accountants. The internal
auditor and the independent registered public accountants meet with the Audit
Committee to discuss audit and financial reporting issues. The Audit Committee
also reviews the company's principal accounting policies, significant internal
accounting controls, quarterly financial information releases, Annual Report and
annual SEC filings (Form 10-K and Proxy Statement).
Robert G. Culp, III Franklin N. Saxon Kenneth R. Bowling
Chairman and Chief President and Vice President and
Executive Officer and Chief Operating Officer Treasurer (principal
(principal executive officer) (principal financial officer) accounting officer)
June 4, 2004 June 4, 2004 June 4, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Shareholders of Culp, Inc.:
We have audited the accompanying consolidated balance sheets of Culp, Inc. and
subsidiaries as of May 2, 2004 and April 27, 2003, and the related consolidated
statements of income (loss), shareholders' equity, and cash flows for each of
the years in the three-year period ended May 2, 2004. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Culp, Inc. and
subsidiaries as of May 2, 2004 and April 27, 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 2, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for inventories from the lower of last-in,
first-out (LIFO) cost or market to the lower of first-in, first-out (FIFO) cost
or market.
\S\ KPMG LLP
Greensboro, North Carolina
June 4, 2004
CONSOLIDATED BALANCE SHEETS
May 2, 2004 and April 27, 2003 (dollars in thousands, except share data) 2004 2003
- -----------------------------------------------------------------------------------------------
ASSETS
current assets:
cash and cash equivalents $ 14,568 14,355
short-term investments 0 10,043
accounts receivable 30,719 32,259
inventories 49,045 49,552
deferred income taxes 9,256 12,303
other current assets 1,634 3,204
- -----------------------------------------------------------------------------------------------
total current assets 105,222 121,716
property, plant and equipment, net 77,770 84,962
goodwill 9,240 9,240
other assets 1,496 2,235
- ----------------------------------------------------------------------------------------------
total assets $ 193,728 218,153
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt $ 528 500
accounts payable 15,323 19,874
accrued expenses 13,028 14,071
accrued restructuring expenses 4,968 7,743
income taxes payable 1,850 349
- ----------------------------------------------------------------------------------------------
total current liabilities 35,697 42,537
long-term debt, less current maturities 50,502 76,000
deferred income taxes 4,138 3,851
- ----------------------------------------------------------------------------------------------
total liabilities 90,337 122,388
- ----------------------------------------------------------------------------------------------
commitments and contingencies (note 11)
shareholders' equity:
preferred stock, $.05 par value, authorized 10,000,000
shares 0 0
common stock, $.05 par value, authorized 40,000,000
shares, issued and outstanding 11,546,634 at
May 2, 2004 and 11,515,459 at April 27, 2003 578 576
capital contributed in excess of par value 39,943 39,749
unearned compensation (349) (559)
retained earnings 63,219 55,999
- ----------------------------------------------------------------------------------------------
total shareholders' equity 103,391 95,765
- ----------------------------------------------------------------------------------------------
total liabilities and shareholders' equity $ 193,728 218,153
==============================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended May 2, 2004, April 27, 2003
and April 28, 2002 (dollars in thousands, except per share data) 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------
net sales $ 318,116 339,646 382,574
cost of sales 259,794 282,073 319,717
- ---------------------------------------------------------------------------------------------------------------
gross profit 58,322 57,573 62,857
selling, general and administrative expenses 41,019 40,040 48,059
goodwill amortization 0 0 1,395
restructuring (credit) expense and asset impairments (1,047) 12,981 10,368
- ---------------------------------------------------------------------------------------------------------------
income from operations 18,350 4,552 3,035
interest expense 5,528 6,636 7,907
interest income (376) (596) (176)
early extinguishment of debt 1,672 0 0
other expense 750 805 1,444
- ---------------------------------------------------------------------------------------------------------------
income (loss) before income taxes 10,776 (2,293) (6,140)
income taxes 3,556 (1,557) (2,700)
- ---------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of accounting change 7,220 (736) (3,440)
cumulative effect of accounting change, net of income taxes 0 (24,151) 0
- ---------------------------------------------------------------------------------------------------------------
net income (loss) $ 7,220 (24,887) (3,440)
===============================================================================================================
basic income (loss) per share:
- ---------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of accounting change $ 0.63 (0.06) (0.31)
cumulative effect of accounting change 0.00 (2.11) 0.00
- ---------------------------------------------------------------------------------------------------------------
net income (loss) $ 0.63 (2.17) (0.31)
===============================================================================================================
diluted income (loss) per share:
- ---------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of accounting change $ 0.61 (0.06) (0.31)
cumulative effect of accounting change 0.00 (2.11) 0.00
- ---------------------------------------------------------------------------------------------------------------
net income (loss) $ 0.61 (2.17) (0.31)
===============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended May 2, 2004, capital accumulated
April 27, 2003 and April 28,2002 common common contributed other total
(dollars in thousands, except stock stock in excess of unearned retained comprehensive shareholders'
share data) shares amount par value compensation earnings income equity
- ----------------------------------------------------------------------------------------------------------------------------
balance, April 29, 2001 11,221,158 561 37,971 (1,056) 84,326 0 121,802
net loss (3,440) (3,440)
net gain on cash flow hedges 7 7
stock-based compensation 144 144
forfeiture of stock options (143) 143 0
common stock issued in connection
with stock option plans 98,426 5 547 552
- ----------------------------------------------------------------------------------------------------------------------------
balance, April 28, 2002 11,319,584 566 38,375 (769) 80,886 7 119,065
net loss (24,887) (24,887)
net loss on cash flow hedges (7) (7)
stock-based compensation 210 210
common stock issued in connection
with stock option plans 195,875 10 1,374 1,384
- ----------------------------------------------------------------------------------------------------------------------------
balance, April 27, 2003 11,515,459 $ 576 39,749 (559) 55,999 0 95,765
net income 7,220 7,220
stock-based compensation 210 210
common stock issued in connection
with stock option plans 31,175 2 194 196
- ----------------------------------------------------------------------------------------------------------------------------
balance, May 2, 2004 11,546,634 $ 578 39,943 (349) 63,219 0 103,391
============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 2, 2004, April 27, 2003 and April 28, 2002
(dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
cash flows provided by operating activities:
net income (loss) $ 7,220 (24,887) (3,440)
adjustments to reconcile net income (loss) to net cash
provided by operating activities:
cumulative effect of accounting change, net of income taxes 0 24,151 0
depreciation 13,642 13,990 17,274
amortization of intangible and other assets 173 457 1,575
stock-based compensation 210 210 144
provision for deferred income taxes 3,334 (2,507) (1,452)
restructuring (credit) expense (1,047) 12,981 10,368
changes in assets and liabilities:
accounts receivable 1,540 11,107 14,483
inventories 507 8,347 2,098
other current assets 1,570 763 2,504
other assets 607 366 (311)
accounts payable (951) (8,558) 998
accrued expenses (1,043) (2,126) 1,727
accrued restructuring expenses (1,911) (3,514) (2,523)
income taxes payable 1,501 349 (1,268)
- -------------------------------------------------------------------------------------------------------------
net cash provided by operating activities 25,352 31,129 42,177
- -------------------------------------------------------------------------------------------------------------
cash flows provided by (used in) investing activities:
capital expenditures (5,976) (6,830) (3,779)
purchases of short-term investments (17,282) (10,043) 0
proceeds from the sale of short-term investments 27,325 0 0
- -------------------------------------------------------------------------------------------------------------
net cash provided by (used in) investing activities 4,067 (16,873) (3,779)
- -------------------------------------------------------------------------------------------------------------
cash flows used in financing activities:
payments on vendor-financed capital expenditures (3,932) (1,294) (4,992)
principal payments of long-term debt (25,470) (31,984) (3,172)
proceeds from common stock issued 196 1,384 552
- -------------------------------------------------------------------------------------------------------------
net cash used in financing activities (29,206) (31,894) (7,612)
- -------------------------------------------------------------------------------------------------------------
increase (decrease) in cash and cash equivalents 213 (17,638) 30,786
cash and cash equivalents, beginning of year 14,355 31,993 1,207
- -------------------------------------------------------------------------------------------------------------
cash and cash equivalents, end of year $ 14,568 14,355 31,993
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of the company and its subsidiaries, which are wholly-owned.
All significant intercompany balances and transactions are eliminated in
consolidation.
Description of Business - The company primarily manufactures and markets
upholstery fabrics and mattress fabrics ("ticking") primarily for the
furniture and bedding industries, with the majority of its business
conducted in North America.
Fiscal Year - The company's fiscal year is the 52 or 53 week period ending
on the Sunday closest to April 30. Fiscal 2004 included 53 weeks. Fiscal
years 2003 and 2002 included 52 weeks.
Cash and Cash Equivalents - Cash and cash equivalents include demand
deposit and money market accounts. For purposes of the consolidated
statements of cash flows, the company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.
Short-Term Investments - Short-term investments are classified as
available-for-sale and reported at fair value based on current market
quotes with unrealized gains and losses, net of any tax effect, recorded as
a separate component of comprehensive income in shareholders' equity until
realized. Interest income is included in interest income. Gains and losses
on investments sold are determined based on the specific identification
method and are included in other expense, net. Unrealized losses that are
other than temporary are recognized in net income. No investments are held
for speculative or trading purposes.
At April 27, 2003, short-term investments consisted of two bond mutual
funds. The investments were originally purchased in February 2003 at a cost
of $10.0 million. Realized and unrealized gains and losses for the year
ended April 27, 2003 were not significant, and accordingly, the cost of
these investments approximated fair value. During fiscal 2004, an
additional $7.3 million was invested in these funds. During the third
quarter of fiscal 2004, these investments were sold resulting in a net loss
of $58,000 which is included in the other expense line of the 2004
Consolidated Statement of Income. During fiscal 2004, two additional bond
funds were purchased at a cost of $10.0 million and subsequently sold
during the year resulting in a net loss of $11,000 which is included in the
other expense line of the 2004 Consolidated Statement of Income.
Accounts Receivable - Substantially all of the company's accounts
receivable are due from manufacturers in the furniture and bedding
industries. The company grants credit to customers, a substantial number of
which are located in North America and generally does not require
collateral. Management continuously performs credit evaluations of its
customers, considering numerous inputs including financial position, past
payment history, cash flows, management ability, historical loss experience
and economic conditions and prospects. While management believes that
adequate allowances for doubtful accounts have been provided in the
consolidated financial statements, it is possible that the company could
experience additional unexpected credit losses.
Inventories - Prior to the fourth quarter of fiscal 2004, principally all
inventories were valued at the lower of last-in, first-out (LIFO) cost or
market. During the fourth quarter of fiscal 2004, the company changed its
method of accounting for inventories to the lower of first-in, first-out
(FIFO) cost or market. The change in accounting principle was made to
provide a better matching of revenue and expenses. Additionally, the change
will enable the financial reporting to parallel the way management assesses
the financial and operational performance of the company's segments. Prior
year consolidated financial statements, including interim periods, have not
been restated as the effect of the change was immaterial.
Management continually examines inventory to determine if there are
indicators that the carrying value exceeds its net realizable value.
Experience has shown that the most significant indicator of the need for
inventory write-downs is the age of the inventory. As a result, the company
provides inventory valuation write-downs based upon set percentages for
inventory aging categories, generally using six, nine and twelve month
categories. While management believes that adequate write-downs for
inventory obsolescence have been made in the consolidated financial
statements, consumer tastes and preferences will continue to change and the
company could experience additional inventory write-downs in the future.
Property, Plant and Equipment - Property, plant and equipment is recorded
at cost. Depreciation is generally computed using the straight-line method
over the estimated useful lives of the respective assets. Major renewals
and betterments are capitalized. Maintenance, repairs and minor renewals
are expensed as incurred. When properties are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
accounts. Amounts received on disposal less the book value of assets sold
are charged or credited to income (loss).
Management reviews long-lived assets, which consist principally of
property, plant and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recovered. Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of the asset to future net
undiscounted cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the excess of the carrying amount over
the fair value of the asset. Assets to be disposed of by sale are reported
at the lower of the carrying value or fair value less cost to sell when the
company has committed to a disposal plan.
Interest costs of $50,000, $74,000 and $36,000 incurred during the years
ended May 2, 2004, April 27, 2003 and April 28, 2002, respectively, for the
construction of qualifying fixed assets were capitalized and are being
amortized over the related assets' estimated useful lives.
Foreign Currency Translation - The United States dollar is the functional
currency for the company's Canadian and Chinese subsidiaries. Translation
losses for the Canadian subsidiary of $153,000, $60,000 and $33,000 are
included in the other expense line item in the Consolidated Statements of
Income (Loss) for the fiscal years ended May 2, 2004, April 27, 2003 and
April 28, 2002, respectively.
Goodwill - The company adopted the provisions of SFAS 142, Goodwill and
Other Intangible Assets, effective April 29, 2002. In accordance with SFAS
No. 142, the company tests goodwill for impairment on an annual basis by
comparing the fair value of each reporting unit to its carrying value. As a
result of the initial application of SFAS No. 142, the company recorded an
impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million) (see note 19). For the fiscal year ended April 28, 2002, goodwill
was amortized using the straight-line method over 40 years, and tested for
impairment by comparison of the carrying value of the goodwill to estimated
future undiscounted cash flows expected to be generated by the related
assets, when events and circumstances indicated that the assets might be
impaired.
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred taxes are recognized for temporary differences between the
financial statement carrying amounts and the tax bases of the company's
assets and liabilities and operating loss and tax credit carryforwards at
income tax rates expected to be in effect when such amounts are realized or
settled. The effect on deferred taxes of a change in tax rates is
recognized in income (loss) in the period that includes the enactment date.
No provision is made for income taxes which may be payable if undistributed
income of the company's Canadian subsidiary were to be paid as dividends to
the company, since the company intends that such earnings will continue to
be invested. At May 2, 2004, the amount of such undistributed income was
$30.2 million. Foreign tax credits may be available as a reduction of
United States income taxes in the event of such distributions.
Revenue Recognition - Revenue is recognized upon shipment, when title and
risk of loss pass to the customer. Provision is made currently for
estimated product returns, claims and allowances. Management considers
historical claims and return experience, among other things, when
establishing the allowance for returns and allowances. While management
believes that adequate allowance has been established for returns and
allowances, it is possible that the company could experience levels higher
than provided for in the consolidated financial statements.
Shipping and Handling Costs - Revenue received for shipping and handling
costs, which is immaterial for all periods presented, is included in net
sales. Shipping costs, principally freight, that comprise payments to
third-party shippers are classified as cost of sales. Handling costs, which
consist principally of finished goods warehousing costs in the company's
various distribution facilities, were $4.6 million, $4.9 million and $5.0
million in 2004, 2003 and 2002, respectively, and are included in selling,
general and administrative expenses.
