===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 30, 2006
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)
1823 EASTCHESTER DRIVE
HIGH POINT, NORTH CAROLINA 27265-1402
(Address of principal executive offices) (zip code)
(336) 889-5161
----------------------------------------------------
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR AT
LEAST THE PAST 90 DAYS. [X] YES NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. (CHECK
ONE);
LARGE ACCELERATED FILER [_] ACCELERATED FILER [_] NON-ACCELERATED FILER [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED BY
RULE 12B-2 OF THE EXCHANGE ACT). [_] YES NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH ISSUER'S CLASSES OF COMMON
STOCK, AS OF THE LATEST PRACTICAL DATE:
COMMON SHARES OUTSTANDING AT JULY 30, 2006: 11,684,959
PAR VALUE: $0.05
================================================================================
INDEX TO FORM 10-Q
FOR THE PERIOD ENDED JULY 30, 2006
PAGE
----
PART I - FINANCIAL STATEMENTS
-----------------------------
ITEM 1. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
- ---------------------------------------------------------------
Consolidated Statements of Net Income (Loss) -- Three Months
Ended July 30, 2006 and July 31, 2005 I-1
Consolidated Balance Sheets -- July 30, 2006, July 31, 2005 and April 30, 2006 I-2
Consolidated Statements of Cash Flows -- Three Months Ended July 30, 2006 and July 31, 2005 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Cautionary Statement Concerning Forward-Looking Information I-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS I-18
- ------------------------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK I-28
- ---------------------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES I-28
- ----------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1A. II-1
- -------
ITEM 6. EXHIBITS II-1
- ---------------
Signatures II-2
Item 1: Financial Statements
- ----------------------------
CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
FOR THE THREE MONTHS ENDED JULY 30, 2006 AND JULY 31, 2005
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
-----------------------------------------------------------------------------
Amounts Percent of Sales
------------------------------ -----------------------------
July 30, July 31, % Over July 30, July 31,
2006 2005 (Under) 2006 2005
--------------- -------------- ----------- ------------ --------------
Net sales $ 62,585 62,340 0.4 % 100.0 % 100.0 %
Cost of sales 54,525 55,785 (2.3)% 87.1 % 89.5 %
--------------- -------------- ----------- ------------ --------------
Gross profit 8,060 6,555 23.0 % 12.9 % 10.5 %
Selling, general and
administrative expenses 6,575 9,856 (33.3)% 10.5 % 15.8 %
Restructuring expense 730 1,826 (60.0)% 1.2 % 2.9 %
--------------- -------------- ----------- ------------ --------------
Income (loss) from operations 755 (5,127) 114.7 % 1.2 % (8.2)%
Interest expense 950 948 0.2 % 1.5 % 1.5 %
Interest income (46) (16) 187.5 % (0.1)% (0.0)%
Other (income) expense (278) 133 (309.0)% (0.4)% 0.2 %
--------------- -------------- ----------- ------------ --------------
Income (loss) before income taxes 129 (6,192) 102.1 % 0.2 % (9.9)%
Income taxes * (3) (2,251) (99.9)% (2.3)% 36.4 %
-------------- -------------- ----------- ------------ --------------
Net income (loss) $ 132 (3,941) 103.3 % 0.2 % (6.3) %
=============== ============== =========== ============ --------------
Net income (loss) per share, basic $ 0.01 (0.34) 102.9 %
Net income (loss) per share, diluted 0.01 (0.34) 102.9 %
Average shares outstanding, basic 11,672 11,551 1.0 %
Average shares outstanding, diluted 11,770 11,551 1.9 %
* Percent of sales column is calculated as a % of income (loss) before income taxes.
See accompanying notes to consolidated financial statements.
I-1
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JULY 30, 2006, JULY 31, 2005 AND APRIL 30, 2006
UNAUDITED
(Amounts in Thousands)
Amounts
------------------------------- Increase
July 30, July 31, (Decrease)
------------------------------ * April 30,
2006 2005 Dollars Percent 2006
--------------- -------------- -------------- ------------ --------------
Current assets:
Cash and cash equivalents $ 8,387 5,238 3,149 60.1 % 9,714
Accounts receivable 26,044 23,019 3,025 13.1 % 29,049
Inventories 43,055 52,125 (9,070) (17.4)% 36,693
Deferred income taxes 7,120 7,054 66 0.9 % 7,120
Assets held for sale 2,531 - 2,531 100.0 % 3,111
Other current assets 2,789 1,660 1,129 68.0 % 1,287
--------------- -------------- -------------- ----------- --------------
Total current assets 89,926 89,096 830 0.9 % 86,974
Property, plant and equipment, net 42,835 60,190 (17,355) (28.8)% 44,639
Goodwill 4,114 4,114 - 0.0 % 4,114
Deferred income taxes 21,513 12,268 9,245 75.4 % 20,176
Other assets 1,542 1,519 23 1.5 % 1,564
--------------- -------------- -------------- ----------- --------------
Total assets $ 159,930 167,187 (7,257) (4.3)% 157,467
=============== ============== ============== =========== ==============
Current liabilities:
Current maturities of long-term debt $ 7,739 8,126 (387) (4.8)% 8,060
Accounts payable 21,247 18,524 2,723 14.7 % 20,835
Accrued expenses 9,130 10,178 (1,048) (10.3)% 7,845
Accrued restructuring costs 3,745 4,855 (1,110) (22.9)% 4,054
Income taxes payable 3,561 1,179 2,382 202.0 % 2,488
--------------- -------------- -------------- ----------- --------------
Total current liabilities 45,422 42,862 2,560 6.0 % 43,282
Long-term debt, less current maturities 39,601 42,440 (2,839) (6.7)% 39,662
--------------- -------------- -------------- ----------- --------------
Total liabilities 85,023 85,302 (279) (0.3)% 82,944
Shareholders' equity 74,907 81,885 (6,978) (8.5)% 74,523
--------------- -------------- -------------- ----------- --------------
Total liabilities and
shareholders' equity $ 159,930 167,187 (7,257) (4.3)% 157,467
=============== ============== ============== =========== ==============
Shares outstanding 11,685 11,552 133 1.2 % 11,655
=============== ============== ============== =========== ==============
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 30, 2006 AND JULY 31, 2005
UNAUDITED
(Amounts in Thousands)
THREE MONTHS ENDED
-----------------------
Amounts
-----------------------
July 30, July 31
2006 2005
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 132 (3,941)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation 1,702 6,172
Amortization of other assets 23 31
Stock-based compensation 132 53
Deferred income taxes (1,337) (2,182)
Restructuring expense 70 853
Gain on sale of equipment (307) --
Changes in assets and liabilities:
Accounts receivable 3,005 5,805
Inventories (6,362) (1,626)
Other current assets (1,502) 1,031
Other assets (6) 166
Accounts payable 796 (4,413)
Accrued expenses 1,285 622
Accrued restructuring (309) (995)
Income taxes payable 1,073 (365)
------- -------
Net cash (used in) provided by operating activities (1,605) 1,211
------- -------
Cash flows from investing activities:
Capital expenditures (637) (3,840)
Proceeds from the sale of buildings and equipment 1,600 2,850
------- -------
Net cash provided by (used in) investing activities 963 (990)
------- -------
Cash flows from financing activities:
Payments on vendor-financed capital expenditures (428) (108)
Payments on long-term debt (382) --
Proceeds from the issuance of long-term debt -- 16
Proceeds from common stock issued 125 2
------- -------
Net cash used in financing activities (685) (90)
------- -------
(Decrease) increase in cash and cash equivalents (1,327) 131
Cash and cash equivalents at beginning of period 9,714 5,107
------- -------
Cash and cash equivalents at end of period $ 8,387 5,238
======= =======
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(Dollars in thousands, except share data)
Capital Accumulated
Common Stock Contributed Other Total
------------------------- in Excess Unearned Retained Comprehensive Shareholders'
Shares Amount of Par Value Compensation Earnings Income Equity
------------ ----------- -------------- ------------ ----------- ------------ -----------
Balance, May 1, 2005 11,550,759 $ 579 39,964 (139) 45,367 - $ 85,771
Net loss - - - - (11,796) - (11,796)
Stock-based compensation - - - 139 - - 139
Gain on cash
flow hedge, net of taxes - - - - - 18 18
Common stock
issued in connection
with stock option plans 104,200 5 386 - - - 391
------------ ----------- -------------- ------------ ------------ --------- -------------
Balance, April 30, 2006 11,654,959 584 40,350 - 33,571 18 74,523
Net income - - - - 132 - 132
Stock-based compensation - - 132 - - - 132
Loss on cash flow
hedge, net of taxes - - - - - (5) (5)
Common stock
issued in connection
with stock option plans 30,000 2 123 - - - 125
------------ ----------- -------------- ------------ ------------ --------- -------------
Balance, July 30, 2006 11,684,959 $ 586 40,605 - 33,703 13 $ 74,907
============ =========== =============== ============= ============ ========= =============
See accompanying notes to consolidated financial statements.
