CULP, INC.
101 SOUTH MAIN STREET
POST OFFICE BOX 2686
HIGH POINT, NC 27261
(336) 889-5161
1999
Annual
Report
[LOGO] CULP
About Culp
Culp ranks as one of the world's largest marketers of upholstery fabrics for
furniture and a leading supplier of mattress ticking. The Culp team of
approximately 4,000 associates markets over 3,000 patterns of upholstery fabrics
for furniture and over 1,000 styles of mattress ticking to an international
array of customers. The company is a fully integrated marketer with
manufacturing plants in North and South Carolina, Alabama, Tennessee,
Pennsylvania and Canada.
HIGHLIGHTS
(AMOUNTS IN THOUSANDS, PERCENT
EXCEPT PER SHARE DATA) 1999 1998 CHANGE
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
Net sales $483,084 476,715 1.3%
Gross profit 76,108 83,561 (8.9)
Income from operations 16,140 30,574 (47.2)
Net income 3,102 15,513 (80.0)
Average shares outstanding
(diluted) 13,064 13,042 0.2
PER SHARE
Net income (diluted) $ 0.24 1.19 (79.8)%
Cash dividends 0.14 0.14 0.0
Book value 10.54 10.11 4.3
BALANCE SHEET
Working capital $ 99,324 102,730 (3.3)%
Total assets 330,612 354,815 (6.8)
Funded debt 138,650 151,616 (8.6)
Shareholders' equity 127,326 131,519 (3.2)
RATIOS
Gross profit margin 15.8% 17.5%
Operating income margin 3.3 6.4
Net income margin 0.6 3.3
Return on average equity 2.4 13.0
Funded debt to capital 52.1 53.5
NET SALES FOR 1999 MARK A RECORD HIGH OF $483.1 MILLION, BUT NET INCOME OF $3.1
MILLION TRAILS YEAR-EARLIER TOTAL OF $15.5 MILLION.
OPERATIONAL REALIGNMENT INVOLVES REDUCTION FROM SIX TO FOUR DIVISIONS.
QUARTERLY FINANCIAL RESULTS SHOW POSITIVE TREND.
STOCK REPURCHASE PROGRAM INITIATED.
(THROUGHOUT THIS ANNUAL REPORT, 1999, 1998, 1997, 1996 AND 1995 ARE USED TO
REFER, RESPECTIVELY, TO THE COMPANY'S FISCAL YEARS THAT ENDED IN THOSE SAME
CALENDAR PERIODS.)
DEAR SHAREHOLDERS:
A year ago we indicated that we saw significant challenges in 1999 to extending
Culp's long-term record of growth. Unfortunately, we did not know how serious
those challenges would be! A substantial decline in international sales of
several of our categories of upholstery fabrics led to a sharp reversal in our
financial performance. The table on the preceding page summarizes the impact of
this development that left net income for 1999 well below the prior year. We are
disappointed with this report that prevented us from realizing our tenth
consecutive year of increased earnings. The industry-wide difficulties we
encountered, however, were not unique to Culp; and we are very encouraged by the
determination of our associates to resume a pattern of growth. We are also
enthusiastic about the results to date of the operational realignment that was
implemented during the year. This change was made to capitalize more effectively
on our managerial and physical resources. The bottom line is that the company's
fundamental competitive position is stronger than ever, and we are optimistic
that this break in our track record will prove temporary.
STOCK REPURCHASE PROGRAM INITIATED
In June 1998 the Board of Directors approved the investment of up to $5 million
for the repurchase of the company's shares. This authorization was followed in
March 1999 with approval to invest an additional $5 million. We are pleased that
the company's improving performance and solid financial position supported the
Board in approving the funds for this program. During fiscal 1999, we
repurchased a total of 938,600 shares at an average price of $5.90 per share.
The timing and size of future transactions will of course depend on market
conditions, but we believe that these repurchases will prove to be a sound
investment of the company's capital.
2
OPERATIONAL REALIGNMENT COMPLETED
Perhaps the most important internal development during 1999 for Culp was a
corporate realignment to accommodate the expanded size of our various divisions
and support future growth plans. The foundation of the new structure was the
formation of four divisions, Culp Decorative Fabrics, Culp Velvets/Prints, Culp
Yarn and Culp Home Fashions, that encompass all of our manufacturing and
marketing operations. This represented a reduction from the six business units
that existed at the start of the year.