Stock-Based Compensation - Compensation costs related to employee stock
option plans are recognized utilizing the intrinsic value-based method
prescribed by APB No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. The company has adopted the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148. Accordingly, compensation cost is recorded over
the vesting period of the options based upon the difference in option price
and fair market price at the date of grant, if any.
At May 2, 2004, the company had stock-based compensation plans, which are
described more fully in note 12 to the consolidated financial statements.
The following table illustrates the effect on net income (loss) and income
(loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123 for the past three fiscal years:
(dollars in thousands, except per share data) 2004 2003 2002
- --------------------------------------------------------------------------------
Net income (loss), as reported $ 7,220 (24,887) (3,440)
Add: Total stock-based employee
compensation expense included in
net income (loss), net of tax 141 67 81
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of tax 456 225 363
- --------------------------------------------------------------------------------
Pro forma net income (loss) $ 6,905 (25,045) (3,722)
- --------------------------------------------------------------------------------
Income (loss) per share:
Basic - as reported $ 0.63 (2.17) (0.31)
Basic - pro forma 0.60 (2.19) (0.33)
Diluted - as reported $ 0.61 (2.17) (0.31)
Diluted - pro forma 0.59 (2.19) (0.33)
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, other current assets, accounts payable
and accrued expenses approximates fair value because of the short maturity
of these financial instruments.
The fair value of the company's long-term debt is estimated by discounting
the future cash flows at rates currently offered to the company for similar
debt instruments of comparable maturities. At May 2, 2004, the carrying
value of the company's long-term debt is $51.0 million and the fair value
is $53.7 million. At April 27, 2003, the carrying value of the company's
long-term debt was $76.5 million and the fair value was $80.2 million.
Use of Estimates - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Reclassification - Certain items in the fiscal 2002 consolidated financial
statements have been reclassified to conform with the current presentation.
2. RESTRUCTURING AND ASSET IMPAIRMENT
Fiscal 2003 CDF Restructuring
In August 2002, management approved a restructuring plan within the Culp
Decorative Fabrics division aimed at lowering manufacturing costs,
simplifying the dobby fabric upholstery line, increasing asset utilization
and enhancing the division's manufacturing competitiveness. The
restructuring plan principally involved (1) consolidation of the division's
weaving, finishing, yarn making and distribution operations by closing the
facility in Chattanooga, Tennessee and integrating these functions into
other plants, (2) a significant reduction in the number of stock keeping
units (SKUs) offered in the dobby product line and (3) a net reduction in
workforce of approximately 300 positions. During fiscal 2003, the total
restructuring and related charges incurred were $15.0 million, of which
approximately $4.1 million represented non-cash items, including $2.8
million in impairment of property, plant and equipment and $1.3 million in
inventory write-downs. Of the total charge, $12.0 million was recorded in
restructuring expense in the 2003 Consolidated Statement of Income (Loss);
and $1.3 million, related to inventory write-downs, and $1.7 million,
related to equipment moving and relocation expense, were recorded in cost
of sales in the 2003 Consolidated Statement of Income (Loss).
During fiscal 2004, as a result of management's continual evaluation of the
restructuring accrual, the reserve was increased $178,000 to reflect
current estimates of future health care claims and decreased $684,000 to
reflect current estimates of remaining lease expenses and other exit costs.
Additionally, the company recorded a restructuring charge of $8,000
representing a non-cash impairment of equipment.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
----------------------------------------------------------------------------
Lease
Employee Termination
Termination and Other Exit
Benefits Costs Total
----------------------------------------------------------------------------
Accrual established in fiscal 2003 $ 1,972 7,194 9,166
Paid in fiscal 2003 (1,228) (949) (2,177)
----------------------------------------------------------------------------
Balance April 27, 2003 $ 744 6,245 6,989
----------------------------------------------------------------------------
Adjustments in fiscal 2004 178 (684) (506)
Paid in fiscal 2004 (422) (1,227) (1,649)
----------------------------------------------------------------------------
Balance May 2, 2004 $ 500 4,334 4,834
----------------------------------------------------------------------------
As of April 27, 2003, assets classified as held for sale consisted of
machinery and equipment with a value of $166,000 and are included in other
assets. Management successfully disposed of these assets during fiscal
2004.
Wet Printed Flock Restucturing
In April 2002, management approved a plan to exit the wet printed flock
upholstery fabric business and has been actively seeking to sell the assets
related to this product line. The exit plan involved closing a printing
facility and flocking operation within the Culp Velvets/Prints division,
reduction in related selling and administrative expenses and termination of
86 employees. The total charge for the exit plan was $9.7 million, of which
approximately $8.2 million represented non-cash items, including $7.6
million in impairment of property, plant and equipment and $619,000 in
inventory write-downs. Of the total charge, $9.1 million was recorded in
restructuring expense in the 2002 Consolidated Statement of Income (Loss),
and $619,000, related to inventory write-downs, was recorded in cost of
sales in the 2002 Consolidated Statement of Income (Loss). During the
fiscal year ended April 28, 2002, sales of the wet printed flock product
contributed $17.1 million, or 4.5%, of the company's total net sales and
resulted in an operating loss of approximately $2.1 million.
During fiscal 2003, an additional restructuring expense of $1.3 million was
recorded for the non-cash write-down of assets to reflect the deterioration
in market value experienced since April 2002. Due to management's continual
evaluation of the restructuring accrual, the reserve was reduced $313,000
to reflect current estimates of future health care claims. Additionally,
the reserve was reduced $42,000 to reflect current estimates of future
security expenses and other costs.
During fiscal 2004, due to management's continual evaluation of the
restructuring accrual, the reserve was reduced $101,000 to reflect current
estimates of employee termination benefits and future health care claims
and reduced $277,000 to reflect current estimates of other exit costs. The
company also recognized a restructuring credit of $171,000 related to the
sale of assets classified as held for sale in connection with the
restructuring.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
----------------------------------------------------------------------------
Lease
Employee Termination
Termination and Other Exit
Benefits Costs Total
----------------------------------------------------------------------------
Accrual established in fiscal 2002 $ 842 610 1,452
Paid in fiscal 2002 (5) (5) (10)
----------------------------------------------------------------------------
Balance April 28, 2002 $ 837 605 1,442
----------------------------------------------------------------------------
Adjustments in fiscal 2003 (313) (42) (355)
Paid in fiscal 2003 (428) (116) (544)
----------------------------------------------------------------------------
Balance April 27, 2003 $ 96 447 543
----------------------------------------------------------------------------
Adjustments in fiscal 2004 (101) (277) (378)
Paid in fiscal 2004 5 (70) (65)
----------------------------------------------------------------------------
Balance May 2, 2004 $ 0 100 100
----------------------------------------------------------------------------
As of April 27, 2003, assets classified as held for sale consisted of a
building, machinery and equipment with an aggregate value of $484,000 and
are included in other assets. As of May 2, 2004, assets classified as held
for sale consist of a building with a value of $180,000 and is included in
other assets. Management is actively marketing the building and anticipates
the successful disposal of the building.
Fiscal 2001 CDF Restructuring
During fiscal 2001 and continuing into fiscal 2002, the company undertook a
restructuring plan in its upholstery fabric segment which involved (1) the
consolidation of certain fabric manufacturing capacity within the Culp
Decorative Fabrics (CDF) division, (2) closing one of the company's four
yarn manufacturing plants, (3) an extensive reduction in selling, general
and administrative expenses including the termination of 110 employees and
(4) a comprehensive SKU reduction initiative related to finished goods and
raw materials in CDF. The 2001 charge from the restructuring and related
costs was $7.4 million, approximately $3.4 million of which represented
non-cash items, including $2.5 million in impairment of property, plant and
equipment and $874,000 in inventory write-downs. Of the total charge, $5.6
million was recorded in restructuring expense in the 2001 Consolidated
Statement of Income (Loss); and $874,000, related to inventory write-downs,
and $931,000, related to equipment relocation costs, were recorded in cost
of sales in the 2001 Consolidated Statement of Income (Loss). The 2002
charge from restructuring and related expenses was $2.5 million,
approximately $160,000 of which represented the non-cash impairment of
property, plant and equipment. Of the total charge, $1.3 million was
included in restructuring expense in the 2002 Consolidated Statement of
Income (Loss), and $1.2 million, related to equipment relocation costs, was
recorded in cost of sales in the 2002 Consolidated Statement of Income
(Loss).
During fiscal 2003, as a result of management's continual evaluation of the
restructuring accrual, the reserve was reduced $275,000 to reflect current
estimates of future health care claims and increased $276,000 to reflect
current estimates of remaining lease expenses, property taxes, insurance
and other exit costs.
During fiscal 2004, as a result of management's continual evaluation of the
restructuring accrual, the reserve was increased $33,000 to reflect current
estimates of future health care claims and reduced $32,000 to reflect
current estimates of other exit costs.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
----------------------------------------------------------------------------
Lease
Employee Termination
Termination and Other Exit
Benefits Costs Total
----------------------------------------------------------------------------
Accrual established in fiscal 2001 $ 969 2,116 3,085
Paid in fiscal 2001 (491) (211) (702)
----------------------------------------------------------------------------
Balance April 29, 2001 $ 478 1,905 2,383
----------------------------------------------------------------------------
Additions in fiscal 2002 925 218 1,143
Paid in fiscal 2002 (891) (1,632) (2,523)
----------------------------------------------------------------------------
Balance April 28, 2002 $ 512 491 1,003
----------------------------------------------------------------------------
Adjustments in fiscal 2003 (275) 276 1
Paid in fiscal 2003 (202) (591) (793)
----------------------------------------------------------------------------
Balance April 27, 2003 $ 35 176 211
----------------------------------------------------------------------------
Adjustments in fiscal 2004 33 (32) 1
Paid in fiscal 2004 (34) (144) (178)
----------------------------------------------------------------------------
Balance May 2, 2004 $ 34 0 34
----------------------------------------------------------------------------
As of May 2, 2004 and April 27, 2003, there were no assets classified as
held for sale related to the fiscal 2001 CDF restructuring.
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
May 2, April 27,
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------
customers $ 33,064 34,580
allowance for doubtful accounts (1,442) (1,558)
reserve for returns and allowances (903) (763)
- --------------------------------------------------------------------------------
$ 30,719 32,259
- --------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
beginning balance (1,558) (2,465) (1,282)
provision for bad debt (139) 570 (4,172)
net write-offs 225 337 2,989
- --------------------------------------------------------------------------------
ending balance (1,442) (1,558) (2,465)
- --------------------------------------------------------------------------------
4. INVENTORIES
A summary of inventories follows:
May 2, April 27,
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------
raw materials $ 21,015 23,269
work-in-process 2,489 2,917
finished goods 25,541 23,366
- --------------------------------------------------------------------------------
$ 49,045 49,522
- --------------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
depreciable lives May 2, April 27,
(dollars in thousands) (in years) 2004 2003
- --------------------------------------------------------------------------------
land and improvements 10 $ 2,319 2,244
buildings and improvements 7-40 32,849 32,791
leasehold improvements 7-10 1,265 1,435
machinery and equipment 3-12 168,078 171,087
office furniture and equipment 3-10 9,849 9,868
capital projects in progress 3,690 1,893
- --------------------------------------------------------------------------------
218,050 219,318
accumulated depreciation (140,280) (134,356)
- --------------------------------------------------------------------------------
$ 77,770 84,962
- --------------------------------------------------------------------------------
The company incurred total capital expenditures of $6,747,000, $12,229,000
and $4,729,000 in the fiscal years 2004, 2003 and 2002, respectively. The
non-cash portion of these capital expenditures representing vendor
financing totaled $331,000, $5,366,000 and $1,363,000 in the fiscal years
2004, 2003 and 2002, respectively.
In connection with the fiscal 2003 CDF restructuring (see note 2),
machinery and equipment with a carrying value of $3.0 million was written
down to its fair value less cost to sell of approximately $166,000 and
reclassified to assets held for sale. In connection with the wet printed
flock restructuring in fiscal 2002 (see note 2), property, plant and
equipment with a carrying value of $9.9 million was written down to its
fair value less cost to sell of approximately $2.3 million and reclassified
to assets held for sale. Assets held for sale are included in the other
assets line item in the Consolidated Balance Sheets. As of May 2, 2004, the
total carrying value of these assets is $180,000. As of April 27, 2003, the
total carrying value of these assets was $650,000.
6. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------
beginning balance $ 9,240 $ 47,083
amortization 0 0
impairment charge 0 (37,580)
adjustment to cost of acquired business 0 (263)
- --------------------------------------------------------------------------------
ending balance $ 9,240 $ 9,240
- --------------------------------------------------------------------------------
As further discussed in notes 1 and 19, the company ceased recording
goodwill amortization and recorded a goodwill impairment charge as a result
of the initial adoption of SFAS 142, Goodwill and Other Intangible Assets,
effective April 29, 2002.
7. ACCOUNTS PAYABLE
A summary of accounts payable follows:
May 2, April 27,
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------
accounts payable - trade $ 13,438 14,389
accounts payable - capital expenditures 1,885 5,485
- --------------------------------------------------------------------------------
$ 15,323 19,874
- --------------------------------------------------------------------------------
8. ACCRUED EXPENSES
A summary of accrued expenses follows:
May 2, April 27,
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------
compensation, commissions and related benefits $ 8,040 9,683
interest 459 763
accrued rebates 2,258 1,401
other 2,271 2,224
- --------------------------------------------------------------------------------
$ 13,028 14,071
- --------------------------------------------------------------------------------
9. INCOME TAXES
Total income taxes (benefits) were allocated as follows:
(dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
income from continuing operations $ 3,556 (1,557) (2,700)
cumulative effect of accounting change 0 13,429 0
shareholders' equity, related to
the tax benefit arising from the
exercise of stock options (60) (402) (145)
- --------------------------------------------------------------------------------
$ 3,496 (11,470) (2,845)
- --------------------------------------------------------------------------------
Income tax expense (benefit) attributable to income from continuing
operations consists of:
(dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
current
federal $ 0 350 (2,655)
state 0 25 0
foreign 222 575 1,407
- --------------------------------------------------------------------------------
222 950 (1,248)
- --------------------------------------------------------------------------------
deferred
federal 3,144 (2,298) (635)
state 520 (300) (600)
foreign (330) 91 (217)
- --------------------------------------------------------------------------------
3,334 (2,507) (1,452)
- --------------------------------------------------------------------------------
$ 3,556 (1,557) (2,700)
- --------------------------------------------------------------------------------
Income before income taxes related to the company's Canadian operation for
the years ended May 2, 2004, April 27, 2003, and April 28, 2002 was
$2,700,000, $2,300,000 and $4,000,000, respectively.