I-4
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc. and
subsidiaries (the "company") include all adjustments, which are, in the opinion
of management, necessary for fair presentation of the results of operations and
financial position. All of these adjustments are of a normal recurring nature
except as disclosed in note 10 to the consolidated financial statements. Results
of operations for interim periods may not be indicative of future results. The
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements, which are included in the
company's annual report on Form 10-K filed with the Securities and Exchange
Commission on July 26, 2006 for the fiscal year ended April 30, 2006.
The company's three months ended July 30, 2006 and July 31, 2005 represent 13
week periods.
2. Stock-Based Compensation
Effective May 1, 2006, the company began recording compensation expense
associated with its stock option plans in accordance with SFAS No. 123R,
"Share-Based Payment" which requires the measurement of the cost of employee
services received in exchange for an award of an equity instrument based on the
grant date fair value of the award. The company adopted the modified prospective
transition method provided for under SFAS No. 123R, and consequently has not
retroactively adjusted results from prior periods. Under this transition method,
compensation expense associated with stock options recognized in the first
quarter of fiscal 2007 now includes amortization related to the remaining
unvested portion of all stock option awards granted prior to May 1, 2006 based
on their grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Prior to May 1, 2006, the company recognized compensation costs related to
employee stock option plans utilizing the intrinsic value-based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. The company had also adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure." SFAS No. 123 required disclosure of pro-forma net income, earnings
per share, and other information as if the fair value method of accounting for
stock options and other equity instruments described in SFAS No. 123 had been
adopted.
As a result of adopting SFAS No. 123R, the company recorded $132,000 of
compensation expense for stock options within selling, general, and
administrative expense for the three-month period ended July 30, 2006. In the
prior year, the company recorded $53,000 of compensation expense for stock
options that were required to be accounted for under the provisions of APB
Opinion No. 25 for the three-month period July 31, 2005.
Prior to the adoption of SFAS No. 123R, the benefit of tax deductions in excess
of recognized compensation costs were reported as an operating cash flow. SFAS
No. 123R requires such benefits be recorded as financing cash flow rather than
as a reduction of taxes paid within operating cash flow. For the three-month
period ended July 30, 2006, no tax benefits in excess of recognized compensation
costs were realized from option exercises.
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The remaining unrecognized compensation costs related to unvested awards at July
30, 2006 is $1.3 million which is expected to be recognized over a weighted
average period of 3.1 years.
The following table illustrates the effect on net loss and net loss per share if
the company had applied the fair value recognition provisions of SFAS No. 123 to
options granted under the company's stock option plan for three-months ended
July 31, 2005:
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) July 31, 2005
- -----------------------------------------------------------------------------------------------------------
Net loss, as reported $ (3,941)
Add: Total stock-based employee compensation expense
included in net loss, net of tax 33
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax (107)
- -----------------------------------------------------------------------------------------------------------
Pro forma net loss $ (4,015)
- -----------------------------------------------------------------------------------------------------------
Net loss per share:
Basic - as reported $ (0.34)
Basic - pro forma (0.35)
Diluted - as reported (0.34)
Diluted - pro forma (0.35)
- -----------------------------------------------------------------------------------------------------------
Under the company's stock option plans, employees and directors may be granted
options to purchase shares of common stock at the fair market value on the date
of grant. Options granted under these plans generally vest over four years and
expire five to ten years after the date of grant. The fair value of each option
award was estimated on the date of grant using a Black-Scholes option-pricing
model. The fair value of stock options granted during the three-month period
ended July 30, 2006 was $2.43 per share using the following assumptions:
- -----------------------------------------------------------------------------------------------------------
Risk-free interest rate 5.03%
Dividend yield 0.00%
Expected volatility 67.03%
Expected term (in years) 1.6
- -----------------------------------------------------------------------------------------------------------
The assumptions utilized in the model are evaluated and revised, as necessary,
to reflect market conditions and actual historical experience. The risk-free
interest rate for periods within the contractual life of the option was based on
the U.S. Treasury yield curve in effect at the time of grant. The dividend yield
was calculated based on the company's annual dividend as of the option grant
date. The expected volatility was derived using a term structure based on
historical volatility and the volatility implied by exchange-traded options on
the company's common stock. The expected term of the options is the contractual
term of the stock options and expected employee exercise and post-vesting
employment termination trends.
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes the stock options (vested and unvested) as of
July 30, 2006 and option activity during the three-month period then ended:
- -------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding, April 30, 2006 993,875 $ 7.11
Granted 218,000 4.52
Expired (154,750) 5.85
Exercised (30,000) 4.10 $ 9,000
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding, July 30, 2006 1,027,125 6.84 3.3 Years $ 712,485
- -------------------------------------------------------------------------------------------------------------------------------
At July 30, 2006, there were 274,750 shares available for future grants under
the company's incentive stock option plans and options to purchase 496,000
shares were exercisable which had a weighted average exercise price of $8.93 per
share, an aggregate intrinsic value of $346,865 and a weighted average
contractual term of 0.16 years.
3. Accounts Receivable
A summary of accounts receivable follows:
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 30, 2006 April 30, 2006
- ------------------------------------------------------------------------------------------------------------------
Customers $ 28,117 $ 30,924
Allowance for doubtful accounts (985) (1,049)
Reserve for returns and allowances and discounts (1,088) (826)
- ------------------------------------------------------------------------------------------------------------------
$ 26,044 $ 29,049
- ------------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
- ------------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 30, 2006 July 31, 2005
- ------------------------------------------------------------------------------------------------------------------
Beginning balance $ (1,049) $ (1,142)
Recovery of bad debt expense 8 0
Net write-offs 56 22
- ------------------------------------------------------------------------------------------------------------------
Ending balance $ (985) $ (1,120)
- ------------------------------------------------------------------------------------------------------------------
I-7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of the activity in the allowance for returns and allowances and
discounts accounts follows:
- --------------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 30, 2006 July 31, 2005
- --------------------------------------------------------------------------------------------------------------------
Beginning balance $ (826) $ (837)
Provision for returns and allowances
and discounts (701) (491)
Discounts taken 439 487
- --------------------------------------------------------------------------------------------------------------------
Ending balance $ (1,088) $ (841)
- --------------------------------------------------------------------------------------------------------------------
4. Inventories
Inventories are carried at the lower of cost or market. Cost is determined using
the FIFO (first-in, first-out) method.
A summary of inventories follows:
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 30, 2006 April 30, 2006
- --------------------------------------------------------------------------------------------------------------------
Raw materials $ 12,452 $ 13,561
Work-in-process 1,894 2,020
Finished goods 28,709 21,112
- --------------------------------------------------------------------------------------------------------------------
$ 43,055 $ 36,693
- --------------------------------------------------------------------------------------------------------------------
5. Accounts Payable
A summary of accounts payable follows:
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 30, 2006 April 30, 2006
- --------------------------------------------------------------------------------------------------------------------
Accounts payable-trade $ 19,182 $ 18,386
Accounts payable-capital expenditures 2,065 2,449
- --------------------------------------------------------------------------------------------------------------------
$ 21,247 $ 20,835
- --------------------------------------------------------------------------------------------------------------------
6. Accrued Expenses
A summary of accrued expenses follows:
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 30, 2006 April 30, 2006
- --------------------------------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 4,252 $ 4,757
Interest 1,225 433
Accrued rebates 902 705
Other 2,751 1,950
- --------------------------------------------------------------------------------------------------------------------
$ 9,130 $ 7,845
- --------------------------------------------------------------------------------------------------------------------
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. Long-Term Debt
A summary of long-term debt follows:
- -----------------------------------------------------------------------------------------------
(dollars in thousands) July 30, 2006 April 30, 2006
- -----------------------------------------------------------------------------------------------
Unsecured term notes $ 42,440 $ 42,440
Real estate loan 4,193 4,242
Canadian government loans 707 1,040
- -----------------------------------------------------------------------------------------------
47,340 47,722
Less current maturities (7,739) (8,060)
- -----------------------------------------------------------------------------------------------
$ 39,601 $ 39,662
- -----------------------------------------------------------------------------------------------
Unsecured Term Notes
The company's unsecured term notes have a fixed interest rate of 7.76% (payable
semi-annually in March and September) and are payable over an average remaining
term of three years beginning March 2007 through March 2010. The principal
payments are required to be paid in annual installments over the next four years
as follows: March 2007 - $7.5 million; March 2008 - $19.9 million; March 2009 -
$7.5 million; and March 2010 - $7.5 million.