The slowdown in our international sales served as a catalyst in
implementing this change. We had already identified the need, however, to shift
our resources to ensure that our marketing program was as effective as possible.
Our underlying drive to offer consistently high customer service had involved a
considerable investment of capital in the years leading up to 1999 for
modernization, expansion and vertical integration of our operations. Capital
expenditures over the preceding five years had exceeded $110 million. This
internal expansion had been complemented by the strategic acquisition of related
operating units. During fiscal 1998 alone, we invested $59 million to purchase
other manufacturing operations. These investments helped produce impressive
growth that included more than doubling of net sales over the 1993-1998 period.
The underlying challenge was to cast a long-term growth strategy by
consolidating these new operations, unifying the related products and linking
the various marketing activities.
The formation of these four divisions has already provided meaningful
advantages in increased managerial productivity and improved efficiency in our
information systems. Having related product groups in a single division has
promoted more effective working communications within the operating levels.
These internal partnerships offer greater potential in developing fabrics and
ticking with exciting designs, patterns and textures that still offer value for
customers. An essential step in designing fabrics is considering the practical
manufacturing issues that will be involved for a fabric to be commercially
successful. Each division now controls a
3
fully integrated design process that extends from the origin of each new idea to
the production, sale and distribution of the products. This change has also
supported our emphasis on correlating different fabrics into unified collections
for customers. Culp has the broadest array of fabrics available from any
manufacturer, and we are receiving a very positive response from the effort to
present groupings of complementary fabrics that allow furniture manufacturers to
select fabrics for entire room settings.
INDUSTRY FUNDAMENTALS FAVOR CULP
As we continue to refine our new organizational framework, we believe that
several broad trends within the home furnishings industry are playing directly
to our strengths. Probably the most significant pattern is the ongoing
consolidation at all levels within the supply chain linking manufacturers with
consumers. A recent survey by Furniture/Today reports that the 25 largest
manufacturers of furniture in the United States accounted for 46% of total
industry sales in 1998. The top 10 manufacturers alone represented 37% of the
industry's shipments. These firms are finding that size indeed does matter in
dealing with retailers who also are increasing their competitive presence. The
25 largest retailers of furniture supplied 26% of the market in the latest
survey, up from 24% in the prior year. These larger companies are seeking true
corporate partners who can provide not only the necessary volume of fabrics but
also consistently high product quality and customer service. Culp is firmly
committed to developing these relationships that increasingly rely on
sophisticated information systems to shorten delivery schedules and yet provide
consumers with the choices they demand.
INTERNATIONAL PROSPECTS APPEAR POSITIVE
After a decade of consistent yearly growth, Culp's international sales declined
17% in 1999 to $113.4 million. We believe that our experience mirrors that of
other suppliers of fabrics to markets in Europe and Asia that were adversely
affected by serious economic turbulence during the year. We do not believe that
this decline
4
suggests any structural shift in the competitive position of Culp or in the
long-term opportunities that are presented by rising demand for furniture in
developing countries. Our volume of international sales, while down from the
preceding year, was still the second highest ever for Culp. Furniture
manufacturers throughout the world value the designs and finishes on our fabrics
as essential components of their marketing programs. American styles remain
popular, and we have the advantage of a product with a relatively low labor
content. We have a distribution capability to supply accounts throughout the
world and are enhancing our computerized system to facilitate placing and
tracking orders.
CONTINUED IMPROVEMENT EXPECTED FOR 2000
A primary goal for 2000 is to achieve continued improvement in Culp's
performance. We ended 1999 on a strong note but recognize that the level of net
income in the fourth quarter was still below the company's historical level of
profitability. We continue to be interested in expansion opportunities, but the
emphasis for the immediate term is to maximize the return from existing assets.
Our new organizational structure is focused specifically on that objective, and
we are optimistic about our prospects. The overall backdrop for demand for home
furnishings appears favorable with high employment levels, stable interest rates
and a high degree of consumer confidence.
We sincerely appreciate the hard work throughout Culp during 1999. The
enthusiasm to meet the challenges that we faced was contagious, and we are
grateful to our associates for the strong, positive spirit they exhibited.
Sincerely,
/s/ Robert G. (Rob) Culp, III
- -------------------------------------
Robert G. (Rob) Culp, III
Chairman and Chief Executive Officer
/s/ Howard L. Dunn, Jr.