The following schedule summarizes the principal differences between income
tax expense (benefit) at the federal income tax rate and the effective
income tax rate reflected in the consolidated financial statements:
2004 2003 2002
- ------------------------------------------------------------------------------
federal income tax rate 34.0% (35.0)% (35.0)%
state income taxes, net of federal
income tax benefit 3.2 (7.8) (6.3)
extraterritorial income or
foreign sales corporation benefit (0.1) (2.3) (0.8)
adjustment to estimated income tax accruals (5.6) (19.6) 0.0
other 1.5 (3.2) (1.9)
- ------------------------------------------------------------------------------
33.0% (67.9)% (44.0)%
- ------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities consist of the
following:
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------
deferred tax assets:
accounts receivable $ 792 799
inventories 1,666 2,427
goodwill 6,244 7,611
compensation 1,027 740
liabilities and reserves 2,477 3,717
alternative minimum tax 1,320 1,320
net operating loss carryforwards 4,287 5,520
- --------------------------------------------------------------------------------
gross deferred tax assets 17,813 22,134
valuation allowance 0 0
- --------------------------------------------------------------------------------
total deferred tax assets 17,813 22,134
- --------------------------------------------------------------------------------
deferred tax liabilities:
property, plant and equipment, net (11,817) (12,853)
other (878) (829)
- --------------------------------------------------------------------------------
total deferred tax liabilities (12,695) (13,682)
- --------------------------------------------------------------------------------
$ 5,118 8,452
- --------------------------------------------------------------------------------
At May 2, 2004, the company had an alternative minimum tax credit
carryforward of approximately $1,320,000 for federal income tax purposes.
Federal and state net operating loss carryforwards with related tax
benefits of $4,287,000 at May 2, 2004 expire in varying amounts through
fiscal 2023. The company believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to
realize the existing deferred tax assets.
Income tax refunds, net of income tax payments, were $1,338,000 in 2004,
$1,470,000 in 2003 and $2,280,000 in 2002.
10. LONG-TERM DEBT
A summary of long-term debt follows:
May 2, April 27,
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------
unsecured term notes $ 49,975 75,000
canadian government loan 1,055 1,500
- --------------------------------------------------------------------------------
51,030 76,500
current maturities (528) (500)
- --------------------------------------------------------------------------------
$ 50,502 76,000
- --------------------------------------------------------------------------------
In August 2002, the company entered into an agreement with its principal
bank lender that provides for a revolving loan commitment of $15.0 million,
including letters of credit up to $2.5 million. Borrowings under the credit
facility generally bear interest at the London Interbank Offered Rate plus
an adjustable margin based upon the company's debt/EBITDA ratio, as defined
by the agreement. As of May 2, 2004, there were $1.4 million in outstanding
letters of credit in support of inventory purchases and no borrowings
outstanding under the agreement. Letter of credit and commitment fees are
also determined by the company's debt/EBITDA ratio, as defined by the
agreement. The credit facility expires in August 2004.
During fiscal 2004, the company elected to make a $25.0 million prepayment
on the unsecured term notes. As a result of this prepayment, the company
incurred a consent fee and prepayment premium of $1.3 million, additional
debt issue cost amortization of $144,000 and approximately $202,000 in
other professional fees. The remaining principal balance is payable over an
average remaining term of 5 years, with principal payments coming due March
2006 through March 2010. Interest is payable semi-annually at a fixed
coupon rate of 7.76%.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At May 2, 2004, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
fiscal years are: 2005 - $528,000; 2006 - $8,062,000; 2007 - $7,535,000;
2008- $19,835,000; and 2009 - $7,535,000.
Interest paid during 2004, 2003 and 2002 totaled $5,882,000, $7,058,000,
and $8,199,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The company leases certain office, manufacturing and warehouse facilities
and equipment, primarily computers and vehicles, under noncancellable
operating leases. Lease terms related to real estate range from one to ten
years with renewal options for additional periods ranging from two to ten
years. The leases generally require the company to pay real estate taxes,
maintenance, insurance and other expenses. Rental expense for operating
leases was $5,013,000 in 2004; $5,673,000 in 2003; and $6,605,000 in 2002.
Future minimum rental commitments for noncancellable operating leases are
$4,753,000 in 2005; $3,265,000 in 2006; $2,067,000 in 2007; $1,217,000 in
2008; and $235,000 in 2009. Management expects that in the normal course of
business, these leases will be renewed or replaced by other operating
leases.
The company is involved in legal proceedings and claims which have arisen
in the ordinary course of its business. These actions, when ultimately
concluded and settled, will not, in the opinion of management, have a
material adverse effect upon the financial position, results of operations
or cash flows of the company.
The company has outstanding capital expenditure commitments of
approximately $4.7 million as of May 2, 2004.
12. STOCK OPTION PLANS
The company has a stock option plan under which options to purchase common
stock may be granted to officers, directors and key employees. At May 2,
2004, 682,450 shares of common stock were authorized for issuance under the
plan. Of this total, none remain available for grant. Options are generally
exercisable from one to five years after the date of grant and generally
expire five to ten years after the date of grant.
No compensation cost has been recognized for this stock option plan as
options were granted at an option price not less than fair market value at
the date of grant.
A summary of the status of the plan as of May 2, 2004, April 27, 2003 and
April 28, 2002 and changes during the years ended on those dates is
presented below:
2004 2003 2002
- ---------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 775,500 $ 7.91 922,875 $ 7.73 788,926 $ 8.87
Granted 0 0 0 0 290,375 4.07
Exercised (31,175) 4.35 (145,375) 6.74 (91,426) 4.45
Canceled/expired (61,875) 12.33 (2,000) 9.00 (65,000) 9.86
- ---------------------------------------------------------------------------------------------------
Outstanding at end of year 682,450 7.65 775,500 7.91 922,875 7.73
- ---------------------------------------------------------------------------------------------------
Options exercisable at
year-end 512,950 8.88 475,250 10.21 491,625 10.64
Weighted-average fair value
of options granted during
the year $0.00 $0.00 $2.14
- ---------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 5/2/04 Contractual Life Exercise Price at 5/2/04 Exercise Price
- ---------------------------------------------------------------------------------------------------
$ 3.03 - $ 3.05 91,250 2.4 years $ 3.03 63,500 $ 3.03
$ 4.00 - $ 7.50 258,575 2.4 4.27 116,825 4.47
$ 7.63 - $ 7.63 108,000 4.4 7.63 108,000 7.63
$ 7.75 - $ 12.13 133,000 2.0 9.72 133,000 9.72
$ 13.34 - $ 20.94 91,625 3.3 18.83 91,625 18.83
- ---------------------------------------------------------------------------------------------------
682,450 2.7 $ 7.65 512,950 $ 8.88
- ---------------------------------------------------------------------------------------------------
During fiscal 1995, the company adopted a stock option plan which provided
for the one-time grant to officers and certain senior managers of options
to purchase 121,000 shares of the company's common stock at $.05 (par
value) per share. As of May 2, 2004, there are no options outstanding under
the plan. Options exercised during fiscal 2004, 2003 and 2002 were 0,
50,500 and 7,000, respectively. As all outstanding options under this plan
have been fully vested, no compensation expense was recorded in fiscal
2004, 2003 and 2002.
During September 1997, the company's shareholders approved the 1997 option
plan which provides for the one-time grant to certain officers and senior
managers of options to purchase 106,000 shares of the company's common
stock at $1.00 per share. Options under the plan are generally exercisable
on January 1, 2006. As of May 2, 2004, the 89,000 options outstanding under
the plan have exercise prices of $1.00 and a weighted-average remaining
contractual life of 2.7 years. There were no options exercised during
fiscal 2004, 2003 and 2002, respectively. During fiscal 2004, 2003 and
2002, the compensation expense recorded under the plan was $210,000,
$210,000 and $144,000, respectively.
During September 2002, the company's shareholders approved the 2002 option
plan under which options to purchase up to 1,000,000 shares of common stock
may be granted to officers, directors and key employees. At May 2, 2004,
1,000,000 shares of common stock were authorized for issuance under the
plan. Of this total, 820,000 remain available for grant. Options are
generally exercisable from one to four years after the date of grant and
generally expire five to ten years after the date of grant. No compensation
cost has been recognized for this stock option plan as options are granted
under the plan at an option price not less than the fair market value at
the date of grant.
A summary of the status of the plan as of May 2, 2004, and April 27, 2003
and changes during the years ended on those dates is presented below:
2004 2003
- --------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding at beginning
of year 93,250 $ 13.43 0 $ 0.00
Granted 88,750 6.99 93,250 13.43
Exercised 0 0.00 0 0.00
Canceled/expired (2,000) 6.61 0 0.00
- --------------------------------------------------------------------------------
Outstanding at end of year 180,000 10.25 93,250 13.43
- --------------------------------------------------------------------------------
Options exercisable at
year-end 43,000 11.62 11,250 9.37
Weighted-average fair value
of options granted during
the year $4.07 $7.29
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 5/2/04 Contractual Life Exercise Price at 5/2/04 Exercise Price
- -----------------------------------------------------------------------------------------------
$ 6.61 - $ 6.61 75,500 4.1 years $ 6.61 0 $ 0.00
$ 9.37 - $ 9.57 22,500 8.9 9.47 22,500 9.47
$ 13.99 - $ 13.99 82,000 3.1 13.99 20,500 13.99
- -----------------------------------------------------------------------------------------------
180,000 4.3 $ 10.25 43,000 $ 11.62
- -----------------------------------------------------------------------------------------------
Had compensation cost for the stock option plan with 682,450 options
outstanding at May 2, 2004 and the 1997 and 2002 stock-based compensation
plans been determined consistent with SFAS No. 123, the company's net
income (loss), basic income (loss) per share and diluted income (loss) per
share would have been changed to the pro forma amounts indicated below:
(in thousands, except per share data) 2004 2003 2002
- -------------------------------------------------------------------------------
Net income (loss) As reported $ 7,220 (24,887) (3,440)
Pro forma 6,905 (25,045) (3,722)
- -------------------------------------------------------------------------------
Net income (loss) per As reported $ 0.63 (2.17) (0.31)
share, basic Pro forma 0.60 (2.19) (0.33)
- -------------------------------------------------------------------------------
Net income (loss) per As reported $ 0.61 (2.17) (0.31)
share, diluted Pro forma 0.59 (2.19) (0.33)
- -------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2004, 2003 and 2002, respectively: dividend
yield of 0%, 0% and 0%; risk-free interest rates of 1.9%, 4.2% and 4.8%;
expected volatility of 80%, 78% and 62%; and expected lives of 4 years, 4
years and 5 years.
13. DERIVATIVES
On April 30, 2001, the company adopted the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Adoption of
SFAS 133 did not have a significant impact on the company's financial
position, results of operations or cash flows. SFAS No. 133, as amended by
SFAS No. 137, SFAS No. 138 and SFAS No. 149, requires the company to
recognize all derivative instruments on the balance sheet at fair value.
These statements also establish new accounting rules for hedging
instruments, which depend on the nature of the hedge relationship. A fair
value hedge requires that the effective portion of the change in the fair
value of a derivative instrument be offset against the change in the fair
value of the underlying asset, liability, or firm commitment being hedged
through earnings. A cash flow hedge requires that the effective portion of
the change in the fair value of a derivative instrument be recognized in
Other Comprehensive Income ("OCI"), a component of Shareholders' Equity,
and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The ineffective portion of a
derivative instrument's change in fair value is immediately recognized in
earnings.
The company uses foreign exchange option and forward contracts to manage
the exposure related to forecasted purchases of inventories denominated in
the EURO. The company utilizes cash flow hedge accounting for these
contracts. At May 2, 2004, there were no contracts outstanding.
The company also uses foreign exchange option and forward contracts to
manage the exposure related to firm commitments to purchase fixed assets
denominated in the EURO. The company has chosen not to utilize hedge
accounting for these contracts, and accordingly changes in the fair value
of these contracts are recorded currently in earnings. At May 2, 2004, the
company had outstanding foreign exchange option and forward contracts to
purchase a total of 564,000 EURO.
From time to time, the company used interest rate swap agreements to
effectively fix the interest rates on certain variable rate debt. During
2001, the interest rate swaps no longer served as a hedge due to the
repayment of debt; consequently the interest rate swaps were recorded at
fair value. During 2002, the company paid $105,000 to terminate the
interest rate swap agreements.
14. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of shares outstanding during the period. Diluted net income per
share uses the weighted-average number of shares outstanding during the
period plus the dilutive effect of stock options calculated using the
treasury stock method. Weighted average shares used in the computation of
basic and diluted net income (loss) per share are as follows:
(in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------
Weighted-average common
shares outstanding, basic 11,525 11,462 11,230
Effect of dilutive stock options 252 0 0
- -----------------------------------------------------------------------------
Weighted-average common
shares outstanding, diluted 11,777 11,462 11,230
- -----------------------------------------------------------------------------
Options to purchase 348,337 shares, 413,844 shares and 608,750 shares of
common stock were not included in the computation of diluted net income
(loss) per share for fiscal 2004, 2003 and 2002, respectively, because the
exercise price of the options was greater than the average market price of
the common shares. Options to purchase 556,031 shares and 465,625 shares
were not included in the computation of diluted net income (loss) per share
for fiscal 2003 and 2002, respectively, because the company incurred a net
loss for these fiscal years.
15. BENEFIT PLANS
The company has a defined contribution plan which covers substantially all
employees and provides for participant contributions on a pre-tax basis and
discretionary matching contributions by the company, which are determined
annually. Company contributions to the plan were $1,583,000 in 2004;
$1,799,000 in 2003; and $1,979,000 in 2002.
In addition to the defined contribution plan, the company implemented a
nonqualified deferred compensation plan covering officers and certain other
associates in fiscal 2003. The plan provides for participant deferrals on a
pre-tax basis and non-elective contributions made by the company. Company
contributions to the plan were $62,000 for both 2004 and 2003. The
company's nonqualified plan liability of $308,000 and $97,000 at May 2,
2004 and April 27, 2003, respectively, is included in accrued expenses in
the Consolidated Balance Sheets.
16. SEGMENT INFORMATION
The company's operations are classified into two business segments:
upholstery fabrics and mattress ticking. The upholstery fabrics segment
principally manufactures and sells woven jacquards and dobbies,
heat-transfer prints, and woven and tufted velvets primarily to residential
and commercial (contract) furniture manufacturers. The mattress ticking
segment principally manufactures and sells woven and damask jacquards, as
well as pigment prints to bedding manufacturers.
International sales, of which 98%, 87% and 91% were denominated in U.S.
dollars in 2004, 2003 and 2002, respectively, accounted for 11%, 12% and
14% of net sales in 2004, 2003 and 2002, respectively and are summarized by
geographic area as follows:
(dollars in thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
North America (excluding USA) $ 26,740 30,375 32,033
Far East and Asia 6,954 4,926 10,703
All other areas 1,557 4,577 10,765
- --------------------------------------------------------------------------------
$ 35,251 39,878 53,501
- --------------------------------------------------------------------------------
Company assets located outside North America are not material for any of
the three years presented.