Real Estate Loan
The company's real estate loan is secured by a lien on the company's corporate
headquarters office located in High Point, NC. This term loan bears interest at
the one-month London Interbank Offered Rate plus an adjustable margin based on
the company's debt/EBITDA ratio, as defined in the agreement and is payable in
varying monthly installments through September 2010, with a final payment of
$3.3 million in October 2010.
Revolving Credit Agreement
On July 20, 2006, the company entered into a Ninth Amendment to this credit
agreement. This credit agreement provides for a revolving loan commitment of
$8.0 million, including letters of credit up to $5.5 million. Borrowings under
the credit facility bear interest at the one-month London Interbank Offered Rate
plus an adjustable margin based on the company's debt/EBITDA ratio, as defined
in the agreement. This agreement limits annual capital expenditures to $2.5
million for fiscal 2007, requires the company to maintain collected deposit
balances of at least $2.0 million, and maintain certain other financial
covenants as defined in the agreement. As of July 30, 2006, there were $4.0
million in outstanding letters of credit and no borrowings outstanding under the
agreement. This agreement expires on August 31, 2007.
I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Canadian Government Loans
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's Rayonese facility
located in Quebec, Canada. This loan is non-interest bearing and is payable in
48 equal monthly installments commencing December 1, 2009. In addition to the
term loan entered into in November 2005, the company had an existing
non-interest bearing term loan with the Canadian government which was paid in
May 2006.
Overall
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At July 30, 2006, the company was in compliance with
these financial covenants.
The principal payment requirements of long-term debt during the next five years
are: Year 1 - $7.7 million; Year 2 - $20.0 million; Year 3 - $7.8 million; Year
4 - $7.8 million; Year 5 - $3.5 million; and thereafter - $455,000.
8. Interest Rate Hedging
In connection with the company's real estate loan, the company was required to
have an agreement to hedge the interest rate risk exposure on the real estate
loan. The company entered into a $2,170,000 notional principal interest rate
swap, which represents 50% of the principal amount of the real estate loan, that
effectively converted the floating rate LIBOR based payments to fixed payments
at 4.99% plus the spread calculated under the real estate loan agreement. This
agreement expires October 2010.
The company accounts for the interest rate swap as a cash flow hedge whereby the
fair value of this contract is reflected in other assets in the accompanying
consolidated balance sheets with the offset recorded as accumulated other
comprehensive income. The fair value of the interest rate swap at July 30, 2006
was $24,000, as determined by quoted market prices.
9. Cash Flow Information
Payments for interest and income taxes follows:
- -------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 30, 2006 July 31, 2005
- -------------------------------------------------------------------------------------------
Interest $ 168 $ 5
Income tax payments 243 366
- -------------------------------------------------------------------------------------------
The company did not finance any of its capital expenditures for the three months
ended July 30, 2006. The non-cash portion of capital expenditures representing
vendor financing totaled $1,670,000 for the three months ended July 31, 2005.
I-10
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. Restructuring and Asset Impairment Charges
A summary of accrued restructuring follows:
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) July 30, 2006 April 30, 2006
- ----------------------------------------------------------------------------------------------------
September 2005 Upholstery Fabrics $ 352 $ 439
August 2005 Upholstery Fabrics 228 134
April 2005 Upholstery Fabrics 946 1,000
October 2004 Upholstery Fabrics 46 64
Fiscal 2003 Culp Decorative Fabrics 2,173 2,412
Fiscal 2001 Culp Decorative Fabrics - 5
- ----------------------------------------------------------------------------------------------------
$ 3,745 $ 4,054
- ----------------------------------------------------------------------------------------------------
September 2005 Upholstery Fabrics
During the first quarter of fiscal 2007, total restructuring and related charges
incurred were $310,000 of which $340,000 related to operating costs associated
with the closing of a plant facility, $169,000 related to asset movement costs,
$26,000 related to employee termination benefits, $9,000 related to lease
termination costs, and a credit of $234,000 for sale proceeds received on
equipment with no carrying value. Of the total charge, $204,000 was recorded in
restructuring expense, $340,000 was recorded in cost of sales, and a credit of
$234,000 was recorded in other income in the 2007 Consolidated Statement of Net
Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ----------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ----------------------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 439 - 439
Adjustments in fiscal 2007 26 - 26
Additions in fiscal 2007 - 9 9
Paid in fiscal 2007 (122) - (122)
- ----------------------------------------------------------------------------------------------------------
Balance, July 30, 2006 $ 343 9 352
- ----------------------------------------------------------------------------------------------------------
As of July 30, 2006 and April 30, 2006, assets classified as held for sale
consisted of a building with a carrying value of $641,000.
August 2005 Upholstery Fabrics
During the first quarter of fiscal 2007, total restructuring and related charges
incurred were $157,000 of which $128,000 related to employee termination
benefits primarily from headcount reductions within the upholstery fabrics
segment, $46,000 related to asset movement costs, $27,000 related to operating
costs associated with the closing of a plant facility, and a credit of $44,000
for sale proceeds received on equipment with no carrying value. Of the total
charge, $174,000 was recorded in restructuring expense, $27,000 was recorded in
cost of sales, and a credit of $44,000 was recorded in other income in the 2007
Consolidated Statement of Net Income.
I-11
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- -----------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- -----------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 127 7 134
Adjustments in fiscal 2007 128 - 128
Paid in fiscal 2007 (33) (1) (34)
- -----------------------------------------------------------------------------------------------
Balance, July 30, 2006 $ 222 6 228
- -----------------------------------------------------------------------------------------------
As of July 30, 2006 and April 30, 2006, assets classified as held for sale
consisted of equipment with a carrying value of $700,000. As of April 30, 2006,
assets classified as held for sale also included a building with a carrying
value of $475,000, which was sold in May 2006.
April 2005 Upholstery Fabrics
During the first quarter of fiscal 2007, the total restructuring and related
charges incurred were $701,000, of which approximately $238,000 related to
inventory markdowns, $169,000 related to asset movement costs, $116,000 for
write-downs of equipment, $102,000 related to operating costs associated with
the closing of a plant facility, $94,000 related to employee termination
benefits primarily from headcount reductions, $8,000 for lease termination
costs, and a credit of $26,000 for sale proceeds received on equipment with no
carrying value. Of this total charge, $387,000 was recorded in restructuring
expense, $340,000 was recorded in cost of sales, and a credit of $26,000 was
recorded in other income in the 2007 Consolidated Statement of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ------------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 799 201 1,000
Adjustments in fiscal 2007 94 8 102
Paid in fiscal 2007 (99) (57) (156)
- ------------------------------------------------------------------------------------------------
Balance, July 30, 2006 $ 794 152 946
- ------------------------------------------------------------------------------------------------
As of July 30, 2006 and April 30, 2006, assets classified as held for sale
consisted of equipment with a carrying value of approximately $1.2 million and
$1.3 million, respectively.
I-12
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
October 2004 Upholstery Fabrics
During the first quarter of fiscal 2007, as a result of management's continual
evaluation of the restructuring accrual, the reserve was decreased by $8,000 to
reflect current estimates of future health care claims. This $8,000 decrease in
the reserve was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ---------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ---------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 64 - 64
Adjustments in fiscal 2007 (8) - (8)
Paid in fiscal 2007 (10) - (10)
- ---------------------------------------------------------------------------------------------
Balance, July 30, 2006 $ 46 - 46
- ---------------------------------------------------------------------------------------------
As of July 30, 2006 and April 30, 2006, there were no assets classified as held
for sale.