- -------------------------------------
Howard L. Dunn, Jr.
President and Chief Operating Officer
5
CORPORATE DIRECTORY
ROBERT G. CULP, III
Chairman of the Board and
Chief Executive Officer;
Director (E,N)
HOWARD L. DUNN, JR.
President and Chief Operating Officer;
Director (E)
FRANKLIN N. SAXON
Senior Vice President and President of
the Culp Velvets/Prints division;
Director (E)
DAN E. JACOBS
Senior Vice President and President of
the Culp Decorative Fabrics division
RODNEY A. SMITH
Senior Vice President and President of
the Culp Yarn division
KENNETH M. LUDWIG
Senior Vice President-Human Resources;
Assistant Secretary
PHILLIP W. WILSON
Vice President and Chief Financial Officer
KATHY J. HARDY
Corporate Secretary
HARRY R. CULP
Director; Private Investments,
High Point, NC
ROBERT T. DAVIS
Director, former chairman of
Artee Industries, Incorporated
EARL M. HONEYCUTT
Director (A,C); Retired President,
Amoco Fabrics and Fibers Company,
Atlanta, GA
PATRICK H. NORTON
Director (N); Chairman of the Board,
La-Z-Boy Incorporated, Monroe, MI
EARL N. PHILLIPS, JR.
Director; Chairman of the Board and
Chief Executive Officer, GE Capital
First Factors, High Point, NC
BLAND W. WORLEY*
Director (A,C,N); Retired Chairman of
the Board and Chief Executive Officer,
BarclaysAmericanCorporation,
Charlotte, NC
BAXTER P. FREEZE, SR.
Director Emeritus; Retired President,
Chairman of the Board,
Commonwealth Hosiery Mills, Inc.,
Randleman, NC
BOARD COMMITTEES:
A-AUDIT
C-COMPENSATION
E-EXECUTIVE
N-NOMINATING
* MR. WORLEY RESIGNED AS A MEMBER OF THE BOARD OF DIRECTORS AND ALL COMMITTEES
OF THE BOARD ON JULY 23, 1999 FOR HEALTH REASONS.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS of financial condition and results of
operations
The following analysis of the financial condition and results of operations
should be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
OVERVIEW Culp is one of the largest manufacturers and marketers in the world for
upholstery fabrics for furniture and is one of the leading global producers of
mattress fabrics (or ticking). The company's fabrics are used primarily in the
production of residential and commercial upholstered furniture and bedding
products, including sofas, recliners, chairs, love seats, sectionals, sofa-beds,
office seating and mattress sets. Although Culp markets fabrics at most price
levels, the company emphasizes fabrics that have broad appeal in the promotional
and popular-priced categories of furniture and bedding.
Culp's worldwide leadership as a manufacturer and marketer of upholstery
fabrics and mattress ticking has been achieved through internal expansion and
the integration of strategic acquisitions.
The company's operating segments are upholstery fabrics and mattress ticking,
with related divisions organized within those segments. In upholstery fabrics,
Culp Decorative Fabrics manufactures jacquard and dobby woven fabrics for
residential and commercial furniture. Culp Velvets/Prints manufactures a broad
range of printed and velvet fabrics used primarily for residential and juvenile
furniture. Culp Yarn manufactures specialty filling yarn that is used by Culp
and also marketed to outside customers. In mattress ticking, Culp Home Fashions
manufactures and markets a broad array of fabrics used by bedding manufacturers.
RESULTS OF OPERATIONS The following table sets forth certain items in the
company's consolidated statements of income as a percentage of net sales.
1999 1998 1997
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 84.2 82.5 81.8
----- ----- -----
Gross profit 15.8 17.5 18.2
Selling, general and administrative
expenses 12.4 11.1 11.3
----- ----- -----
Income from operations 3.3 6.4 6.9
Interest expense 2.0 1.5 1.2
Interest income (0.0) (0.1) (0.1)
Other expense 0.5 0.4 0.4
----- ----- -----
Income before income taxes 0.9 4.6 5.4
Income taxes (*) 28.0 29.0 36.0
Net income 0.6% 3.3% 3.5%
----- ----- -----
- ----------
* Calculated as a percent of income before income taxes.