The company internally manages and reports selling, general and
administrative expenses, interest expense, interest income, other expense
and income taxes on a total company basis. Thus, profit by business segment
represents gross profit. In addition, the company internally manages and
reports cash and cash equivalents, short-term investments, other current
assets and other assets on a total company basis. Thus, identifiable assets
by business segment represent accounts receivable, inventories, property,
plant and equipment and goodwill.
Sales and gross profit for the company's operating segments are as follows:
(dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 211,794 240,096 277,272
Mattress Ticking 106,322 99,550 105,302
- --------------------------------------------------------------------------------
$ 318,116 339,646 382,574
- --------------------------------------------------------------------------------
Gross profit
Upholstery Fabrics $ 34,946 34,738 33,648
Mattress Ticking 23,376 22,835 29,209
- --------------------------------------------------------------------------------
$ 58,322 57,573 62,857
- --------------------------------------------------------------------------------
One customer represented approximately 13%, 14% and 13% of consolidated net
sales for 2004, 2003 and 2002, respectively. No other customer accounted
for 10% or more of consolidated net sales during those years.
Identifiable assets for the company's operating segments are as follows:
(dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
Identifiable assets
Upholstery Fabrics $ 114,894 124,889 182,316
Mattress Ticking 51,880 51,124 55,804
- --------------------------------------------------------------------------------
$ 166,774 176,013 238,120
- --------------------------------------------------------------------------------
Non-identifiable assets
cash and cash equivalents 14,568 14,355 31,993
short-term investments 0 10,043 0
deferred income taxes 9,256 12,303 9,447
other current assets 1,634 3,204 3,966
other assets 1,496 2,235 4,187
- --------------------------------------------------------------------------------
Total assets $ 193,728 218,153 287,713
- --------------------------------------------------------------------------------
17. RELATED PARTY TRANSACTIONS
A director of the company is also an officer and director of a major
customer of the company. The amount of sales to this customer was
approximately $41,819,000 in 2004; $47,593,000 in 2003; and $48,418,000 in
2002. The amount due from this customer at May 2, 2004 was approximately
$4,768,000 and at April 27, 2003 was approximately $2,690,000.
Rents paid to entities owned by certain shareholders and officers of the
company and their immediate families were approximately $682,000 in 2004,
$708,000 in 2003 and $726,000 in 2002.
18. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by shareholders
and distributions to shareholders not reflected in net income (loss).
A summary of comprehensive income (loss) follows:
(dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
Net income (loss) $ 7,220 (24,887) (3,440)
Gain (loss) on foreign exchange options,
net of taxes:
Net changes in fair value 0 0 7
Net gains reclassified into earnings 0 (7) 0
- --------------------------------------------------------------------------------
$ 7,220 (24,894) (3,433)
- --------------------------------------------------------------------------------
19. RECENTLY ADOPTED ACCOUNTING STANDARDS
The company adopted SFAS 142, Goodwill and Other Intangible Assets,
effective April 29, 2002. SFAS No. 142 requires that goodwill no longer be
amortized and that goodwill be tested for impairment by comparing each
reporting unit's carrying value to its fair value. SFAS No. 142 requires
that any goodwill impairment loss recognized as a result of initial
application be reported as a change in accounting principle, and that the
loss per share effects of the accounting change be separately disclosed.
As required by the standard, the company ceased recording goodwill
amortization for fiscal 2003. The following table reconciles fiscal 2002
net loss to its amount adjusted to exclude goodwill:
(dollars in thousands, except per share data) 2002
- ---------------------------------------------------------------------
Reported net loss $ (3,440)
Goodwill amortization, net of tax 921
- ---------------------------------------------------------------------
Adjusted net loss (2,519)
- ---------------------------------------------------------------------
Basic
Reported net loss per share (0.31)
Adjusted net loss per share (0.22)
- ---------------------------------------------------------------------
Diluted
Reported net loss per share (0.31)
Adjusted net loss per share (0.22)
- ---------------------------------------------------------------------
For the initial application of SFAS No. 142, an independent business
valuation specialist was engaged to assist the company in the determination
of the fair market value of Culp Decorative Fabrics (CDF), one of the
company's two divisions within the upholstery segment, because of the
significance of the goodwill associated with the division and due to its
operating performance for fiscal 2002 and 2001. The fair value of the CDF
division determined using several different methods, including comparable
companies, comparable transactions and discounted cash flow analysis, was
less than the carrying value. Accordingly, the company recorded a goodwill
impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million), or $2.11 per share diluted, related to the goodwill associated
with the CDF division. After the goodwill impairment charge, the company's
remaining goodwill relates to the following divisions: Culp Decorative
Fabrics - $5.1 million and Culp Home Fashions - $4.1 million.
The company updated its goodwill impairment test as of May 2, 2004. This
updated impairment test, which was prepared by the company with the
assistance of an independent business valuation specialist, did not
indicate any further impairment of goodwill. The determination of fair
value involves considerable estimation and judgment. In particular,
determining the fair value of a business unit involves, among other things,
developing forecasts of future cash flows and appropriate discount rates.
Although the company believes it has based the impairment testing on
reasonable estimates and assumptions, the use of different estimates and
assumptions could result in materially different results. As a result of a
continuing difficult business environment, there is a potential for further
impairment of the goodwill related to Culp Decorative Fabrics.
20. RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Under Statement 4, all gains and losses from extinguishment of
debt were required to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. This Statement
eliminates Statement 4 and as a result, gains and losses from
extinguishment of debt should be classified as extraordinary items only if
they meet the criteria in APB No. 30. This Statement became effective for
the company on April 28, 2003. As a result of its adoption, the net loss
associated with the debt extinguishment during fiscal 2004 has been
classified in continuing operations.
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. This Interpretation was subsequently revised in
December 2003. This Interpretation clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support. An enterprise shall consolidate a variable interest
entity, as defined, if that enterprise has a variable interest that will
absorb a majority of the entity's expected losses, receive a majority of
the entity's expected residual returns, or both. This Interpretation became
effective for the company August 4, 2003. The adoption of Interpretation 46
did not impact the consolidated financial statements.
SELECTED QUARTERLY DATA
fiscal fiscal fiscal fiscal fiscal fiscal fiscal fiscal
2004 2004 2004 2004 2003 2003 2003 2003
(amounts in thousands, except per share 4th 3rd 2nd 1st 4th 3rd 2nd 1st
amounts) quarter quarter quarter quarter quarter quarter quarter quarter
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 85,148 76,561 82,731 73,676 90,406 79,492 83,740 86,008
cost of sales 69,510 62,093 65,993 62,198 74,218 65,704 69,997 72,154
- ------------------------------------------------------------------------------------------------------------------------------------
gross profit 15,638 14,468 16,738 11,478 16,188 13,788 13,743 13,854
SG & A expenses 9,925 10,282 10,296 10,516 10,324 9,798 9,481 10,437
restructuring expense (credit)
and asset impairments (1,047) 0 0 0 (25) (354) 13,360 0
- ------------------------------------------------------------------------------------------------------------------------------------
income (loss) from operations 6,760 4,186 6,442 962 5,889 4,344 (9,098) 3,417
interest expense 988 1,534 1,509 1,497 1,392 1,665 1,676 1,903
interest income (20) (113) (121) (122) (182) (143) (121) (150)
early extinguishment of debt 0 1,672 0 0 0 0 0 0
other expense 220 229 62 239 160 192 242 211
- ------------------------------------------------------------------------------------------------------------------------------------
income (loss) before income taxes 5,572 864 4,992 (652) 4,519 2,630 10,895) 1,453
income taxes 1,839 112 1,846 (241) 1,247 963 (4,305) 538
- ------------------------------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of
accounting change 3,733 752 3,146 (411) 3,272 1,667 (6,590) 915
cumulative effect of accounting change,
net of income taxes 0 0 0 0 0 0 0 (24,151)
- ------------------------------------------------------------------------------------------------------------------------------------
net income (loss) 3,733 752 3,146 (411) 3,272 1,667 (6,590) (23,236)
- ------------------------------------------------------------------------------------------------------------------------------------
depreciation 3,348 3,411 3,439 3,444 3,436 3,415 3,498 3,641
- ------------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,531 11,529 11,524 11,515 11,496 11,485 11,483 11,383
weighted average shares outstanding,
assuming dilution 11,815 11,859 11,774 11,515 11,616 11,714 11,483 11,765
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
basic income (loss) per share:
income (loss) before cumulative effect of
accounting change $ 0.32 0.07 0.27 (0.04) 0.28 0.15 (0.57) 0.08
cumulative effect of accounting change 0 0 0 0 0 0 0 (2.12)
- ------------------------------------------------------------------------------------------------------------------------------------
net income (loss) 0.32 0.07 0.27 (0.04) 0.28 0.15 (0.57) (2.04)
- ------------------------------------------------------------------------------------------------------------------------------------
diluted income (loss) per share:
income (loss) before cumulative effect of
accounting change $ 0.32 0.06 0.27 (0.04) 0.28 0.14 (0.57) 0.08
cumulative effect of accounting change 0 0 0 0 0 0 0 (2.12)
- ------------------------------------------------------------------------------------------------------------------------------------
net income (loss) 0.32 0.06 0.27 (0.04) 0.28 0.14 (0.57) (2.04)
- ------------------------------------------------------------------------------------------------------------------------------------
book value 8.95 8.63 8.55 8.28 8.33 8.02 7.87 8.45
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (3) $ 64,439 62,492 61,262 54,854 61,937 64,063 68,492 70,762
property, plant and equipment, net 77,770 78,909 81,219 83,299 84,962 85,396 85,049 89,201
total assets 193,728 193,853 224,812 214,387 218,153 236,753 235,598 235,959
capital expenditures 2,377 1,103 1,427 1,840 3,153 3,748 2,258 3,070
long-term debt (1) 51,030 51,063 76,616 76,551 76,500 96,141 96,558 96,533
shareholders' equity 103,391 99,467 98,605 95,340 95,765 92,075 90,326 97,007
capital employed (2) 154,421 150,530 175,221 171,891 172,265 188,216 186,884 193,540
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA
gross profit margin 18.4% 18.9% 20.2% 15.6% 17.9% 17.3% 16.4% 16.1%
operating income (loss) margin 7.9 5.5 7.8 1.3 6.5 5.5 (10.9) 4.0
net income (loss) margin before cumulative
effect of accounting change 4.4 1.0 3.8 (0.6) 3.6 2.1 (7.9) 1.1
effective income tax rate 33.0 13.0 37.0 37.0 27.6 36.6 39.5 37.0
long-term debt-to-total capital employed
ratio (1) 33.0 33.9 43.7 44.5 44.4 51.1 51.7 49.9
operating working capital turnover (3) 5.2 5.3 5.3 5.1 5.0 4.9 4.8 4.7
days sales in receivables 33 31 34 32 32 34 36 34
inventory turnover 5.5 4.7 5.1 5.0 5.8 4.9 4.9 4.9
- -----------------------------------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 12.28 12.25 10.95 8.03 8.10 9.97 14.95 17.89
low 8.52 9.98 7.00 5.05 3.75 6.21 3.81 8.00
close 8.61 11.56 10.72 7.42 5.00 7.19 6.50 11.40
daily average trading volume (shares) 22.9 32.0 56.0 107.9 65.5 59.9 97.4 145.5
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Long-term debt includes long- and short-term debt
(2) Capital employed includes long-term debt and shareholders' equity
(3) Operating working capital for this calculation is accounts receivable, inventories and accounts payable
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended May 2, 2004, there were no changes of accountants
and/or disagreements on any matters of accounting principles or practices or
financial statement disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures have been established to ensure that material
information relating to the company is made known to management, including the
company's Chief Executive officer and Chief Financial officer, and the board of
directors. The company's Chief Executive officer and Chief Financial officer
have concluded that the company's disclosure controls and procedures are
effective based on their evaluation of these controls and procedures at the end
of the period covered by this report.
There have been no significant changes in the company's internal controls over
financial reporting or in other factors that could materially affect these
controls during the period covered by this report or subsequent to the date of
their evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers and directors of the company is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the caption "Nominees, Directors and
Executive Officers," which information is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included in the company's
definitive Proxy Statement to be filed within 120 days after the end of the
company's fiscal year pursuant to Regulation 14A of the Securities and Exchange
Commission, under the caption "Executive Compensation," which information is
herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain beneficial owners
and management is included in the company's definitive Proxy Statement to be
filed within 120 days after the end of the company's fiscal year pursuant to
Regulation 14A of the Securities and Exchange Commission, under the caption
"Voting Securities," which information is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the subcaption "Certain Relationships
and Related Transactions," which information is herein incorporated by
reference.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to accountants fees and services is included in the
company's definitive Proxy Statement to be filed within 120 days after the end
of the company's fiscal year pursuant to Regulation 14A of the Securities and
Exchange Commission, under the caption "Fees Paid to Independent Auditors,"
which information is herein incorporated by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated Financial Statements
The following consolidated financial statements of Culp, Inc. and its
subsidiaries are filed as part of this report.
Page of Annual
Report on
Item Form 10-K
- ---- ---------
Consolidated Balance Sheets - May 2, 2004 and.................... 34
April 27, 2003
Consolidated Statements of Income (Loss) -
for the years ended May 2, 2004
April 27, 2003, and April 28, 2002 ............................ 35
Consolidated Statements of Shareholders' Equity -
for the years ended May 2, 2004,
April 27, 2003, and April 28, 2002.............................. 36
Consolidated Statements of Cash Flows -
for the years ended May 2, 2004,
April 27, 2003, and April 28, 2002.............................. 37
Notes to Consolidated Financial Statements....................... 38
Report of Independent Registered Public Accounting Firm ......... 33
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
The following exhibits are attached at the end of this report, or
incorporated by reference herein. 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 July 28, 2002, filed September 11, 2002, and are
incorporated herein by reference.
3(ii) Restated and Amended Bylaws of the company, as amended June 12,
2001, were filed as Exhibit 3(ii) to the company's Form 10-Q
for the quarter ended July 29, 2001, filed September 12, 2001,
and are incorporated herein by reference.
10(a) 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(b) 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(c) 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, 1991, and is
incorporated herein by reference.
10(d) 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(e) 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(f) 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(g) 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(h) Amendments to 1993 Stock Option Agreement dated September 26,
2000. This amendment was filed as Exhibit 10(rr) to the
company's Form 10-Q for the quarter ended October 29, 2000, and
is incorporated herein by reference. (*)
10(i) Performance-Based Stock Option Plan, dated June 21, 1994, was
filed as Exhibit 10(bb) to the company's Form 10-K for the year
ended April 30, 1995, filed on July 26, 1995, and is
incorporated herein by reference. (*)
10(j) Form of Note Purchase Agreement (providing for the issuance by
Culp, Inc. of its $20 million 6.76% Series A Senior Notes due
3/15/08 and its $55 million 6.76% Series B Senior Notes due
3/15/10), each dated March 4, 1998, between Culp, Inc. and each
of the following:
1. Connecticut General Life Insurance Company;
2. The Mutual Life Insurance Company of New York;
3. United of Omaha Life Insurance Company;
4. Mutual of Omaha Insurance Company;
5. The Prudential Insurance Company of America;
6. Allstate Life Insurance Company;
7. Life Insurance Company of North America; and
8. CIGNA Property and Casualty Insurance Company
This agreement was filed as Exhibit 10(ll) to the company's
Form 10-K for the year ended May 3, 1998, filed on July 31,
1998, and is incorporated herein by reference.