Fiscal 2003 Culp Decorative Fabrics Restructuring
During the first quarter of fiscal 2007, as a result of management's continual
evaluation of the restructuring accrual, the reserve was decreased by
approximately $22,000 to reflect current estimates of sub-lease income and other
exit costs. This $22,000 decrease in the reserve was recorded in restructuring
expense in the 2007 Consolidated Statement of Net Income. Additionally, the
company recorded a restructuring related charge of $12,000 for other operating
costs associated with a closed plant facility. This $12,000 restructuring
related charge was recorded in cost of sales in the 2007 Consolidated Statement
of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ----------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ----------------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 88 2,324 2,412
Adjustments in fiscal 2007 - (22) (22)
Paid in fiscal 2007 (11) (206) (217)
- ----------------------------------------------------------------------------------------------------
Balance, July 30, 2006 $ 77 2,096 2,173
- ----------------------------------------------------------------------------------------------------
As of July 30, 2006 and April 30, 2006, there were no assets classified as held
for sale.
I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fiscal 2001 Culp Decorative Fabrics Restructuring
During the first quarter of fiscal 2007, as a result of management's continual
evaluation of the restructuring accrual, the reserve was decreased by
approximately $5,000 to reflect current estimates of future health care claims.
This $5,000 decrease in the reserve was recorded in restructuring expense in the
2007 Consolidated Statement of Net Income. Additionally, the company recorded a
restructuring related charge of $26,000 for other operating costs associated
with a closed plant facility. This $26,000 restructuring related charge was
recorded in cost of sales in the 2007 Consolidated Statement of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- -----------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- -----------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 5 - 5
Adjustments in fiscal 2007 (5) - (5)
Paid in fiscal 2007 - - -
- -----------------------------------------------------------------------------------------------
Balance, July 30, 2006 $ - - -
- -----------------------------------------------------------------------------------------------
As of July 30, 2006 and April 30, 2006, there were no assets classified as held
for sale.
11. 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 (loss) 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 follows:
- -------------------------------------------------------------------------------------------------------------------
Three months ended
(amounts in thousands) July 30, 2006 July 31, 2005
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,672 11,551
Effect of dilutive stock options 98 -
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,770 11,551
- -------------------------------------------------------------------------------------------------------------------
Options to purchase 466,125 and 515,375 shares of common stock were not included
in the computation of diluted net income (loss) per share for the three months
ended July 30, 2006 and July 31, 2005, respectively, because the exercise price
of the options was greater than the average market price of the common shares.
Options to purchase 36,138 shares of common stock were not included in the
computation of diluted net loss per share for the three months ended July 31,
2005, because the company incurred a net loss for the period.
I-14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
12. Segment Information
The company's operations are classified into two segments: mattress fabrics and
upholstery fabrics. The mattress fabrics segment manufactures, sources, and
sells fabrics to bedding manufacturers. The upholstery fabrics segment
manufactures, sources, and sells fabrics primarily to residential and commercial
(contract) furniture manufacturers.
Financial information for the company's operating segments as follows:
- ----------------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 30, 2006 July 31, 2005
- ----------------------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 21,845 $ 22,915
Upholstery Fabrics 40,740 39,425
- ----------------------------------------------------------------------------------------------------------------------
$ 62,585 $ 62,340
- ----------------------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 3,521 $ 3,095
Upholstery Fabrics 5,285 3,955
- ----------------------------------------------------------------------------------------------------------------------
Total segment gross profit 8,806 7,050
Restructuring related charges (746) (1) (495) (3)
- ----------------------------------------------------------------------------------------------------------------------
$ 8,060 $ 6,555
- ----------------------------------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 1,663 $ 1,737
Upholstery Fabrics 3,710 4,335
- ----------------------------------------------------------------------------------------------------------------------
Total segment selling, general, and
administrative expenses 5,373 6,072
Unallocated corporate expenses 1,202 762
Restructuring related charges - 3,022 (4)
- ----------------------------------------------------------------------------------------------------------------------
$ 6,575 $ 9,856
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Mattress Fabrics $ 1,858 $ 1,358
Upholstery Fabrics 1,575 (380)
- ----------------------------------------------------------------------------------------------------------------------
Total segment income from operations 3,433 978
Unallocated corporate expenses (1,202) (762)
Restructuring and related charges (1,476) (2) (5,343) (5)
- ----------------------------------------------------------------------------------------------------------------------
$ 755 $ (5,127)
- ----------------------------------------------------------------------------------------------------------------------
(1) The $746,000 represents restructuring related charges of $507,000 for other
operating costs associated with the closing of or closed plant facilities
and $239,000 for inventory markdowns related to the reduction of SKUs.
These charges relate to the Upholstery Fabrics segment.
I-15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2) The $1.5 million represents restructuring and related charges of $507,000
for other operating costs associated with the closing of or closed plant
facilities, $385,000 for asset movement costs, $239,000 for inventory
markdowns related to the reduction of SKUs, $235,000 for termination
benefits, $116,000 for write-downs of equipment, and a credit of $6,000 for
lease termination costs. Of this total charge, $746,000 and $730,000 are
included in cost of sales and restructuring expense, respectively. These
charges relate to the Upholstery Fabrics segment.
(3) The $495,000 represents restructuring related charges for accelerated
depreciation. These charges primarily relate to the Upholstery Fabrics
segment.
(4) The $3.0 million represents restructuring related charges for accelerated
depreciation. These charges primarily relate to the Upholstery Fabrics
segment.
(5) The $5.3 million represents $3.5 million for accelerated depreciation, $1.2
million for asset movement costs, $754,000 for write-downs of equipment,
$47,000 for lease termination costs, and a restructuring credit of $142,000
for the reversal of accrued termination and benefit expenses. Of the total
charge, $495,000, $3.0 million, and $1.8 million are included in the cost
of sales, selling, general, and administrative expenses, and restructuring
expense, respectively. These charges primarily related to the Upholstery
Fabrics segment.
Balance sheet information for the company's operating segments follow:
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 30, 2006 April 30, 2006
- --------------------------------------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets (8) $ 21,061 $ 21,179
Property, plant and equipment (6) 24,319 25,357
- --------------------------------------------------------------------------------------------------------------
Total mattress fabrics assets 45,380 46,536
- --------------------------------------------------------------------------------------------------------------
Upholstery Fabrics
Current assets (8) 48,038 44,563
Assets held for sale 2,531 3,111
Property, plant and equipment (7) 18,468 19,229
- --------------------------------------------------------------------------------------------------------------
Total upholstery fabrics assets 69,037 66,903
- --------------------------------------------------------------------------------------------------------------
Total segment assets 114,417 113,439
Non-segment assets:
Cash and cash equivalents 8,387 9,714
Deferred income taxes 28,633 27,296
Other current assets 2,789 1,287
Property, plant & equipment 48 53
Goodwill 4,114 4,114
Other assets 1,542 1,564
- --------------------------------------------------------------------------------------------------------------
Total assets $ 159,930 $ 157,467
- --------------------------------------------------------------------------------------------------------------
I-16
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 30, 2006 July 31, 2005
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 26 $ 2,870
Upholstery Fabrics 654 1,174
- -------------------------------------------------------------------------------------------------------------------
$ 680 $ 4,044
- -------------------------------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 942 $ 857
Upholstery Fabrics 760 1,798
- -------------------------------------------------------------------------------------------------------------------
Total segment depreciation expense 1,702 2,655
Accelerated depreciation - 3,517
- -------------------------------------------------------------------------------------------------------------------
$ 1,702 $ 6,172
- -------------------------------------------------------------------------------------------------------------------
(6) Included in property, plant, and equipment are assets located in the U.S.
totaling $12.6 million and $12.9 million at July 30, 2006 and April 30,
2006, respectively.
(7) Included in property, plant, and equipment are assets located in the U.S.
totaling $12.5 million and $13.8 million at July 30, 2006 and April 30,
2006, respectively. Included in this U.S. property, plant, and equipment
are various other corporate allocations totaling $4.0 million and $4.1
million at July 30, 2006 and April 30, 2006, respectively.
(8) Current assets represent accounts receivable and inventory for the
respective segment.
I-17
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report and the exhibits attached hereto 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, operating income, 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, changes in
consumer preferences for various categories of furniture coverings, as well as
changes in costs to produce such products (including import duties and quotas or
other import costs) can have significant effect on demand for the company's
products. Also, changes in the value of the U.S. dollar versus other currencies
can affect the company's financial results because a significant portion of the
company's operations are located outside the United States. Further, 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.