The following table sets forth the company's sales by segment and division for
each of the company's three most recent years. The table also sets forth the
change in net sales for the segments and divisions as a percentage for
comparative periods included in the table.
(DOLLARS IN THOUSANDS) AMOUNTS PERCENT CHANGE
- --------------------------------------------------------------------------------
1998- 1997-
SEGMENT/DIVISION 1999 1998 1997 1999 1998
- ---------------- ---- ---- ---- ---- ----
UPHOLSTERY FABRICS:
Culp Decorative
Fabrics $ 222,058 $ 210,165 $ 167,730 5.7% 25.3%
Culp Velvets/
Prints 144,073 171,389 156,467 (15.9) 9.5
Culp Yarn 21,513 7,876 -- 173.1 100.0
--------- --------- --------- ----- -----
387,644 389,430 324,197 (0.5) 20.1
MATTRESS TICKING:
Culp Home
Fashions 95,440 87,285 74,682 9.3 16.9
--------- --------- --------- ----- -----
$ 483,084 $ 476,715 $ 398,879 1.3% 19.5%
--------- --------- --------- ----- -----
1999 COMPARED WITH 1998
NET SALES. Net sales for 1999 increased by $6.4 million, or 1.3%, compared
with 1998. The company's sales of upholstery fabrics decreased $1.8 million, or
0.5% for 1999 compared with 1998. However, fiscal 1999 includes an incremental
contribution of $13.6 million from Culp Yarn (formerly Artee Industries), which
was acquired on February 2, 1998. Excluding the incremental sales from Culp
Yarn, sales of upholstery fabrics decreased $15.4 million, or 4.0% for 1999
compared with 1998. The principal factor contributing to the lower sales was a
pronounced slowdown in international sales of wet print and heat-transfer
printed flock fabrics. This trend, which the company believes also affected
other manufacturers of upholstery fabrics, became apparent after the close of
1998 and persisted throughout 1999. A large percentage of the company's sales of
this product line were being shipped directly or indirectly to customers in the
emerging consumer markets of Russia, other former Soviet countries and Eastern
Europe. All of these areas encountered very weak economic conditions that, in
turn, adversely affected demand for furniture and other home furnishings. During
1999, the company significantly curtailed production schedules for these fabrics
and shifted its marketing focus for this product category to geographic areas
where demand appears more favorable. The company also introduced a line of
printed cotton upholstery fabrics utilizing some of the same manufacturing
assets used to produce wet print and heat-transfer printed flock fabrics.
International sales, consisting primarily of upholstery fabrics, decreased to
$113.4 million, down 17.4% from 1998. International shipments accounted for
23.5% of the company's sales for 1999, down from 28.8% in 1998. The company is
continuing to experience sluggish demand in some international markets, but has
broadened its marketing program in other geographic areas.
7
The increased sales by Culp Home Fashions (primarily mattress ticking) during
1999 marked a continuation of the longer-term expansion that this division has
experienced. The introduction of new designs and fabric constructions, and the
advantages of the company's vertical integration, are driving Culp's growth in
mattress ticking. In particular, the ability to manufacture the jacquard greige
(unfinished) goods that are then printed to produce mattress ticking has aided
Culp in meeting faster delivery schedules reliably and providing improved
overall customer service.
GROSS PROFIT AND COST OF SALES. Gross profit for 1999 decreased 8.9% to $76.1
million. The decline was due principally to a sharp decline in international
sales. Although the company took substantial steps to reduce operating expenses,
it continued to be affected throughout 1999 by excess manufacturing capacity and
lower absorption of fixed costs.
To help offset the pressure on gross margins, the company instituted a number
of actions during 1999. A major change involved reorganization from six to four
divisions during the first quarter. This new corporate alignment brought related
operations together under common management and was accompanied by several
changes in managerial positions. Subsequent steps to improve profitability that
are related to this realignment have included a significant reduction in the
capacity for manufacturing printed flock fabrics, comprehensive programs to
reduce inventories and an intense effort to reduce operating expenses and raise
productivity. The cost of raw materials remained relatively stable in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased as a percentage of net sales for 1999 to 12.4%
compared with 11.1% in 1998. The increase principally related to lower than
expected sales for the year, higher marketing costs for new fabric designs,
incremental costs from the Artee acquisition and increased costs for credit
expenses, partially offset by lower accruals for incentive-based compensation
plans.