10(k) First Amendment, dated January 31, 2002 to Note Purchase
Agreement (providing for the issuance by Culp, Inc. of its $20
million 6.76% Series A Senior Notes due 3/15/08 and its $55
million 6.76% Series B Senior Notes due 3/15/10), each dated
March 4, 1998, between Culp, Inc. and each of the following:
1. Connecticut General Life Insurance Company;
2. Life Insurance Company of North America;
3. ACE Property and Casualty;
4. J. Romeo & Co.;
5. United of Omaha Life Insurance Company;
6. Mutual of Omaha Insurance Company;
7. The Prudential Insurance of America; and
8. Allstate Life Insurance Company
This amendment was filed as Exhibit 10(a) to the company's Form
10-Q for the quarter ended January 27, 2002, and is incorporated
herein by reference.
10(l) Rights Agreement, dated as of October 8, 1999, between Culp,
Inc. and EquiServe Trust Company, N.A., as Rights Agent,
including the form of Articles of Amendment with respect to the
Series A Participating Preferred Stock included as Exhibit A to
the Rights Agreement, the forms of Rights Certificate included
as Exhibit B to the Rights Agreement, and the form of Summary
of Rights included as Exhibit C to the Rights Agreement. The
Rights Agreement was filed as Exhibit 99.1 to the company's
Form 8-K dated October 12, 1999, and is incorporated herein by
reference.
10(m) Form of Change of Control and Noncompetition Agreement, each
dated December 11, 2001, by and between the company and each of
Robert G. Culp, III, Howard L. Dunn, Jr., Franklin N. Saxon,
Kenneth M. Ludwig, and Rodney A. Smith. (*)
10(n) 2002 Stock Option Plan was filed as Exhibit 10(a) to the
company's Form 10-Q for the quarter ended January 26, 2003,
filed on March 12, 2003, and is incorporated herein by
reference.(*)
10(o) Amended and Restated Credit Agreement dated as of August
23, 2002 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as Exhibit 10(a) to
the company's Form 10-Q for the quarter ended July 28, 2002,
filed September 11, 2002, and is incorporated herein by
reference.
10(p) First Amendment to Amended and Restated Credit Agreement
dated as of March 17, 2003 among Culp, Inc. and Wachovia Bank,
National Association, as Agent and as Bank, was filed as exhibit
10(p) to the company's form 10-K for the year ended April 27,
2003, filed on July 25, 2003, and is incorporated here by
reference.
10(q) Second Amendment to Amended and Restated Credit Agreement
dated as of June 3, 2003 among Culp, Inc. and Wachovia Bank,
National Association, as Agent and as Bank. was filed as exhibit
10(q) to the company's form 10-K for the year ended April 27,
2003, filed on July 25, 2003, and is incorporated here by
reference.
10(r) Sale and Purchase Agreement dated March 8, 2004, by and between
Sara Lee Foundation and the company.
18 Letter on change in accounting principles
21 List of subsidiaries of the company
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on
Form S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843,
333-27519, 333-59512, 333-59514 and 333-101850), dated March 20,
1987, September 18, 1990, June 13, 1994, September 22, 1995, May
21, 1997, April 25, 2001, April 25, 2001 and December 12, 2002.
24(a) Power of Attorney of Harry R. Culp, DDS, dated July 6, 2004
24(b) Power of Attorney of Howard L. Dunn, dated July 6, 2004
24(c) Power of Attorney of Patrick B. Flavin, dated July 7, 2004
24(d) Power of Attorney of Kenneth W. McAllister, dated July 6, 2004
24(e) Power of Attorney of Patrick H. Norton, dated July 8 , 2004
31(a) Certification of Principal Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K:
The company filed the following reports on Form 8-K during the quarter
ended May 2, 2004:
(1) Form 8-K, dated February 24, 2004, included under Item 12, Results of
Operations and Financial Condition, the company's press release for
quarterly earnings and the financial information release relating to
certain financial information for the quarter ended February 1, 2004.
(2) Form 8-K, dated March 12, 2004, included under Item 9, Regulation FD,
the company's press release to disclose an agreement with Precision Fabrics
to distribute flame-resistant fabrics to the bedding industry.
c) Exhibits:
The exhibits to this Form 10-K are filed at the end of this Form 10-K
immediately preceded by an index. A list of the exhibits begins on page 63
under the subheading "Exhibits Index."
d) Financial Statement Schedules:
See Item 15(a) (2)
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, CULP, INC. has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 16th day of July 2004.
CULP, INC.
By /s/ Robert G. Culp, III
-------------------
Robert G. Culp, III
Chairman and Chief Executive Officer
(principal executive officer)
By: /s/ Franklin N. Saxon
-----------------
Franklin N. Saxon
President and Chief Operating
Officer (principal financial officer)
By: /s/ Kenneth R. Bowling
------------------
Kenneth R. Bowling
Vice President and Treasurer
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 16th day of July 2004.
/s/ Robert G. Culp, III /s/ Patrick H. Norton *
------------------- -------------------
Robert G. Culp, III Patrick H. Norton
(Chairman of the (Director)
Board of Directors)
/s/ Franklin N. Saxon /s/ Harry R. Culp *
----------------- ---------------
Franklin N. Saxon Harry R. Culp
(Director) (Director)
/s/ Howard L. Dunn, Jr.*
-------------------- ----------------
Howard L. Dunn, Jr. H. Bruce English
(Director) (Director)
/s/ Patrick B. Flavin*
------------------
Patrick B. Flavin
(Director)
/s/ Kenneth W. McAllister*
----------------------
Kenneth W. McAllister
(Director)
* By Franklin N. Saxon, Attorney-in-Fact, pursuant to Powers of Attorney
filed with the Securities and Exchange Commission.
EXHIBITS INDEX
Exhibit Number Exhibit
- -------------- -------
10(r) Sale and Purchase Agreement dated March 8, 2004, by and between
Sara Lee Foundation and the company.
18 Letter on change in accounting principles
21 List of subsidiaries of the company.
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on
Form S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843,
333-27519, 333-59512, 333-59514 and 333-101850), dated March
20, 1987, September 18, 1990, June 13, 1994, September 22, 1995,
May 21, 1997, April 25, 2001, April 25, 2001 and December 12,
2002.
24(a) Power of Attorney of Harry R. Culp, DDS, dated July 6, 2004
24(b) Power of Attorney of Howard L. Dunn, dated July 6, 2004
24(c) Power of Attorney of Patrick B. Flavin, dated July 7, 2004
24(d) Power of Attorney of Kenneth W. McAllister, dated July 6, 2004
24(e) Power of Attorney of Patrick H. Norton, dated July 8, 2004
31(a) Certification of Principal Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
SALE AND PURCHASE AGREEMENT
---------------------------
THIS SALE AND PURCHASE AGREEMENT ("Agreement") is made and entered into as
of the 8th day of March, 2004, by and between SARA LEE FOUNDATION, an Illinois
not-for-profit corporation, acting for itself and any subsidiary or division
that may hold legal title to the Property (as defined below), as seller (the
"Seller"), and CULP INC., a North Carolina corporation, as buyer ("Buyer").
W I T N E S S E T H:
That for and in consideration of the mutual covenants and agreements herein
contained, Seller and Buyer agree as follows:
1. CONVEYANCE. Seller agrees to sell and convey, and Buyer agrees to
purchase and take title to, that certain parcel of improved real estate commonly
known as 1823 Eastchester Drive, High Point, North Carolina, which real property
and related improvements (collectively, the "Real Property") are more
particularly legally described in Exhibit A attached hereto and hereby made a
part hereof; together with those items of personal property specifically
identified on Exhibit B (the "Personal Property"). The Real Property and the
Personal Property are sometimes referred to herein as the "Property"). Seller
shall sell and Buyer shall purchase the Property upon the terms and conditions
herein set forth.
2. PURCHASE PRICE; EARNEST MONEY. (a) The purchase price of the Property
shall be THREE MILLION EIGHT HUNDRED FIFTY THOUSAND AND NO/100THS DOLLARS
($3,850,000.00) ("Purchase Price"). The Purchase Price shall be paid at Closing
(as defined in Paragraph 8 below) in the form of a wire transfer of immediately
available United States funds transmitted to an account designated by Seller.
(b) Concurrently with its execution of this Agreement, Buyer shall deliver
to the Title Company (as defined below), the sum of FIFTY THOUSAND AND NO/100THS
DOLLARS ($50,000.00) as earnest money ("Earnest Money") pursuant to the Title
Company's usual form of strict joint order escrow instructions. Buyer's Earnest
Money deposit shall be made by wire transfer of immediately available United
States funds. The Earnest Money shall be held by the Title Company and, at
Buyer's option and expense, may be invested in U.S. Government obligations,
certificates of deposit, money market funds, or such other interest bearing
investments as Buyer shall determine, and all interest and other earnings
thereon shall be paid to the party to whom the Earnest Money is payable pursuant
to the terms of this Agreement, net of any investment fee charged by the Title
Company to invest such funds. Subject to the terms, provisions and conditions
hereof, if Closing occurs, the Earnest Money shall be a credit against the
Purchase Price at Closing and the balance of the Purchase Price shall be paid at
Closing as set forth in Paragraph 2(a) above. The Earnest Money shall be
disbursed in accordance with Paragraph 10(c) hereof.
3. BROKERAGE. Buyer and Seller each hereby acknowledges, represents and
warrants to the other that the entities entitled to a commission, finder's fee
or other like compensation arising in any manner from this Agreement shall be
Triad Commercial Properties, LLC ("TCP") and Price Commercial Properties ("PCP")
(TCP and PCP together shall be referred to herein as the "Brokers" and
separately, each shall be referred to as a "Broker"). The commission to be paid
to such Brokers shall be paid by Seller as agreed to by Seller and Brokers, upon
the Closing of the sale of the Property to Buyer. Each party hereby agrees to,
and shall, indemnify and hold the other harmless from and against any and all
claims, demands, liabilities, and causes of action, losses, expenses, fines,
penalties and costs whatsoever (including without limitation attorneys' fees and
court costs) for broker's fees, commissions, or charges which are asserted
against the other party by any persons or parties, other than Brokers, who
allege that they were engaged, retained by, or acted on behalf of, such party.
In addition, each of Buyer and Seller hereby agrees to provide (or cause their
respective Broker, if any, to provide) at Closing any and all broker's lien
waiver documentation that may be required by the Title Company for title
clearance.
4. TITLE. Buyer shall obtain at Buyer's expense a commitment for the
issuance of a policy of owner's title insurance (the "Title Commitment") from a
title insurer of Buyer's choice (the "Title Company"). Buyer shall direct the
Title Company to provide a copy of the Title Commitment and all documents of
record to Seller on the same date such documents are furnished to Buyer. If
Buyer serves written notice (the "Title Notice") on Seller on or before the date
that is ten (10) business days prior to the expiration of the Investigation
Period (the "Objection Date") that the Title Commitment contains any matter,
exception or exceptions which are not in good faith acceptable to Buyer for any
reason (the "Unpermitted Exceptions"), then, within six (6) business days after
receipt of such notice by Seller, which time period may be waived by Seller,
(the "Cure Period") Seller may elect to attempt to cure such defects by (x)
removing such Unpermitted Exceptions, or (y) causing the Title Insurer to
provide an affirmative endorsement insuring Buyer over the effect of any such
Unpermitted Exceptions and providing evidence of such removal or endorsement to
Buyer. All exceptions not objected to by Buyer on or before the Objection Date
as being Unpermitted Exceptions, or endorsed over as provided in (y) above are
hereinafter referred to as "Permitted Exceptions". In addition, notwithstanding
any objection by Buyer, the following items shall also be deemed Permitted
Exceptions:
(a) general real estate taxes which are not yet due and payable;
(b) general and special assessments against the Property which are not yet
due and payable;
(c) exceptions to title relating to any matters created by, through, or
under the acts of Buyer, its successors and/or assigns, directors,
officers, employees, agents, contractors, licensees, or engineers, or any
of them in connection with the Investigations (as defined below);
(d) the printed exclusions and conditions and stipulations set forth in the
Title Commitment; and
(e) any other exceptions to title approved in writing by Buyer.
If Seller is unable or unwilling to cause any or all of the Unpermitted
Exceptions to be removed or insured over by endorsement as described above,
Buyer shall have the right to either: (1) terminate this Agreement by sending
written notice of such termination to Seller prior to the expiration of the
Investigation Period, in which event, the Earnest Money shall be refunded to
Buyer promptly as Buyer's sole and exclusive remedy, and, except as explicitly
stated herein, thereafter neither Seller nor Buyer shall have any further
obligations under this Agreement, provided, however, that the indemnities of
Buyer and Seller set forth in Paragraph 3 and Paragraph 7 hereof and all other
indemnities and agreements which expressly survive termination, shall survive
the termination of this Agreement; or (2) waive its objection to such
Unpermitted Exceptions and accept title to the Property subject thereto, in
which case such Unpermitted Exceptions shall be deemed Permitted Exceptions.
Notwithstanding anything contained herein to the contrary, Seller shall not be
required to expend any funds whatsoever in an effort to remove Unpermitted
Exceptions. Notwithstanding the foregoing, at or prior to Closing, Seller at
Seller's expense shall remove or insure over, to Buyer's reasonable
satisfaction, any Unpermitted Exceptions that relate to (1) financing liens,
mechanics' and materialmen's liens caused by Seller or Sara Lee Corporation or
either of their agents, (2) delinquent tax liens relating to the Property, or
(3) other liens or encumbrances which secure other monetary obligations of
Seller which are of a definite, undisputed and ascertainable amount. If Buyer
has not delivered the Title Notice to Seller on or before the Objection Date,
Buyer shall be deemed to have waived Buyer's rights to object to title matters
or terminate this Agreement pursuant to the provisions of this Paragraph 4. On
the Closing Date (as defined in Paragraph 8 below), Seller shall convey title to
the Property free from defects, exceptions and encumbrances except for the
Permitted Exceptions.