Further information about these factors, as well as other factors that could
affect the company's future operations or financial results and the matters
discussed in forward-looking statements are included in Item 1A "Risk Factors"
section in the company's Form 10-K filed with the Securities and Exchange
Commission on July 26, 2006 for the fiscal year ended April 30, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following analysis of financial condition and results of operations should
be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
OVERVIEW
Culp, Inc. (or the "company") has two operating segments - mattress fabrics and
upholstery fabrics. The company manufactures, sources and markets fabrics that
are used primarily in the production of bedding products and residential and
commercial upholstered furniture, including mattresses, box springs, mattress
sets, sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and office
seating. The company primarily markets fabrics that have broad appeal in the
"good" and "better" priced categories of furniture and bedding. Management
believes that Culp is the largest producer of mattress fabrics 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.
I-18
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." The company's fiscal
year is the 52 or 53 week period ending on the Sunday closet to April 30. The
first quarter of fiscal 2007 and 2006 included 13 weeks.
The following tables set forth the company's net sales, gross profit, selling,
general and administrative expenses and operating income (loss) by segment for
the three months ended July 30, 2006 and July 31, 2005.
I-19
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE THREE MONTHS ENDED JULY 30, 2006 AND JULY 31, 2005
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------------ ------------------------------
July 30, July 31, % Over July 30, July 31,
Net Sales by Segment 2006 2005 (Under) 2006 2005
- ------------------------------------------------- ------------- -------------- ----------- -------------- -------------
Mattress Fabrics $ 21,845 22,915 (4.7)% 34.9 % 36.8 %
Upholstery Fabrics 40,740 39,425 3.3 % 65.1 % 63.2 %
------------- -------------- -------------------------------------------
Net Sales $ 62,585 62,340 0.4 % 100.0 % 100.0 %
============= ============== ===========================================
Gross Profit by Segment Gross Profit Margin
- ------------------------------------------------- ------------------------------
Mattress Fabrics $ 3,521 3,095 13.8 % 16.1 % 13.5 %
Upholstery Fabrics 5,285 3,955 33.6 % 13.0 % 10.0 %
------------- -------------- -------------------------------------------
Subtotal 8,806 7,050 24.9 % 14.1 % 11.3 %
Restructuring related charges (746)(1) (495)(3) 50.7 % (1.2)% (0.8)%
------------- -------------- -------------------------------------------
Gross Profit $ 8,060 6,555 23.0 % 12.9 % 10.5 %
============= ============== ===========================================
Sales, General and
Administrative expenses by Segment Percent of Sales
- -------------------------------------------------- ------------------------------
Mattress Fabrics $ 1,663 1,737 (4.3)% 7.6 % 7.6 %
Upholstery Fabrics 3,710 4,335 (14.4)% 9.1 % 11.0 %
Unallocated Corporate expenses 1,202 762 57.7 % 1.9 % 1.2 %
------------- -------------- -------------------------------------------
Subtotal 6,575 6,834 (3.8)% 10.5 % 11.0 %
Restructuring related charges - 3,022 (4) (100.0)% 0.0 % 4.8 %
------------- -------------- -------------------------------------------
Selling, General and Administrative expenses $ 6,575 9,856 (33.3)% 10.5 % 15.8 %
============= ============== ===========================================
Operating income (loss) by Segment Operating Income (Loss) Margin
- -------------------------------------------------- ------------------------------
Mattress Fabrics $ 1,858 1,358 36.8 % 8.5 % 5.9 %
Upholstery Fabrics 1,575 (380) 514.5 % 3.9 % (1.0)%
Unallocated corporate expenses (1,202) (762) (57.7)% (1.9)% (1.2)%
------------- -------------- -------------------------------------------
Subtotal 2,231 216 932.9 % 3.6 % 0.3 %
Restructuring expense and
restructuring related charges (1,476)(2) (5,343)(5) (72.4)% (2.4)% (8.6)%
------------- -------------- -------------------------------------------
Operating income (loss) $ 755 (5,127) 114.7 % 1.2 % (8.2)%
============= ============== =========== ============= =============
Depreciation by Segment
- -------------------------------------------------
Mattress Fabrics $ 942 857 9.9 %
Upholstery Fabrics 760 1,798 (57.7)%
------------- -------------- ------------
Subtotal 1,702 2,655 (35.9)%
Accelerated depreciation - 3,517 (100.0)%
------------- -------------- ------------
Total Depreciation $ 1,702 6,172 (72.4)%
============= ============== =============
(1) The $746,000 represents restructuring related charges of $507,000 for other
operating costs associated with the closing of or closed plant facilities
and $239,000 for inventory markdowns.
(2) The $1.5 million represents $507,000 for other operating costs associated
with the closing of or closed plant facilities, $385,000 for asset movement
costs, $239,000 for inventory markdowns, $235,000 for termination benefits,
$116,000 for write-downs of equipment, and a credit of $6,000 for lease
termination costs. Of this total charge, $746,000 and $730,000 are included
in cost of sales and restructuring expense, respectively.
(3) The $495,000 represents restructuring related charges for accelerated
depreciation.
(4) The $3.0 million represents restructuring related charges for accelerated
depreciation.
(5) The $5.3 million represents $3.5 million for accelerated depreciation, $1.2
million for asset movement costs, $754,000 for write-downs of equipment,
$47,000 for lease termination costs, and a restructuring credit of $142,000
for the reversal of accrued termination benefits. Of this total charge,
$495,000, $3.0 million, and $1.8 million are included in cost of sales,
selling, general, and administrative expenses, and restructuring expense,
respectively.
I-20
THREE MONTHS ENDED JULY 30, 2006 COMPARED WITH THREE MONTHS ENDED JULY 31, 2005
For the three months ended July 30, 2006, net sales were $62.6 million compared
to $62.3 million for the first quarter of fiscal 2006. The company reported net
income of $132,000, or $0.01 per diluted share for the first quarter of fiscal
2007, which included restructuring and related pre-tax charges of $1.2 million.
The company reported a net loss of $3.9 million, or $0.34 per share diluted, in
the first quarter of fiscal 2006, which included restructuring and related
pre-tax charges of $5.3 million.
RESTRUCTURING AND RELATED CHARGES
During the first quarter of fiscal 2007, total restructuring and related charges
incurred were $1.2 million, of which $507,000 related to other operating costs
associated with the closing of or closed plant facilities, $385,000 for asset
movement costs, $239,000 for inventory markdowns, $235,000 for termination
benefits, $116,000 for write-downs of equipment and a building, a credit of
$6,000 for lease termination costs, and a credit of $307,000 for sale proceeds
received on equipment with no carrying value. Of this total charge, $730,000 was
recorded in restructuring expense, $746,000 was recorded in cost of sales, and a
credit of $307,000 was recorded in other income in the 2007 Consolidated
Statement of Net Income.
MATTRESS FABRICS SEGMENT
NET SALES -- Mattress fabric (known as mattress ticking) net sales for the first
quarter of fiscal 2007 were $21.8 million compared to $22.9 million for the
first quarter of fiscal 2006, a 4.7% decline. On a unit volume basis, total
yards sold decreased by 5.6% compared with the first quarter of fiscal 2006.
This trend reflects a decline in demand for printed ticking, a less popular
category, and an increase in demand for knitted ticking, reflecting changing
customer demand. Although prices on the key product lines have trended lower,
the average selling price of $2.30 per yard for mattress ticking for the first
quarter of fiscal 2007 was slightly higher than the $2.28 average selling price
of the first quarter of fiscal 2006, due to the shift in product mix to
increased sales of substantially higher priced knitted ticking.
OPERATING INCOME -- For the first quarter of fiscal 2007, the mattress fabrics
segment reported operating income of $1.9 million, or 8.5% of net sales,
compared to $1.4 million, or 5.9% of net sales, for the first quarter of fiscal
2006. Operating margins improved in the first quarter of fiscal 2007 compared to
the first quarter of fiscal 2006 due to productivity gains from the $10.0
million capital project implemented over the past 18 months. We also continue to
see higher sales and profits in knitted ticking, and we expect this product line
to represent a higher percentage of our mattress ticking business in fiscal
2007. We are experiencing a growing trend with our customers to use more knits
on the top of the mattress and woven jacquards on the sides.
SEGMENT ASSETS -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of July 30, 2006, accounts receivable and
inventory totaled $21.1 million compared to $21.2 million at April 30, 2006.