INTEREST EXPENSE. Net interest expense for 1999 of $9.4 million rose 38.3%
from $6.8 million in 1998 due to higher average borrowings outstanding. The
increased borrowings related principally to borrowings used to fund acquisitions
during 1998 and the relatively high level of capital expenditures in 1998.
OTHER EXPENSE. Other expense increased 26.2% to $2.4 million for 1999 compared
with $1.9 million for 1998, due primarily to the incremental goodwill
amortization related to acquired operations in fiscal 1998 and losses on
disposal of fixed assets.
INCOME TAXES. The effective tax rate for 1999 was 28.0% compared with 29.0% in
1998. The lower rates for 1999 and 1998 as compared with the federal statutory
rate of 35% are due principally to tax benefits related to the company's
international sales and to a higher proportion of earnings from the company's
Canadian subsidiary that is taxed at a lower effective rate. The company expects
the effective tax rate for 2000 to be approximately 34%.
NET INCOME PER SHARE. Diluted net income per share for 1999 totaled $0.24
compared with $1.19 a year ago.
1998 COMPARED WITH 1997
NET SALES. Net sales for 1998 increased by $77.8 million, or 19.5%, compared
with 1997. The company's sales of upholstery fabrics increased $65.2 million, or
20.1%, in 1998 compared with 1997. The principal factor contributing to the
increased sales was the contribution of $40.6 million from acquired operations
($32.7 million from Phillips Mills, which was acquired on August 5, 1997 and
$7.9 million from Artee Industries, which was acquired on February 2, 1998).
Sales from Culp Velvets/Prints, which manufactures and markets fabrics that have
been especially popular in markets outside the United States, were up from the
prior year. Although the strength in the U.S. dollar relative to other
currencies affected demand for Culp's fabrics, Culp Velvets/Prints achieved
increased international sales during 1998. Sales of Culp Decorative Fabrics rose
at a lesser rate for 1998. Sales of Culp Home Fashions, which principally
consist of mattress ticking and bedding products, rose 16.9% from 1997.
International sales, consisting primarily of upholstery fabrics, increased to
$137.2 million for 1998, up 35.1% from 1997. International shipments accounted
for 28.8% of the company's sales for 1998, up from 25.5% in 1997.
GROSS PROFIT AND COST OF SALES. Gross profit for 1998 increased by $11.1
million and amounted to 17.5% of net sales compared with 18.2% in 1997. The
company benefited from an increased absorption of fixed costs as a result of the
growth in sales, the investment in equipment designed to lower manufacturing
costs and raise productivity and contributions from acquisitions. These benefits
were more than offset in 1998 by the impact of competitive pressures on the
margins of sales to certain U.S. and international customers and expansion
projects that did not reach targeted levels of productivity. The cost of raw
materials remained relatively stable in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses declined slightly as a percentage of net sales for 1998
to 11.1% compared with 11.3% a year ago. During 1998, the company continued to
incur higher expenses related to expanded resources for designing fabrics with
new patterns and textures and increased selling commissions associated with
international sales. These factors were offset by lower accruals as a percentage
of net sales for incentive-based compensation plans and by the increase in
overall operating efficiency as a result of the growth in net sales.
INTEREST EXPENSE. Net interest expense for 1998 of $6.8 million was up from
$4.4 million in 1997 due principally to borrowings related to the acquisition of
Phillips Mills on August 5, 1997. The company also incurred higher borrowings in
1998 to finance capital expenditures and additional working capital
requirements.
OTHER EXPENSE. Other expense increased to $1.9 million for 1998 compared with
$1.5 million for 1997, principally due to the amortization of goodwill
associated with the acquisition of Phillips Mills.
8
INCOME TAXES. The effective tax rate for 1998 was 29.0% compared with 36.0% in
1997. The lower rate was due principally to increased tax benefits related to
the company's international sales and to a higher proportion of earnings from
the company's Canadian subsidiary that is taxed at a lower effective rate.
NET INCOME PER SHARE. Diluted net income per share for 1998 totaled $1.19
compared with $1.15 a year ago. The weighted average number of outstanding
shares diluted increased 9.3% from 1997, principally due to the company's
secondary offering completed in February 1997.
LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Cash and cash investments were
$509,000 as of May 2, 1999 compared with $2.3 million at the end of 1998. Funded
debt (long-term debt, including current maturities, less restricted investments)
decreased to $138.7 million at the close of 1999 from $151.6 million at the end
of 1998. As a percentage of total capital (funded debt plus total shareholders'
equity), the company's borrowings amounted to 52.1% as of May 2, 1999 compared
with 53.5% at the end of 1998. The company's working capital as of May 2, 1999
was $99.3 million compared with $102.7 million at the close of 1998.
The company's cash flow from operations was $32.5 million for 1999, consisting
of $24.3 million from earnings (net income plus depreciation, amortization and
deferred income taxes) plus $8.2 million from changes in working capital.
In separate authorizations in June 1998 and March 1999, the board of directors
of the company authorized the use of a total of $10.0 million to repurchase the
company's common stock. During 1999, the company repurchased a total of 938,600
shares at an average price of $5.90 a share under these authorizations.
FINANCING ARRANGEMENTS. In April 1998, Culp completed the sale of $75 million
of senior unsecured notes ("Notes") in a private placement to institutional
investors. The Notes have a fixed coupon rate of 6.76% and an average remaining
term of nine years.
Culp has an $88 million syndicated, unsecured, multi-currency revolving credit
facility. The facility, which expires in April 2002, requires quarterly payments
of interest on all outstanding borrowings and a quarterly facility fee paid in
advance. In October 1998, the company amended the credit facility to amend
certain covenants. Additionally, the amendment increased the interest rate
0.375% to LIBOR plus 1.125%. As of May 2, 1999, the company had outstanding
balances of $25 million under the credit facility.
The company also has a total of $35.3 million in currently outstanding
industrial revenue bonds ("IRBs") which have been used to finance capital
expenditures. The IRBs are collateralized by restricted investments of $3.3
million as of May 2, 1999 and letters of credit for the outstanding balance of
the IRBs and certain interest payments due thereunder.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. As of May 2, 1999, the
company was in compliance with these financial covenants.
As of May 2, 1999, the company had three interest rate swap agreements to
reduce its exposure to floating interest rates on a $25 million notional amount.
The effect of these contracts is to "fix" the interest rate payable on $25
million of the company's variable rate borrowings at a weighted average rate of
7.1%. The company also enters into foreign exchange forward and option contracts
to hedge against currency fluctuations with respect to firm commitments to
purchase certain machinery, equipment and raw materials.
CAPITAL EXPENDITURES. The company maintains an ongoing program of capital
expenditures designed to increase capacity as needed, enhance manufacturing
efficiencies through modernization and increase the company's vertical
integration. Capital expenditures totaled $10.7 million for 1999, down from
$35.9 million for 1998. The company anticipates capital spending of
approximately $20 million in 2000.
The company believes that cash flows from operations and funds available under
existing credit facilities and committed IRB financings will be sufficient to
fund capital expenditures and working capital requirements for the foreseeable
future.
INFLATION The cost of the company's raw materials remained generally stable
during 1999 and 1998. Factors that reasonably can be expected to influence
margins in the future include changes in raw material prices, trends in other
operating costs and overall competitive conditions.
SEASONALITY The company's business is slightly seasonal, with increased sales
during the second and fourth fiscal quarters. This seasonality results from
one-week closings of the company's manufacturing facilities, and the facilities
of most of its customers in the United States, during the first and third
quarters for the holiday weeks including July 4th and Christmas.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
for periods beginning after December 15, 1997. The purpose of this standard is
to disclose disaggregated information which provides information about the
operating segments an enterprise engages in, consistent with how management
reviews financial information to make decisions about the enterprise's operating
matters. The company adopted SFAS No. 131 for fiscal year 1999 (see disclosure
in note 14 to the consolidated financial statements).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
periods beginning after June 15, 2000, although early adoption is allowed. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging
9
activities. The company has not determined the financial impact of adopting this
SFAS and has not determined if it will adopt its provisions prior to its
effective date.
YEAR 2000 CONSIDERATIONS Management has developed a plan to modify the company's
information technology to recognize the year 2000. The plan has three distinct
areas of focus; namely, traditional information systems, technology used in
support areas, and preparedness of suppliers and customers.