Should Buyer receive an updated Title Commitment or Survey (as defined below)
following the expiration of the Investigation Period that discloses exceptions
to title other than the Permitted Exceptions (the "Updated Exceptions") which
are not reasonably acceptable to Buyer for Buyer's proposed use, then Buyer
shall within five (5) days following its receipt of the updated Survey or
updated Title Commitment notify Seller in writing of any such Updated Exceptions
to which Buyer reasonably objects (any such notice, a "Defect Notice"). Within
three (3) business days after Seller's receipt of any such Defect Notice from
Purchaser, Seller shall elect either to (i) terminate this Agreement whereupon
neither party shall have any further obligations hereunder, except for those
that survive termination or (ii) attempt to cure such defects by (x) removing
such defects or (y) causing the Title Company to provide an affirmative
endorsement (reasonably acceptable to Buyer) insuring over the effect of any
such defect. If Seller is unable to cure the Updated Exceptions identified in
the Defect Notice within thirty (30) days following the originally scheduled
Closing Date, then Purchaser may elect by written notice to Seller to (i)
terminate this Agreement whereupon neither party shall have any further
obligations hereunder, except for those that survive termination or (ii) waive
its objection to such defects and close the transaction contemplated by the this
Agreement without deduction or setoff from the Purchase Price. All Updated
Exceptions identified in a Defect Notice that are endorsed over as provided in
(y) above or not timely objected to by Buyer as required above are hereinafter
also referred to as "Permitted Exceptions".
5. SURVEY. Buyer shall obtain at Buyer's expense a survey of the Property
(the "Survey"), which shall (i) include or show the gross land area of the
Property, and (ii) be reasonably acceptable to the Title Company for the
purposes of deleting the standard preprinted survey exceptions. Buyer shall
promptly provide a copy of the Survey to Seller upon receipt of same. If on or
before the Objection Date Buyer provides written notice (the "Survey Notice") to
Seller that the Survey contains any matters which are not reasonably acceptable
to Buyer for Buyer's proposed use, then Seller, within the Cure Period, may
elect to attempt to cure such defects and deliver a revised Survey to Buyer. If
Buyer fails to timely deliver any written objections to the Survey to Seller on
or before the Objection Date, then Buyer shall be deemed to have accepted and
approved the Survey. If Seller is unable or unwilling to cure any or all of the
defects indicated in the Survey Notice, Buyer shall have the right to either:
(1) terminate this Agreement by sending written notice of such termination to
Seller prior to the expiration of the Investigation Period, in which event, the
Earnest Money shall be refunded to Buyer promptly as Buyer's sole and exclusive
remedy, and, except as explicitly stated herein, thereafter neither Seller nor
Buyer shall have any further obligations under this Agreement, provided,
however, that the indemnities of Buyer and Seller set forth in Paragraph 3 and
Paragraph 7 hereof and all other indemnities and agreements which expressly
survive termination shall survive the termination of this Agreement; or (2)
waive its objection to such matters and accept the Survey subject thereto.
Notwithstanding anything contained herein to the contrary, Seller shall not be
required to expend any funds whatsoever in an effort to cure any such defects in
the Survey. If Buyer has not delivered the Survey Notice to Seller on or before
the Objection Date, Buyer shall be deemed to have waived Buyer's rights to
object to Survey matters or terminate this Agreement pursuant to the provisions
of this Paragraph 5.
6. OBLIGATIONS TO CLOSE. Provided that Buyer has not timely terminated this
Agreement pursuant to Paragraph 4, 5 or 7 of this Agreement, Buyer's obligation
hereunder to close shall be subject only to (i) the Property being in
substantially the same physical condition on the Closing Date as it is on the
date of this Agreement, and (ii) the title to the Property being free from
defects and encumbrances, except for the Permitted Exceptions or as otherwise
expressly provided herein. If either condition is not fulfilled, then Buyer
shall have the option to terminate this Agreement on or before the Closing Date
by written notice given to the other party stating the reason for such
termination, in which event, both parties shall be relieved of all further
liability hereunder, provided, however, that the indemnities of Buyer and Seller
set forth in Paragraph 3 and Paragraph 7 hereof and all other indemnities and
agreements which expressly survive termination, shall survive the termination of
this Agreement, and upon such termination the Earnest Money shall be refunded to
Buyer in accordance with the provisions of Paragraph 10(c) hereof.
7. INVESTIGATIONS BY BUYER.
(a) Buyer shall have the right, for a sixty (60) day period after the date
of this Agreement (the "Investigation Period") and at its sole cost and
expense (unless otherwise specified herein), to perform whatever
investigations and studies of the Real Property that Buyer deems advisable
and appropriate, provided that no such investigations and studies shall
interfere with the use and operation of the Real Property as currently used
and operated or the rights of any tenant(s) (collectively, the
"Investigations"). At Buyer's option, the Investigations shall include, but
not be limited to, Buyer's right to have a qualified independent consultant
chosen by Buyer (the "Consultant") to enter upon the Real Property, upon
forty-eight (48) hours prior verbal notice to Seller (given to Brian Hunter
at 312/558-8686), in order to inspect the Real Property. Seller may, in
Seller's sole discretion, elect to have an agent of Seller accompany Buyer
or Consultant during any such Investigations of the Real Property. The
Investigations relating to the environmental condition of the Real Property
may include engineering inspections and other examinations of the surface
conditions of the Real Property, including investigations of the soil
conditions of the Real Property and any improvements. Notwithstanding
anything to the contrary contained herein, under no circumstances shall
Buyer perform any invasive tests on the Property without first obtaining
Seller's prior written consent (which consent shall not be unreasonably
withheld or delayed but may be reasonably conditioned). Buyer shall have
the right to terminate this Agreement prior to the expiration of the
Investigation Period by causing written notice of termination to actually
be received by Seller on or before 5:00 p.m. Central Time on the date of
the expiration of the Investigation Period. In such event, (i) the Earnest
Money shall be promptly refunded to Buyer in accordance with the provisions
of Paragraph 10(c) hereof, and (ii) Buyer and Consultant, except as
required by law or court order, shall disclose to no one, publicly or
privately, any information with respect to the Property supplied by Seller
or developed by or for Buyer, or Buyer's reason or reasons for terminating
this Agreement. In such event, this non-disclosure agreement, covenant and
obligation shall be a continuing agreement, covenant and obligation of
Buyer and Consultant which shall survive the termination of this Agreement.
In the event this Agreement is terminated in accordance with the above
provisions of this Paragraph 7, except as otherwise expressly provided
herein, neither party shall have any further liability or obligation to the
other under this Agreement, provided, however, that the indemnities
provided for in Paragraph 3 hereof and this Paragraph 7, and all other
indemnities and agreements which expressly survive termination, shall
survive the termination of this Agreement.
(b) Buyer shall, at its sole expense obtain and maintain, and shall cause
Consultant to obtain and maintain, from a financially sound insurance
company or companies acceptable to Seller, policies of insurance for the
following types of coverage and with limits of liability not less than the
minimum amounts set forth below.
(1) workers' compensation and occupational disease insurance with
statutory limits and employers' liability insurance with limits of not
less than $500,000; and
(2) comprehensive general public liability insurance with limits of
not less than $5,000,000 combined single limit for claims arising from
bodily injury and/or property damage, written on an "occurrence" basis
and including coverage for products and completed operations,
independent contractors, blanket broad form contractual liability, and
explosion, collapse, and underground hazards.
Prior to initiating the Investigations, Buyer and Consultant shall provide
Seller with a certificate(s) of insurance evidencing that the foregoing
policies of insurance have been obtained and are in full force and effect
and, except for Buyer's and Consultant's workers' compensation insurance
coverage and Consultant's errors and omissions and pollution liability
insurance coverage, that Seller has been named an additional insured under
said policies. Said certificate(s) shall also show the expiration date of
each policy and provide that Seller shall be given at least ten (10) days'
prior written notice of any cancellation or material modification thereof.
Neither the purchase of any policy of insurance nor the furnishing of
evidence thereof to Seller pursuant hereto shall relieve Buyer of its
indemnification obligations hereunder.
(c) If Buyer does not purchase the Property for any reason other than
Seller's default hereunder, Buyer shall provide Seller with copies of all
preliminary and final reports, results of the Investigations, including all
test data and reports, and such other written information issued by
Consultant in connection therewith. All information, test data, and reports
resulting from the Investigations, together with any and all information,
data and reports pertaining to the environmental condition of the Property
provided to Buyer by Seller shall be kept strictly confidential by Buyer
and shall not be used for any purpose other than the evaluation of the
possible purchase of the Property. Under no circumstances shall any part of
same be provided to any third party, exclusive of professional advisors
engaged by Buyer to assist with this transaction, unless Seller has first
been satisfied that proper arrangements have been made to preserve its
confidentiality and Seller has expressly consented in writing to Buyer's
release of the information to the other party. All necessary steps shall be
taken by Buyer to keep the information in full and complete confidence and
Buyer shall cause Consultant to keep the information in full and complete
confidence. In the event of a breach, or attempted or contemplated breach
of the foregoing obligations, Buyer hereby acknowledges that monetary
damages alone will be inadequate to compensate Seller and, accordingly,
Buyer agrees that, in such event, Seller will be entitled to injunctive
relief to prevent the disclosure of the information, together with such
other remedies as may be available to Seller either at law or in equity.
(d) Except as otherwise provided herein, the Investigations shall be
conducted at Buyer's sole risk and expense. Buyer hereby forever
indemnifies Seller from and against any and all liability suffered by
Seller as a result of Buyer's or Consultant's (or their employees',
agents', subcontractors' or representatives') activities upon the Property,
including without limitation, the cost of correcting or compensating for
injuries to persons, property, the environment, and any natural resources,
and any fines or penalties arising out of or incidental to the performance
of the Investigations, but excluding any liability resulting from the mere
discovery of a condition on the Property not caused by Buyer, its
Consultants or any agent of either of them. Promptly following the
Investigations, the Property shall be restored by Buyer to the condition
that existed prior thereto. In the event that Buyer fails to restore the
Property to the condition that existed prior to the Investigations, Seller
may (but shall not be obligated to) restore the Property to such condition
and deduct the cost of such restoration from the Earnest Money. In such
event, Buyer shall be responsible for restoring the Earnest Money to the
amount required under Paragraph 2 hereof within five days after notice from
Seller. The obligations of Buyer contained herein shall be continuing
agreements, covenants and obligations of Buyer that survive the Closing and
the termination of this Agreement.
8. CLOSING. The closing of the transaction contemplated hereunder (the
"Closing") shall take place at the office of the Title Company on May 28, 2004,
or such other mutually acceptable date as the parties may hereafter agree upon
in writing (the "Closing Date"). On the Closing Date, Buyer, Seller and the
Title Company (as escrowee) shall enter into closing escrow instructions
substantially in the form attached hereto as Exhibit C ("Closing Escrow
Instructions") to effectuate a closing through an escrow with the Title Company
without a physical presence by the parties. At the Closing:
(a) Seller shall execute and deliver, or cause to be executed and
delivered, a Special Warranty Deed, conveying the Real Property to
Buyer, subject only to the Permitted Exceptions and such other title
exceptions which Buyer has accepted or been deemed to have accepted
pursuant to Paragraph 4 above;
(b) Seller shall execute and deliver, or cause to be executed and
delivered, a Bill of Sale pertaining to the Personal Property;
(c) Seller shall execute and deliver, or cause to be executed and
delivered, a certificate pursuant to the Foreign Investment in Real
Property Transfer Act;
(d) Seller shall execute and deliver, or cause to be executed and
delivered, a 1099 Solicitation Form;
(e) Buyer shall cause the Earnest Money to be disbursed in accordance
with Paragraph 10(c) hereof and deposit the balance of the Purchase
Price in accordance with Paragraph 2 hereof;
(f) Seller shall execute and deliver a customary owner's affidavit
required by the Title Company;
(g) Seller and Buyer shall jointly execute and deliver a closing
statement, in triplicate;
(h) Seller and Buyer shall each deliver to the other such other
documents and instruments as may reasonably be required by the other
party or the Title Company that may be necessary to close this
transaction and enable the parties to complete the Closing;
(i) Seller shall deliver the keys (if any) to the Real Property to the
Seller;
(j) Escrowee shall complete the Closing and record the Deed and other
applicable closing documents pursuant to the closing escrow
instructions;
(k) Seller shall pay any applicable state, county and municipal
transfer stamps in connection with this transaction, except as
otherwise required by statute; and
(l) Seller shall pay for one-half (1/2) of the Title Company's closing
fees. Buyer shall pay for any and all costs and fees charged by the
Title Company for the title examination, the Title Commitment, the
issuance of an Owner's title insurance policy including the costs for
extended coverage and for any and all endorsements beyond extended
coverage, all loan charges and fees, and one-half (1/2) of the Title
Company's closing fees.
9. APPORTIONMENT AND ADJUSTMENT. The following items are to be apportioned
to, and adjusted between Seller and Buyer, as of the Closing Date, and are to be
fully assumed and paid thereafter by Buyer:
(a) all utilities (if any);
(b) all real estate taxes and assessments, general and special, based
on the most recent ascertainable bill therefor; and
(c) all other public or governmental charges or assessments against
the Property, which are or may be payable (including, without
limitation, metropolitan district, sanitary commission, or other
benefit charges, assessments, liens, or encumbrances for sewer, water,
drainage, or other public improvements completed or commenced on or
prior to the date hereof or subsequent thereto, with Seller being
responsible for any installments of assessments due prior to the
Closing Date and Buyer responsible for any installments due on or
after the Closing Date).
The adjustment of all such items shall be determined by apportionment as of
the Closing Date (the "Apportionment Time"). If the amount of any
apportioned item is not ascertainable at Closing, the adjustment thereof
shall be on the basis of one hundred ten percent (110%) of the most
recently ascertainable bill therefor, and such apportionment shall be
final. If any refunds of real property taxes or assessments, water rates
and charges or sewer taxes and rents shall be made after the Closing Date,
the same shall be held in trust by Seller or Buyer, as the case may be, and
shall first be applied to the unreimbursed costs incurred in obtaining the
same, and the balance, if any, shall be paid to Seller (for the period
prior to the Apportionment Time) and to Buyer (for the period after the
Apportionment Time). Seller shall receive a credit at Closing for any
prepaid taxes, utilities or assessments or deposit(s) made in connection
therewith. Seller shall not be responsible for (and Buyer shall pay for)
any additional costs of any prorated item based on the action of Buyer,
including, but without limitation, improvements or alterations made by
Buyer, loss of exemption or loss of tax credits.
10. REMEDIES.
(a) In the event Seller fails to keep or perform any of the covenants or
obligations to be kept or performed by Seller under this Agreement ("Seller
Default"), and the same shall continue for ten (10) days following written
notice thereof to Seller from Buyer specifying such default, Buyer shall
have the right, as its sole and exclusive remedy, to either (i) seek
specific performance from Seller or (ii) terminate this Agreement and
receive a refund of the Earnest Money, whereupon neither party shall have
any further obligations hereunder, except those that expressly survive such
termination. If specific performance of this Agreement is impossible due to
Seller's conveyance of the Property to a third party in breach of this
Agreement, Buyer may recover from Seller Buyer's reasonable, out-of-pocket,
third-party expenses incurred in connection with this Agreement, not to
exceed Twenty-Five Thousand and No/100ths Dollars ($25,000.00).