Also as of July 30, 2006, property, plant and equipment totaled $24.3 million
compared to $25.4 million at April 30, 2006. Included in property, plant, and
equipment are assets located in the U.S. totaling $12.6 million and $12.9
million at July 30, 2006 and April 30, 2006, respectively.
UPHOLSTERY FABRICS SEGMENT
NET SALES -- Upholstery fabric net sales for the first quarter of fiscal 2007
were $40.7 million, a 3.3% improvement compared with $39.4 million in the first
quarter of fiscal 2006. Total yards sold increased by 6.3%, while average
selling prices were 3.9% lower compared to the first quarter of fiscal 2006.
Sales of upholstery fabrics reflect significantly higher sales of non-U.S.
produced fabrics, but continued very soft demand industry wide for U.S. produced
fabrics, driven by consumer preference for leather and suede furniture and other
imported fabrics, including an increasing amount of cut and sewn kits. Sales of
non-U.S. produced fabrics were $23.5 million in the first quarter of fiscal
2007, a 102.5% increase in comparison to the first quarter of fiscal 2006. Sales
of U.S. produced fabrics were $17.2 million, a decrease of 38.1% from the first
quarter of fiscal 2006.
I-21
OPERATING INCOME (LOSS) - Operating income for the first quarter of fiscal 2007
was $1.6 million, or 3.9% of net sales, compared with an operating loss of
$380,000 for the first quarter of fiscal 2006. These improved results were
driven by the sales of non-U.S. produced fabrics, including the company's China
platform. In addition, the improved operating margins reflect significantly
lower U.S. manufacturing fixed costs (down 59% year over year) and variances,
and lower selling, general, and administrative expenses (down 14% year over
year) as a result of the company's aggressive steps to reduce manufacturing
complexities and improve the cost structure of its U.S. upholstery fabric
operations.
NON-U.S. PRODUCED SALES - Net sales of upholstery fabrics produced outside the
company's U.S. manufacturing operations accounted for 58% of upholstery fabric
sales for the first quarter of 2007, as compared to 30% of upholstery fabric
sales for the first quarter of fiscal 2006. Sales of non-U.S. produced
upholstery fabrics surpassed sales of U.S. produced upholstery fabrics for the
first time. As the company's U.S. customers have continued to move an increasing
amount of their fabric purchases to Asia, the company has moved with them and
responded with an operation designed to meet their needs. A key component of
this platform is the fabric finishing and inspection facility located near
Shanghai. A key element of the company's strategy is to control the value-added
finishing and inspection process, thereby assuring customers that the company's
fabrics will meet or exceed U.S. quality standards.
U.S .PRODUCED SALES - As previously discussed, management has continued to take
aggressive actions over the past year to reduce manufacturing complexities and
improve the cost structure of its U.S. upholstery fabric operations. As a result
of these activities, the company now has three U.S. manufacturing facilities
operating in the upholstery fabrics segment - one for velvet fabrics, one for
decorative fabrics, and one for specialty yarns. As of July 30, 2006, the
carrying value of the company's U.S. based upholstery fabrics fixed assets is
$8.5 million (excludes various corporate allocations) compared with
approximately $32 million at the end of fiscal 2005. As of July 30, 2006, the
company had assets held for sale with a carrying value of $2.5 million compared
to $3.1 million as of April 30, 2006. The company received sale proceeds of
approximately $1.3 million on assets held for sale in the first quarter of
fiscal 2007. The company expects the majority of assets held for sale as of July
30, 2006 to be sold in the next twelve months.
While management believes it is important to produce some level of upholstery
fabric in the U.S. to support its customers' domestic fabric requirements,
management remains committed to taking additional steps if necessary to address
the profitability of the company's U.S. upholstery fabric operations. The
company could experience additional write-downs of its property, plant, and
equipment in this business if sales continue to decline and further
restructuring actions become necessary.
SEGMENT ASSETS -- Segment assets consist of accounts receivable, inventory,
assets held for sale, and property, plant, and equipment. As of July 30, 2006,
accounts receivable and inventory totaled $48.0 million compared to $44.6
million at April 30, 2006. As of July 30, 2006, assets held for sale totaled
$2.5 million compared to $3.1 million as of April 30, 2006. As of July 30, 2006,
property, plant, and equipment totaled $18.5 million compared to $19.2 million
at April 30, 2006. Included in property, plant, and equipment are assets located
in the U.S. totaling $12.5 million and $13.8 million at July 30, 2006, and April
30, 2006, respectively. Included in this U.S. property, plant, and equipment are
various other corporate allocations totaling $4.0 million and $4.1 million at
July 30, 2006, and April 30, 2006, respectively.
I-22
OTHER (INCOME) EXPENSE CATEGORIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general, and
administrative expenses of $6.6 million for the first quarter of fiscal 2007
decreased approximately $3.3 million, from $9.9 million in the first quarter of
fiscal 2006. Included in the $9.9 million for the first quarter of fiscal 2006
was $3.0 million in accelerated depreciation associated with the company's
design and distribution centers sold in June 2005. The company adopted SFAS No.
123R as of the beginning of the current year, which requires all share-based
payments to be recognized as expense over the requisite service period based
upon their values as of the grant dates. Under the provisions of SFAS No. 123R,
total stock-based compensation expense was $132,000. The company recorded
$53,000 of stock-based compensation expense for stock options accounted for
under the provisions of APB Opinion No. 25, for the three-month period July 31,
2005.
INTEREST EXPENSE (INCOME) -- Interest expense for the first quarter of fiscal
2007 was $950,000 compared to $948,000 for the first quarter of fiscal 2006.
Interest income was $46,000 compared to $16,000 for the first quarter of fiscal
2006, reflecting higher invested balances.
OTHER (INCOME) EXPENSE - Other income for the first quarter of fiscal 2007 was
$278,000 compared to other expense of $133,000 for the first quarter of fiscal
2006. The change primarily reflects sale proceeds of $307,000 received on
equipment with no carrying value.
INCOME TAXES -- The effective tax rate (taxes as a percentage of income (loss)
before income taxes) for the first quarter of fiscal 2007 was an income tax
benefit of 2.3% compared with 36.4% for the first quarter of fiscal 2006. The
change in the effective income tax rate reflects losses from the company's U.S.
operations combined with lower income tax rates on income from foreign sources.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY -- The company's sources of liquidity include cash and cash
equivalents, cash flow from operations and amounts available under its revolving
credit line. These sources have been adequate for day-to-day operations and
capital expenditures. Cash and cash equivalents as of July 30, 2006 decreased to
$8.4 million from $9.7 million as of April 30, 2006, primarily reflecting net
cash used in operations of $1.6 million, capital expenditures of $637,000
primarily related to our China operations, $428,000 for payments on
vendor-financed capital expenditures, $382,000 for payments on long-term debt,
offset somewhat by proceeds from common stock of $125,000 in connection with
stock option exercises and sales proceeds of $1.6 million from the sale of a
building and equipment resulting from the company's restructuring activities.
WORKING CAPITAL -- Accounts receivable as of July 30, 2006 increased 13.1% in
comparison to July 31, 2005. Days sales outstanding totaled 35 days at July 30,
2006 compared with 31 days at July 31, 2005. Inventories at the close of the
first quarter decreased 17.4% in comparison to July 31, 2005. However,
inventories increased by 17.3% in comparison to April 30, 2006 due primarily to
the growth in demand for non-US produced fabric. Inventory turns for the first
quarter were 5.5 versus 4.3 for the year-earlier period. Operating working
capital (comprised of accounts receivable and inventories, less trade accounts
payable) was $47.9 million at July 30, 2006, down from $56.6 million at July 31,
2005.
I-23
FINANCING ARRANGEMENTS
UNSECURED TERM NOTES
The company's unsecured term notes have a fixed interest rate of 7.76% (payable
semi-annually in March and September) and are payable over an average remaining
term of three years beginning March 2007 through March 2010. The principal
payments are required to be paid in annual installments over the next four years
as follows: March 2007 - $7.5 million; March 2008 - $19.9 million; March 2009 -
$7.5 million; and March 2010 - $7.5 million.
REAL ESTATE LOAN
The company's real estate loan is secured by a lien on the company's corporate
headquarters office located in High Point, NC. This term loan bears interest at
the one-month London Interbank Offered Rate plus an adjustable margin based on
the company's debt/EBITDA ratio, as defined in the agreement, and is payable in
varying monthly installments through September 2010, with a final payment of
$3.3 million in October 2010.
REVOLVING CREDIT AGREEMENT
On July 20, 2006, the company entered into a Ninth Amendment to this credit
agreement. This credit agreement provides for a revolving loan commitment of
$8.0 million, including letters of credit up to $5.5 million. Borrowings under
the credit facility bear interest at the one-month London Interbank Offered Rate
plus an adjustable margin based on the company's debt/EBITDA ratio, as defined
in the agreement. This agreement limits annual capital expenditures to $2.5
million for fiscal 2007, requires the company to maintain collected deposit
balances of at least $2.0 million, and maintain certain other financial
covenants as defined in the agreement. As of July 30, 2006, there were $4.0
million in outstanding letters of credit and no borrowings outstanding under the
agreement. This agreement expires on August 31, 2007.
CANADIAN GOVERNMENT LOANS
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's Rayonese facility
located in Quebec, Canada. This loan is non-interest bearing and is payable in
48 equal monthly installments commencing December 1, 2009. In addition to the
term loan entered into in November 2005, the company had an existing
non-interest bearing term loan with the Canadian government which was paid in
May 2006.
OVERALL
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At July 30, 2006, the company was in compliance with
these financial covenants.
The principal payment requirements of long-term debt during the next five years
are: Year 1 - $7.7 million; Year 2 - $20.0 million; Year 3 - $7.8 million; Year
4 - $7.8 million; Year 5 - $3.5 million; and thereafter - $455,000.
I-24
CAPITAL EXPENDITURES - Cash expenditures for capital spending in the first
quarter of fiscal 2007 were $637,000, primarily for our China operations. The
company's capital budget for fiscal 2007 is $2.0 million. Depreciation for the
first quarter of fiscal 2007 was $1.7 million and is estimated to be $7.0
million for fiscal 2007. The company expects that the availability of funds
under the revolving credit line and cash flow from operations will be sufficient
to fund its planned capital needs.
LIQUIDITY REQUIREMENTS -- As indicated earlier, the company's sources of
liquidity include cash and cash equivalents, cash flow from operations and
amounts available under its revolving credit line. The company believes its
sources of liquidity continue to be adequate to meet its current operating
needs. In addition, the company is taking further steps to support its
liquidity, including ongoing efforts to reduce inventories and operating
expenses. However, the company's cash position may be adversely affected by
factors beyond its control, such as weakening industry demand, delays in receipt
of payment on accounts receivable and the availability of trade credit.
CRITICAL ACCOUNTING POLICIES AND RECENT ACCOUNTING DEVELOPMENTS
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 July 30, 2006, accounts receivable related to the upholstery fabrics
segment totaled approximately $18.0 million, and approximately $8.0 million
related to the mattress fabrics segment. Additionally, as of July 30, 2006, the
aggregate accounts receivable balance of the company's ten largest customers was
$10.2 million, or 39% 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. Significant
management judgment and estimates must be used in connection with establishing
the reserve for allowance for doubtful accounts. 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
increasing availability of low cost imports and 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, twelve and fifteen 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 follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other means.
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. During the first
quarter of fiscal 2007, no events or changes in circumstances occurred that
would require the company to test for impairment. Unforeseen events and changes
in circumstances and market conditions could negatively affect the value of
assets and result in an impairment charge.
I-25
The determination of future operating cash flows involves considerable
estimation and judgment about future market conditions, future sales and
profitability, and future asset utilization. Although the company believes it
bases its impairment testing as required by SFAS No. 144 on reasonable estimates
and assumptions, the use of different estimates and assumptions, or a decision
to dispose of substantial portions of these assets, could result in materially
different results.
GOODWILL. As of July 30, 2006, the company's remaining $4.1 million of goodwill
relates to the mattress fabrics segment. 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. During the first quarter of
fiscal 2007, no events or changes in circumstances occurred that would require
the company to test for impairment.
RESTRUCTURING CHARGES. 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)."
Under SFAS 146, 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 employee
termination benefits that qualify under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
The U.S. upholstery fabric industry continues to be under significant pressure
from a variety of external forces, such as the current consumer preference for
leather and suede furniture and the growing competition from imported fabrics
and cut and sewn kits, primarily from China. In an effort to reduce operating
expenses and scale U.S. productive capacity in line with demand, the company has
undertaken restructuring initiatives during the past several years. These
restructuring initiatives have resulted in restructuring charges related to the
remaining lease costs of the closed facilities, the write-down of property,
plant and equipment, workforce reduction and elimination of facilities.
Severance and related charges are accrued at the date the restructuring was
approved by the board of directors based on an estimate of amounts that will be
paid to affected employees, in accordance with SFAS No. 112. Under SFAS No. 144,
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. Other exit costs, which principally consist of
charges for lease termination and losses from termination of existing contracts,
equipment relocation costs and inventory markdowns that are related to the
restructuring are accounted for in accordance with SFAS No. 146.
I-26
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
10 to the consolidated financial statements.
INCOME TAXES. The company is required to estimate its actual current income tax
expense and to assess temporary differences resulting from differing treatment
of items for tax and accounting purposes. At April 30, 2006, the company had
deferred tax assets of $31.4 million (all of which relate to U.S. operations)
and U.S. deferred tax liabilities of $2.2 million (all of which reverse in the
carryforward period), resulting in net U.S. deferred tax assets of $29.2
million. Total deferred tax liabilities at April 30, 2006 were $4.1 million,
resulting in total net deferred tax assets of $27.3 million. As of July 30,
2006, the company's net deferred tax assets total $28.6 million, an increase of
$1.3 million from the end of fiscal 2006, primarily reflecting the federal and
state tax benefits recorded for the loss from U.S. operations during the first
quarter of fiscal 2007. A valuation allowance has not 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.
In making the judgment about the realization of the deferred tax assets,
management has considered both negative and positive evidence, and concluded
that sufficient positive evidence exists to overcome the cumulative losses
experienced in recent years. Specifically, management considered the following,
among other factors: nature of the company's products; history of positive
earnings in the mattress fabrics segment; capital projects that have been
completed to further enhance the company's globally competitive cost structure
in the mattress fabrics segment; recent significant restructuring actions in the
domestic upholstery fabrics business to adjust the domestic cost structure and
bring U.S. manufacturing capacity in line with demand; and development of
offshore manufacturing and sourcing programs to meet changing demands of
upholstery fabric customers in the U.S. Management's analysis of taxable income
also included the following considerations: none of the company's net operating
loss carryforwards has previously expired unused; the U.S. federal carryforward
period is 20 years; and the company's current losses principally expire in 16-20
years, fiscal 2022 through 2026.
Considerable judgment is involved in this process as ultimate realization of
benefits is dependent on the generation of income from future U.S. operations.
INFLATION
The cost of certain of the company's raw materials, principally fibers from
petroleum derivatives, and utility/energy costs, increased during the first
quarter of fiscal 2007 as oil and energy prices increased and had an impact on
the company's financial results. These increases, however, are often not
directly related to general economic inflation, which has not been a material
factor in the company's recent financial results. Any significant increase in
the company's raw material costs, utility/energy costs and general economic
inflation could have a material adverse impact on the company, because
competitive conditions have limited the company's ability to pass significant
operating cost increases on to its customers.
I-27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company's exposure to interest
rate risk consists of floating rate debt based on the London Interbank Offered
Rate plus an adjustable margin under the company's revolving credit agreement
and real estate term loan. As of July 30, 2006, there were $4.2 million in
borrowings outstanding under the real estate term loan and no borrowings under
the company's revolving credit agreement. In connection with the real estate
term loan, the company entered into a $2,170,000 notional principal interest
rate swap agreement, which represents 50% of the principal amount on the real
estate loan, and effectively converts the floating rate LIBOR based payments to
fixed payments at 4.99% plus the spread calculated under the real estate term
loan agreement. The company's unsecured term notes have a fixed interest rate of
7.76% and the Canadian government loan is non-interest bearing. Additionally,
approximately 95% of the company's long-term debt is at a fixed rate or is
non-interest bearing. Thus, any foreseeable change in interest rates would have
a minimal material effect on the company's interest expense.