(b) In the event Buyer fails to keep or perform any of the covenants or
obligations to be kept or performed by Buyer under this Agreement ("Buyer
Default") and the same shall continue for ten (10) days following written
notice thereof to Buyer from Seller specifying such default, Seller may
terminate this Agreement and receive any and all Earnest Money. The parties
acknowledge and agree that the actual damages in such event are uncertain
in amount and difficult to ascertain, and that said amount of liquidated
damages was reasonably determined. Notwithstanding the foregoing, Seller
shall have the right to receive specific performance of Buyer's obligations
hereunder.
(c) The following provision shall apply to the Earnest Money deposited by
Buyer hereunder: from and after the date hereof, except (i) upon the
occurrence of a Seller Default hereunder with respect to which Buyer elects
to pursue the remedy of terminating the Agreement as set forth in Paragraph
10(a), or (ii) Buyer's timely election to terminate this Agreement pursuant
to the provisions of Paragraphs 4, 5 or 7 hereof or (iii) as provided in
Paragraph 23 below, the Earnest Money shall be nonrefundable to Buyer and
shall be payable to Seller, and provided that the transaction contemplated
hereunder closes, the Earnest Money shall be credited against the Purchase
Price at the Closing.
11. CONDITION OF THE PROPERTY. Possession of the Property shall be
delivered by Seller to Buyer at Closing. Buyer agrees to accept the Property at
such time on an "as-is," "where is," and "with all faults" basis and condition.
Seller shall have no obligation to remediate or improve the Property, including
but not limited to the environmental condition of the Property, or any existing
improvements located thereon. Buyer expressly acknowledges and agrees that
Seller has not and does not make any representation, covenant, or warranty,
express or implied, regarding the condition of the Property (including the
environmental condition) (although Seller does make the representation and
warranty regarding notices as contained in paragraph 21(c) below [the "Notice
Representation"]) or the fitness of the Property for any intended or particular
use, any and all such representations, covenants, and warranties, express or
implied, being hereby expressly denied by Seller and waived by Buyer. Buyer
represents and warrants that, prior to the Closing, but subject to the express
terms and conditions hereof, Buyer shall have had the opportunity to make or
cause to be made all such investigations, examinations, assessments, and audits
of the Property as Buyer wishes to make or have made, including without
limitation the Investigations provided for in Paragraph 7 hereof, the review of
title to the Property under Paragraph 4 hereof and the review and knowledge of
any adverse matters disclosed by the Survey acquired pursuant to Paragraph 5
hereof. If Closing occurs, subject to the Notice Representation, Buyer assumes
the risk that adverse physical characteristics and existing conditions may not
have been or may not be revealed by the foregoing, and Buyer waives all claims,
objections to, or complaints about physical characteristics and existing
conditions of the Property, including, without limitation, subsurface conditions
and the potential for solid and hazardous wastes and substances, or toxic wastes
and substances, to be present in, on, under, or related to the Property. Subject
to the Notice Representation, Buyer agrees that, by acquiring title to the
Property, Buyer thereby forever remises, releases, waives, and discharges all
claims, causes of action, and demands against Seller, under any federal, state
or local environmental laws, rules, regulations, ordinances, and orders
(including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. section 9601 et seq or any state
counterpart or equivalent), in law or in equity, which Buyer has or shall, can,
or may have or acquire, including but not limited to cross-claims, (but
excluding third-party claims, interpleader claims, and claims for contribution
and indemnification), arising from or relating to any and all conditions of the
Property, including but not limited to the environmental condition of the
Property. In any action by Buyer, this Agreement may be pleaded by Seller as a
defense or by way of counterclaim or cross-complaint.
12. ASSIGNMENT. The provisions of this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. The Seller may assign any of its rights or interests hereunder to
any affiliate of Seller. The Buyer may not assign any of its rights or interest
hereunder without first obtaining the prior written consent of Seller, which
consent may be withheld in the sole and absolute discretion of Seller.
13. CUMULATIVE RIGHTS. All rights, privileges, and remedies of each of the
parties provided for in this Agreement shall be cumulative, and the exercise of
one remedy provided for in any paragraph of this Agreement shall not be deemed
to be a waiver of all or any other rights, remedies, or privileges provided for
herein.
14. INDEPENDENT CONTRACTORS. It is expressly understood and agreed that
each party hereto is an independent contracting party and that in no event shall
this Agreement be construed as creating a joint venture or partnership.
15. ALTERATION. This Agreement embodies the complete agreement between the
parties hereto and cannot be altered, changed, or modified except by written
instrument executed by each of Buyer and Seller.
16. NOTICE. Any notice, request, demand, instruction or other document to
be given or served hereunder or under any document or instrument executed
pursuant hereto shall be in writing and shall be delivered personally, by
nationally recognized overnight courier service or, by telecopy. Any such notice
shall be effective (i) upon receipt if delivered personally, (ii) on the next
business day after deposit with a nationally recognized overnight courier
service, prepaid, or (iii) upon confirmation of complete receipt if given by
telecopy. A party may change its address for receipt of notices by service of a
notice of such change in accordance herewith:
To Buyer:
Culp, Inc.
P.O. Box 2686
101 South Main Street
High Point, North Carolina 27261
Attn: Kenneth M. Ludwig
Telephone: (336) 888-6282
Telecopy: (336) 887-7089
with a copy to:
Robinson Bradshaw & Hinson, P.A.
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246
Attention: Julie C. Chiu, Esq.
Telephone: (704) 377-8348
Telecopy: (704) 373-3948
To Seller:
Sara Lee Foundation
Three First National Plaza
Chicago, Illinois 60602-4260
Attn: Helen N. Kaminski, Esq.
Telephone: (312) 558-8525
Telecopy: (312) 558-8687
with a copy to:
Piper Rudnick LLP
203 North LaSalle Street, Suite 1800
Chicago, Illinois 60601
Attn: Louis S. Cohen, Esq.
Telephone: (312) 368-2171
Telecopy: (312) 236-7516
17. INTENTIONALLY DELETED.
18. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State in which the Real Property is located.
20. TIME OF THE ESSENCE. Time is of the essence in this Agreement and each
and every term and condition hereof. If any date for performance of any action
or matter set forth in this Agreement falls on a weekend or national holiday,
such date shall automatically by deemed by the parties to be required to be
taken or performed on the next succeeding business day.
21. SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Seller represents and warrants to Buyer that Seller has full legal
power and authority to enter into and perform this Agreement. This
Agreement and all transactions contemplated hereby have been or will
be fully authorized on behalf of Seller, the person or persons
executing this Agreement on behalf of Seller have been duly authorized
by all appropriate action of Seller to execute this Agreement and have
been or will be duly authorized to execute such other documents and to
take such other action as is necessary or desirable to consummate the
transactions contemplated hereby, and such transactions will not
result in a violation of any agreement or document under which Seller
is organized or operating, or any other agreement to which Seller is a
party or by which it is bound or subject; and this Agreement, when
executed, shall constitute the valid and binding obligation of Seller.
(b) Following the full execution of this Agreement, Seller shall use
commercially reasonable efforts to deliver to Buyer true, correct, and
complete copies of any engineering reports, plans, environmental
reports, title commitments, title policies and surveys relating to the
Property in Seller's or Sara Lee Corporation's possession; any written
expense information relating to the last twelve (12) months of the
operation of the Property in the possession of Seller or Sara Lee
Corporation (or its affiliates); and a certificate of insurance
evidencing Seller's hazard insurance covering the Property.
(c) To Seller's actual knowledge, Seller has not received any written
notice from any governmental authority having jurisdiction over Seller
or the Property of any uncured violation of any rule, regulation,
code, resolution, ordinance, statute or law involving the use,
maintenance, operation or condition of the Property or any of the
improvements located thereon.
(d) Seller covenants that, until Closing, it shall maintain the same
hazard insurance on the Property that it maintains as of the date of
this Agreement.
The foregoing representations and warranties shall survive the Closing for a
period of six (6) months.
22. BUYER'S REPRESENTATION AND WARRANTY.
(a) Buyer represents and warrants to Seller that Buyer has full legal
power and authority to enter into and perform this Agreement. This
Agreement and all transactions contemplated hereby have been or will
be fully authorized on behalf of Buyer, the person or persons
executing this Agreement on behalf of Buyer have been duly authorized
by all appropriate action of Buyer to execute this Agreement and have
been or will be duly authorized to execute such other documents and to
take such other action as is necessary or desirable to consummate the
transactions contemplated hereby, and such transactions will not
result in a violation of any agreement or document under which Buyer
is organized or operating, or any other agreement to which Buyer is a
party or by which it is bound or subject; and this Agreement, when
executed, shall constitute the valid and binding obligation of Buyer.
23. CONDEMNATION; DAMAGE.
(a) In the event that prior to the Closing, the Property is condemned
in whole or in part or if the improvements located thereon are damaged
by fire or other casualty to the extent that the value of the
condemnation award or the cost to repair such damage shall be One
Hundred Thousand and No/100ths Dollars ($100,000.00) or more, then,
and in any of such events, Seller shall promptly notify Buyer in
writing of such condemnation or casualty loss. Buyer shall then have
the right, upon written notice to Seller, delivered within ten (10)
days after receipt of said notice from Seller, to terminate this
Agreement and thereupon the parties shall be released and discharged
from any further obligations each to the other; provided, however,
that the indemnitees of Buyer and Seller set forth in Paragraph 3 and
Paragraph 7 hereof and all other indemnitees and agreements which
expressly survive termination, shall survive termination of this
Agreement and the Earnest Money (and any interest thereon) provided
herein shall be returned to the Buyer. If Buyer does not elect to so
terminate this Agreement within the said ten (10) day period, the
Closing shall be held at any time thereafter upon at least five (5)
days prior written notice from Seller to Buyer (provided in no event
will Buyer be required to close prior to the Closing Date originally
scheduled), and the Purchase Price shall not be reduced, but Seller
shall at Closing (i) assign to Buyer all of Seller's right, title and
interest in and to all insurance proceeds resulting from the damage or
destruction and/or condemnation award and (ii) credit to Buyer the
amount of any deductible under Seller's insurance policy.
(b) In the event the improvements are damaged by fire or other
casualty or a portion of the Property is condemned to the extent that
the cost of repairing the same or the value of the condemnation award
shall be less than One Hundred Thousand and No/100ths Dollars
($100,000.00), the Closing shall occur pursuant to the terms hereof
without any delay or reduction of Purchase Price, and Seller shall at
Closing, (i) assign to Buyer all of Seller's right, title and interest
in and to all insurance proceeds resulting from the damage or
destruction and/or condemnation awards and (ii) credit to Buyer the
amount of any deductible under Seller's insurance policy.
24. DISPUTE. In the event of a dispute relating to this Agreement, the
nonprevailing party in such dispute shall pay the prevailing party's reasonable
attorney's fees, expenses and court costs.
[Balance of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands to
this Sale and Purchase Agreement as of the date and year first above written.
BUYER:
CULP INC., a North Carolina corporation
By: /s/ Kenneth M. Ludwig
-----------------
Name: Kenneth M. Ludwig
Title: Senior Vice President
SELLER:
SARA LEE FOUNDATION, an Illinois not-for-
profit corporation
By: /s/ Robin S.Tryloff
---------------
Name: Robin S.Tryloff
Title: President and Executive Director
EXHIBIT A
(TO SALE AND PURCHASE AGREEMENT)
------------------------------
Legal Description of the Property
---------------------------------
Beginning at a point in the new northwest right-of-way line of Eastchester Drive
(N.C. Highway 68) located North 49 degrees 48' 28" West 12.0 feet from an iron
in the old northwest right-of-way line of Eastchester Drive marking the
easternmost corner of the property of Buelah G. Smith (Tax Map 340-2, Lot 10)
running thence with the northeast line of said property of Buelah G. Smith and
falling in with the northeast line of W. Vernon Duncan (Tax Map 340-2, Lot 28)
North 49 degrees 48' 28" West 689.31 feet to an iron marking the southernmost
corner of property of City of High Point (Tax Map 340-2, Lot 24) thence with the
East line of said property in the City of High Point North 08 degrees 20' 21"
East 316.48 feet to an iron; thence with a southeast line of said property of
the City of High Point North 66 degrees 37' 03" East 147.65 feet to an iron
marking the westernmost corner of property of J.C. Coggins (Tax Map 340-2, Lot
19) thence with the southwest line of said property of J.C. Coggins South 49
degrees 39' 51" East 791.50 feet to a point in the new northwest right-of-way
line of Eastchester Drive located North 49 degrees 39' 51" West 12.0 feet from
an iron in the old northwest right-of-way line of Eastchester Drive marking the
southernmost corner of said property of J.C. Coggins; thence with said new
northwest right-of-way line South 40 degrees 19' 11" West 399.06 feet to the
point and place of beginning.
EXHIBIT B
(TO SALE AND PURCHASE AGREEMENT)
------------------------------
Items to be included within the meaning of "Personal Property"
All personal property (including office cubicles
and furnishings, but excluding all art work) at the
Property as of January 30, 2004.
EXHIBIT C
(TO SALE AND PURCHASE AGREEMENT)
------------------------------
CLOSING ESCROW INSTRUCTIONS
Escrow No.:____________________
Escrow Officer:________________
Telephone:_____________________
Title Commitment No.:__________
______________, 2004
_________ Title Insurance Company
_________________________________
_________________________________
Re: Escrow Instructions
-------------------
Ladies & Gentlemen:
As used herein, the following terms shall have the following meanings:
Seller: Sara Lee Foundation, an Illinois not-for-profit corporation
Buyer: Culp Inc., a North Carolina corporation
Property: That certain parcel of land and improvements commonly known as
1823 Eastchester Drive, High Point, North Carolina, and legally
described in Attachment A attached hereto and made a part hereof.
Permitted
Exceptions: Title exceptions set forth in Attachment B attached hereto and
made a part hereof.
Seller's Attorneys: Piper Rudnick LLP
203 North LaSalle Street, Suite 1800
Chicago, Illinois 60601
Attn: Louis S. Cohen, Esq.
Telephone: (312) 368-2171
Telecopy: (312) 236-7516
Buyer's
Attorneys: Robinson Bradshaw & Hinson, P.A.
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246
Attention: Julie C. Chiu, Esq.