The company's exposure to fluctuations in foreign currency exchange rates are
due to foreign subsidiaries domiciled in China and Canada. These subsidiaries
use the United States dollar as their functional currency. The company generally
does not use financial derivative instruments to hedge foreign currency exchange
rate risks associated with its foreign subsidiaries. A 10% change in either
exchange rate at July 30, 2006 would not have a significant impact on the
company's results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
The company conducted a review and evaluation of its disclosure controls and
procedures, under the supervision and with the participation of the company's
principal executive officer and principal financial officer as of July 30, 2006,
and the principal executive officer and principal financial officer have
concluded that the company's disclosure controls and procedures are adequate and
effective. In addition, no change in the company's internal control over
financial reporting has occurred during, or subsequent to, the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
I-28
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors during the first quarter
of fiscal 2007. Our risk factors are disclosed in our Form 10-K for the year
ended April 30, 2006.
ITEM 6. EXHIBITS
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT.
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) Ninth Amendment to Amended and Restated Credit Agreement among Culp,
Inc. and Wachovia Bank, National Association, as Agent and as Bank.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
II-1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CULP, INC.
(REGISTRANT)
Date: September 8, 2006
By: /S/ FRANKLIN N. SAXON
--------------------------
Franklin N. Saxon
President
(Authorized to sign on behalf of the registrant
and also signing as principal financial officer)
By: /S/ KENNETH R. BOWLING
----------------------------
Kenneth R. Bowling
Vice President-Finance, Treasurer
(Authorized to sign on behalf of the registrant
and also signing as principal accounting officer)
II-2
EXHIBIT 10(A)
NINTH AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
THIS NINTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ("Ninth
Amendment") is made as of the 20th day of July, 2006, by and between CULP, INC.,
a North Carolina corporation (together with its successors and permitted
assigns, the "Borrower") and WACHOVIA BANK, NATIONAL ASSOCIATION (formerly,
Wachovia Bank, N.A.), a national banking association, as Agent and as a Bank
(together with its endorsees, successors and assigns, the "Bank").
BACKGROUND
----------
The Borrower and the Bank entered into an Amended and Restated Credit
Agreement, dated as of August 23, 2002, as amended by Second Amendment to
Amended and Restated Credit Agreement (the "Second Amendment"), dated as of June
3, 2003, by Third Amendment to Amended and Restated Credit Agreement (the "Third
Amendment"), dated as of August 23, 2004, by Fourth Amendment to Amended and
Restated Credit Agreement ("Fourth Amendment"), dated as of December 7, 2004, by
Fifth Amendment to Amended and Restated Credit Agreement ("Fifth Amendment")
dated as of February 18, 2005, by Sixth Amendment to Amended and Restated Credit
Agreement ("Sixth Amendment"), dated as of August 30, 2005, by Seventh Amendment
to Amended and Restated Credit Agreement ("Seventh Amendment"), dated as of
December 7, 2005, and by Eighth Amendment to Amended and Restated Credit
Agreement ("Eighth Amendment"), dated as of January 29, 2006 (it being
acknowledged by the parties hereto that the proposed First Amendment to Amended
and Restated Credit Agreement, which had been under discussion in March 2003,
was never executed by the parties and is of no force or effect; otherwise, such
agreement, as amended by the Second Amendment, Third Amendment, Fourth
Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment and Eighth
Amendment, and as it may be further amended, restated, supplemented and/or
modified, shall be referred to herein as the "Credit Agreement"). Terms used
herein and not herein defined shall have the meanings given to them in the
Credit Agreement.
The Borrower has now requested additional amendments to the provisions
of the Credit Agreement, which the Bank is willing to accommodate subject to the
terms, provisions and conditions set forth in this Seventh Amendment.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank hereby agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is hereby
amended as follows:
(a) The following definition in Section 1.01 is hereby amended and
restated in its entirety to read as follows:
"Termination Date" means whichever is applicable of (i)
August 31, 2007, (ii) the date the Commitments are terminated
pursuant to Section 6.01 following the occurrence of an Event of
Default, or (iii) the date the Borrower terminates the Commitments
entirely pursuant to Section 2.08.
(b) Section 5.24 of the Credit Agreement is hereby amended and restated
in its entirety to read as follows:
"Section 5.24 CAPITAL EXPENDITURES. Aggregate Capital Expenditures for
any Fiscal Year will not exceed $2,500,000.00."
(c) Section 5.26 of the Credit Agreement is hereby amended and restated
in its entirety to read as follows:
"Section 5.26 LIQUIDITY REQUIREMENT. The Borrower will
maintain with the Bank at all times collected deposit balances of not
less than $2,000,000 (none of which shall have been borrowed
hereunder).
(d) Section 5.27 of the Credit Agreement is hereby amended and restated
in its entirety to read as follows:
"Section 5.27. MINIMUM EBITDA. EBITDA, for the following
Fiscal Quarters of Fiscal Year 2006 and Fiscal Year 2007 shall equal
or exceed the following amounts:
Fiscal Quarter Ending July 30, 2006 $10,000,000
Fiscal Quarter Ending October 29, 2006 $10,000,000
Fiscal Quarter Ending January 28, 2007 $10,000,000
Fiscal Quarter Ending April 29, 2007 $11,000,000"
2. FURTHER ASSURANCES. The Borrower will execute such confirmatory
instruments, if any, with respect to the Credit Agreement and this Ninth
Amendment as the Bank may reasonably request.
3. RATIFICATION BY BORROWER. The Borrower ratifies and confirms all of
its representations, warranties, covenants, liabilities and obligations under
the Credit Agreement (except as expressly modified by this Ninth Amendment) and
agrees that: (i) except as expressly modified by this Ninth Amendment, the
Credit Agreement continues in full force and effect as if set forth specifically
herein; and (ii) the Borrower has no right of setoff, counterclaim or defense to
payment of its obligations under the Credit Agreement. The Borrower and the Bank
agree that this Ninth Amendment shall not be construed as an agreement to
extinguish the Borrower's obligations under the Credit Agreement or the Notes
and shall not constitute a novation as to the obligations of the Borrower under
the Credit Agreement or the Notes. The Bank hereby expressly reserves all rights
and remedies it may have against all parties who may be or may hereafter become
secondarily liable for the repayment of the obligations under the Credit
Agreement or the Notes.
-2-
4. AMENDMENTS. This Ninth Amendment may not itself be amended, changed,
modified, altered, or terminated without in each instance the prior written
consent of the Bank. This Ninth Amendment shall be construed in accordance with
and governed by the laws of the State of North Carolina.
5. COUNTERPARTS. This Ninth Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one and the same agreement.
6. MODIFICATION AND EXTENSION FEE. The Borrower shall pay to the Bank
on the date this Ninth Amendment is executed, an amendment and extension fee
equal to $10,000.00, which fee, once paid, shall be fully earned and
non-refundable.
7. BANK'S EXPENSES. In accordance with Section 9.03 of the Credit
Agreement, Borrower hereby acknowledges and agrees to pay all reasonable
out-of-pocket expenses incurred by the Bank in connection with the preparation
of this Ninth Amendment, including without limitation reasonable attorneys'
fees.
[SIGNATURE PAGE FOLLOWS]
-3-
IN WITNESS WHEREOF, this Ninth Amendment has been duly
executed under seal by Borrower and Bank as of the day
and year first above written.
BORROWER:
CULP, INC.
By:/s/ Kenneth R. Bowling
Name: Kenneth R Bowling
Title: Vice President - Finance, Treasurer
BANK:
WACHOVIA BANK, NATIONAL ASSOCIATION,
as Agent and as Bank
By:/s/ Matthew M. Rankin
Name: Matthew M. Rankin
Title: Vice President
-4-
EXHIBIT 31.1
CERTIFICATIONS
I, Robert G. Culp, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state any 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 quarterly 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) 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
(d) 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.
/S/ ROBERT G. CULP, III
- ------------------------------------
Robert G. Culp, III
Chairman and Chief Executive Officer
(principal executive officer)
Date: September 8, 2006
EXHIBIT 31.2
CERTIFICATIONS
I, Franklin N. Saxon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state any 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 quarterly 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) 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
(d) 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.
/S/ FRANKLIN N. SAXON
--------------------------------------------
Franklin N. Saxon
President and Chief Operating Officer
(principal financial officer)
Date: September 8, 2006
EXHIBIT 32.1
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 this quarterly report of Culp, Inc. (the
"Company") on Form 10-Q for the quarterly period ended July 30, 2006 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
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Robert G. Culp, III
Chairman of the Board and
Chief Executive Officer
September 8, 2006
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 32.2
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 this quarterly report of Culp, Inc. (the
"Company") on Form 10-Q for the quarterly period ended July 30, 2006 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
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Franklin N. Saxon
President and
Chief Operating Officer
September 8, 2006
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.