Telephone: (704) 377-8348
Telecopy: (704) 373-3948
Escrowee: ___________________
_____________________________
_____________________________
Telephone:______________
Telecopy: ______________
Purchase
Agreement: Sale and Purchase Agreement dated as of March ___, 2004
("Purchase Agreement")
Closing Date: May ___, 2004
A. Seller's Deposits. On or before the Closing Date, Seller's Attorneys
will deposit with you, on behalf of Seller, the following ("Seller's
Deposits"):
1. Special Warranty Deed conveying fee simple title to the Property
to Buyer;
2. Owner's Affidavit;
3. Internal Revenue Service Waiver under FIRPTA;
4. Form 1099 Solicitation; and
5. Bill of Sale.
B. Buyer's Deposits. On or before the Closing Date, Buyer's Attorneys
will deposit with you, on behalf of Buyer, the sum of Three Million
Eight Hundred Fifty Thousand and No/100ths Dollars ($3,850,000.00),
plus or minus the proration amounts and other credits and deposits set
forth in Joint Deposit 1 below, if any, plus an amount sufficient to
pay any of Buyer's title, escrow, recording and other closing costs, if
any, as hereafter provided, by cashier's or certified check; or by wire
transfer of good funds ("Buyer's Deposits").
C. Joint Deposits. On or before the Closing Date, Seller's Attorneys and
Buyer's Attorneys will, on behalf of Seller and Buyer, respectively,
jointly deposit with you the following ("Joint Deposits"):
1. Closing Statement, in triplicate; and
2. All required state and county transfer/transaction tax
declaration(s) and any required municipal transfer/transaction
tax declarations, in triplicate.
D. After (i) all of the above deposits have been made, and (ii) you are
prepared to issue the title insurance policy described below, you are
to record Seller's Deposit 1 at once. When you are prepared to issue
your ALTA Form B Owner's Title Insurance Policy in the amount of
$3,850,000.00 showing title to the Property subject only to the
Permitted Exceptions, you are then authorized and directed to proceed
as follows in the order listed:
1. Pay the net prorations, if any, to Buyer pursuant to Joint
Deposit 1, from which you are to deduct Buyer's title, escrow and
recording charges;
2. Pay to Seller by wired funds transmitted to an account designated
by Seller the balance remaining, less Seller's share of closing
charges;
3. Deliver the Owner's Title Insurance Policy; originals of Seller's
Deposits 2, 3, 4 and 5; copies of other Seller's Deposits; and
copies of the Joint Deposits to Buyer's Attorneys;
4. Deliver original of Joint Deposits, and a copy of Buyer's
Deposits to Seller's Attorneys; and
5. Deliver to Seller's Attorneys and Buyer's Attorneys an accounting
of all funds received and distributed.
E. In the event Seller's Deposits are received, but Buyer's Deposits are
not received within the time limit herein specified, you are directed
to continue to comply with the instructions contained herein until you
are in receipt of a written demand from Seller's Attorneys for the
return of Seller's Deposits. Upon receipt of said demand, you are
directed to notify Buyer's Attorneys at the address shown herein by
United States certified mail, return receipt requested; or by a
nationally recognized overnight express courier service, that said
demand has been made on you, with a copy of said notice simultaneously
sent to Buyer's Attorneys by telecopy to the number set forth on the
first page of these Escrow Instructions. In the event Buyer does not
cure its default hereunder by making its deposits on or before five (5)
business days after the date your notice is deposited in the United
States mail, then upon further demand from Seller without notice to any
other party, you are directed to return Seller's Deposits to Seller's
Attorneys and to hold any remaining deposits on the order of the
respective depositor or depositors thereof. For purposes of this
Paragraph E and Paragraph F below, "Seller's Deposits" shall be deemed
to include the Joint Deposits.
F. In the event Buyer's Deposits are received, but Seller's Deposits are
not received within the time limit herein specified, you are directed
to continue to comply with the instructions contained herein until you
are in receipt of a written demand from Buyer's Attorneys for the
return of Buyer's Deposits. Upon receipt of said demand, you are
directed to notify Seller's Attorneys at the address shown herein by
United States certified mail, return receipt requested; or by a
nationally recognized overnight express courier service, that the
demand has been made on you, with a copy of said notice simultaneously
sent to Seller's Attorneys by telecopy to the number set forth on the
first page of these Escrow Instructions. In the event Seller does not
cure its default hereunder by making its deposits on or before five (5)
business days after the date your notice is deposited in the United
States mail, then upon further demand from Buyer without notice to any
other party, you are directed to return Buyer's Deposits to Buyer's
Attorneys, and to hold any remaining deposits on the order of the
respective depositor or depositors thereof.
G. In the event Escrowee is not prepared to issue its Owner's Title
Insurance Policy as provided herein on the date on which the last of
the Seller's Deposits, Buyer's Deposits and the Joint Deposits have
been received herein, you are hereby authorized and directed to
continue to comply with these Escrow Instructions until the receipt of
a written demand from any party hereto for the return of escrow
deposits made by said party. Upon receipt of such a demand, you are
hereby authorized and directed to notify the other party through its
attorneys at the address shown herein by United States certified mail,
return receipt requested, that said demand has been made on you, with a
copy of said notice simultaneously sent to such party's attorneys by
telecopy to the applicable number set forth on the first page of these
Escrow Instructions. In the event that you are still not prepared to
issue your Owner's Title Policy as provided herein within five (5)
business days after the date your notice is deposited in the United
States mail, then upon further demand from the party originally
requesting the return of its escrow deposits, you are hereby authorized
to return to the party making such demand the escrow deposits made by
such party without notice to any other party and to hold the remaining
escrow deposits subject to the order of the respective depositor or
depositors thereof.
H. If the Escrow Instructions direct you to continue to comply with
instructions following expiration of a time limit for making a deposit
until demand is received from the other party, unless otherwise
provided herein, the deposit may be made and accepted at any time prior
to receipt of the demand, and the default will be cured by said deposit.
No claim of a default shall be valid if the party making same is in
default, unless said default is caused by a failure of the other party
to take some action required by the Escrow Instructions.
Whenever under the terms and provisions of these Escrow Instructions
the time for performance of a condition falls upon a Saturday, Sunday
or holiday, such time for performance shall be extended to the next
business day.
I. Seller shall pay for one-half (1/2) of the closing and escrow costs,
and one-half (1/2) of the New York-style escrow fees (if any). Buyer
shall pay for any and all costs and fees charged for the title
examination, title commitment, the issuance of an Owner's title
insurance policy including the costs for extended coverage and the cost
of any and all endorsements beyond extended coverage, all loan charges
and fees, one-half (1/2) of closing and escrow costs, one-half (1/2) of
the New York-style escrow fees (if any) and the recordation of Seller's
Deposit 1.
J. Deposits made pursuant to these instructions may be invested on behalf
of any party or parties hereto, provided, that any direction to
Escrowee for such investment shall be expressed in writing and contain
the consent of all other parties to this Escrow. Escrowee will, upon
request, furnish information concerning its procedures and fee
schedules for investment.
Except as to deposits of funds for which Escrowee has received express
written direction concerning investment or other handling, the parties
hereto agree that Escrowee shall be under no duty to invest or reinvest
any deposits at any time held by it hereunder; and, further, that
Escrowee may commingle such deposits with other deposits or with its
own funds in the manner provided for the administration of funds under
any corporate fiduciary act under the laws of the State of North
Carolina and may use any part or all of such funds for its own benefit
without obligation to any party for interest or earnings derived
thereby, if any. Provided, however, nothing herein shall diminish
Escrowee's obligation to apply the full amount of the deposits in
accordance with the terms of these instructions.
[Balance of Page Intentionally Left Blank]
In the event Escrowee is requested to invest deposits hereunder,
Escrowee is not to be held responsible for any loss of principal or
interest which may be incurred as a result of making the investments or
redeeming said investment for the purposes of this Escrow.
Sincerely yours,
FOR SELLER:
___________________________
By: _______________________
FOR BUYER:
___________________________
By: _______________________
ACCEPTED:
_____________ TITLE INSURANCE COMPANY
By: _______________________
Escrow Officer
______________, 2004
ATTACHMENT A
------------
(TO EXHIBIT C TO SALE AND PURCHASE AGREEMENT)
LEGAL DESCRIPTION
-----------------
ATTACHMENT B
------------
(TO EXHIBIT C TO SALE AND PURCHASE AGREEMENT)
PERMITTED EXCEPTIONS
--------------------
Exhibit 18
KPMG LETTERHEAD
July 15, 2004
The Board of Directors
Culp, Inc.
P.O. Box 2686
High Point, North Carolina 27261
Dear Directors:
We have audited the consolidated balance sheets of Culp, Inc. and
subsidiaries (the "Company") as of May 2, 2004 and April 27, 2003, and the
related consolidated statements of income (loss), shareholders' equity and
cash flows for each of the years in the three-year period ended May 2, 2004,
and have reported thereon under date of June 4, 2004. The aforementioned
consolidated financial statements and our audit report thereon are included
in the Company's annual report on Form 10-K for the year ended May 2, 2004.
As stated in Note 1 to those consolidated financial statements, the Company
changed its method of accounting for inventories from the lower of last-in,
first-out (LIFO) cost or market to the lower of first-in, first-out (FIFO)
cost or market and states that the newly adopted accounting principle is
preferable in the circumstances as it provides a better matching of revenue
and expenses. Additionally, the change will enable the financial reporting to
parallel the way management assesses the financial and operating performance
of the Company's segments. In accordance with your request, we have reviewed
and discussed with Company officials the circumstances and business judgment
and planning upon which the decision to make this change in the method of
accounting was based.
With regard to the aforementioned accounting change, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
the Company's compliance with the requirements of the Securities and Exchange
Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting
is preferable in the Company's circumstances.
Very truly yours,
\S\ KPMG LLP
Greensboro, North Carolina
Exhibit 21
LIST OF SUBSIDIARIES OF CULP, INC.
Name of Subsidiary Jurisdiction of Incorporation
Culp Fabrics (Shanghai) Co., Ltd. People's Republic of China
Culp International Trading (Shanghai) Co., Ltd. People's Republic of China
Culp International Holdings Ltd. Cayman Islands
Rayonese Textile Inc. Canada
3096726 Canada Inc. Canada
Exhibit 23(a)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------
To the Board of Directors and Shareholders of Culp, Inc.:
We consent to incorporation by reference in the registration statements (numbers
333-59512, 333-59514, 333-27519, 333-101805, 33-13310, 33-37027, 33-80206, and
33-62843) on Form S-8 of Culp, Inc. of our report dated June 4, 2004, relating
to the consolidated balance sheets of Culp, Inc. and subsidiaries as of May 2,
2004 and April 27, 2003, and the related consolidated statements of income
(loss), shareholders' equity and cash flows for each of the years in the
three-year period ended May 2, 2004, which report appears in the May 2, 2004
annual report on Form 10-K of Culp, Inc. Our report refers to a change from the
lower of last-in, first-out (LIFO) cost or market to the lower of first-in,
first-out (FIFO) cost or market of valuing inventory.
\S\ KPMG LLP
Greensboro, North Carolina
July 15, 2004
Exhibit 24(a)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP,
INC., a North Carolina corporation, hereby constitutes and appoints FRANKLIN
N. SAXON the true and lawful agent and attorney-in-fact to sign for the
undersigned as a director of the Corporation the Corporation's Annual Report
on Form 10-K for the year ended May 2, 2004 to be filed with the Securities
and Exchange Commission, Washington, D.C., under the Securities Exchange Act
of 1934, as amended, and to sign any amendment or amendments to such Annual
Report, hereby ratifying and confirming all acts taken by such agent and
attorney-in-fact, as herein authorized.
/s/ Harry R. Culp, DDS
------------------
Harry R. Culp, DDS
Date: July 6, 2004
Exhibit 24(b)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP,
INC., a North Carolina corporation, hereby constitutes and appoints FRANKLIN
N. SAXON the true and lawful agent and attorney-in-fact to sign for the
undersigned as a director of the Corporation the Corporation's Annual Report
on Form 10-K for the year ended May 2, 2004 to be filed with the Securities
and Exchange Commission, Washington, D.C., under the Securities Exchange Act
of 1934, as amended, and to sign any amendment or amendments to such Annual
Report, hereby ratifying and confirming all acts taken by such agent and
attorney-in-fact, as herein authorized.
/s/ Howard L. Dunn
--------------
Howard L. Dunn
Date: July 6, 2004
Exhibit 24(c)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP,
INC., a North Carolina corporation, hereby constitutes and appoints FRANKLIN
N. SAXON the true and lawful agent and attorney-in-fact to sign for the
undersigned as a director of the Corporation the Corporation's Annual Report
on Form 10-K for the year ended May 2, 2004 to be filed with the Securities
and Exchange Commission, Washington, D.C., under the Securities Exchange Act
of 1934, as amended, and to sign any amendment or amendments to such Annual
Report, hereby ratifying and confirming all acts taken by such agent and
attorney-in-fact, as herein authorized.
/s/ Patrick B. Flavin
-----------------
Patrick B. Flavin
Date: July 7, 2004
Exhibit 24(d)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP,
INC., a North Carolina corporation, hereby constitutes and appoints FRANKLIN
N. SAXON the true and lawful agent and attorney-in-fact to sign for the
undersigned as a director of the Corporation the Corporation's Annual Report
on Form 10-K for the year ended May 2, 2004 to be filed with the Securities
and Exchange Commission, Washington, D.C., under the Securities Exchange Act
of 1934, as amended, and to sign any amendment or amendments to such Annual
Report, hereby ratifying and confirming all acts taken by such agent and
attorney-in-fact, as herein authorized.
/s/ Kenneth W. McAllister
---------------------
Kenneth W. McAllister
Date: July 6, 2004
Exhibit 24(e)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP,
INC., a North Carolina corporation, hereby constitutes and appoints FRANKLIN
N. SAXON the true and lawful agent and attorney-in-fact to sign for the
undersigned as a director of the Corporation the Corporation's Annual Report
on Form 10-K for the year ended May 2, 2004 to be filed with the Securities
and Exchange Commission, Washington, D. C., under the Securities Exchange Act
of 1934, as amended, and to sign any amendment or amendments to such Annual
Report, hereby ratifying and confirming all acts taken by such agent and
attorney-in-fact, as herein authorized.
/s/ Patrick H. Norton
-----------------
Patrick H. Norton
Date: July 8, 2004
Exhibit 31(a)
CERTIFICATION
I, Robert G. Culp, III, Chairman of the Board and Chief Executive Officer
(principal executive officer) of Culp, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 16, 2004 By: /s/ Robert G. Culp, III
Robert G. Culp, III
Chairman of the Board and Chief
Executive Officer (principal executive
officer)
Exhibit 31(b)
CERTIFICATION
I, Franklin N. Saxon, President and Chief Operating Officer (principal financial
officer) of Culp, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: July 16, 2004 By: /s/ Franklin N. Saxon
Franklin N. Saxon
President and Chief Operating Officer (principal
financial officer)
Exhibit 32(a)
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Culp, Inc. (the "Company") on Form
10-K for the period ended May 2, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Robert G. Culp,III, Chairman of
the Board and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Robert G. Culp, III
Chairman of the Board and
Chief Executive Officer
July 16, 2004
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32(b)
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Culp, Inc. (the "Company") on Form
10-K for the period ended May 2, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Franklin N. Saxon, President
and Chief Operating Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Franklin N. Saxon
President and
Chief Operating Officer
July 16, 2004
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.