The initiative for traditional information systems, which started in 1992, has
led to substantial completion of the assessment, required changes and testing of
the company's operational systems (order entry, billing, sales, finished goods)
and financial systems (payroll, human resources, accounts payable, accounts
receivable, general ledger, fixed assets). The company is currently focused on
modifying the remaining systems that support the company's manufacturing
processes. The programming and testing of these systems was substantially
completed by April 1, 1999, and implementation of these systems was
substantially completed by June 30, 1999. The remaining system implementations
are scheduled for completion during the second quarter of fiscal 2000.
The second area of focus has been an assessment of non-traditional information
technology, which includes the electronics in equipment such as telephone
switches and manufacturing equipment. Inventories of this equipment have been
completed and correspondence has been initiated with vendors and suppliers of
this equipment. The company is currently evaluating the vendor responses and
testing the equipment. After the testing phase is complete, the company will
conduct a review of the inventories and the testing procedures, with this phase
expected to also be completed during the second quarter of fiscal 2000.
The third area of focus is communications with suppliers and customers to
understand their level of readiness and assure a constant flow of materials to
support business plans. Communication to date has shown a high level of
awareness and planning by these parties. The company has a response rate in the
60% - 70% range, and at the present time no material problems or concerns are
indicated by these responses. However, if a significant vendor or customer is
non-compliant, the company can give no assurance that such occurrence will not
have an adverse affect on the company's results. The company believes its action
plans will minimize these risks and prevent any major interruptions in the flow
of materials and products.
Formal contingency plans will not be formulated unless the company has
identified specific areas where there is a substantial risk of year 2000
problems occurring. No such areas have been identified.
The plan is being administered by a team of internal staff and management.
Costs incurred in the company's readiness effort are being expensed as incurred.
Anticipated costs are expected to approximate $800,000 and to date an estimated
$500,000 has been spent. This project, and the year 2000 issue in general, are
not expected to have a significant effect on the company's operations, though no
assurance can be given in this regard.
FORWARD-LOOKING INFORMATION This annual report to shareholders and the company's
annual report on Form 10-K contain statements that could be deemed
"forward-looking statements" within the meaning of the federal securities laws.
Such statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections, expectations
or beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by qualifying words
such as "expect," "believe," "estimate," "plan," and "project" and their
derivatives. Factors that could influence the matters discussed in such
statements include the level of housing starts and sales of existing homes,
consumer confidence, trends in disposable income and general economic
conditions. Decreases in these economic indicators could have a negative effect
on the company's business and prospects. Likewise, increases in interest rates,
particularly home mortgage rates, and increases in consumer debt or the general
rate of inflation, could affect the company adversely. Because of the
significant percentage of the company's sales derived from international
shipments, strengthening of the U.S. dollar against other currencies could make
the company's products less competitive on the basis of price in markets outside
the United States and adversely affect the company. Additionally, economic and
political instability in the international area could affect the demand for the
company's products.
10
CONSOLIDATED BALANCE SHEETS
MAY 2, 1999 AND MAY 3, 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998
-------- --------
ASSETS
current assets:
cash and cash investments $ 509 2,312
accounts receivable 70,503 73,773
inventories 67,070 78,594
other current assets 9,633 7,808
-------- --------
total current assets 147,715 162,487
restricted investments 3,340 4,021
property, plant and equipment, net 123,310 128,805
goodwill 51,269 55,162
other assets 4,978 4,340
-------- --------
total assets $330,612 354,815
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt $ 1,678 3,325
accounts payable 25,687 37,214
accrued expenses 21,026 17,936
income taxes payable 0 1,282
-------- --------
total current liabilities 48,391 59,757
long-term debt 140,312 152,312
deferred income taxes 14,583 11,227
-------- --------
total liabilities 203,286 223,296
-------- --------
commitments and contingencies (notes 10 and 11)
shareholders' equity:
preferred stock, $.05 par value, authorized 10,000,000 shares 0 0
common stock, $.05 par value, authorized 40,000,000 shares,
issued and outstanding 12,079,171 at May 2, 1999 and
13,007,021 at May 3, 1998 604 650
capital contributed in excess of par value 37,966 40,882
retained earnings 88,756 89,987
-------- --------
total shareholders' equity 127,326 131,519
-------- --------
total liabilities and shareholders' equity $330,612 354,815
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
11
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MAY 2, 1999, MAY 3, 1998,
AND APRIL 27, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
--------- ------- -------
net sales $ 483,084 476,715 398,879
cost of sales 406,976 393,154 326,394
--------- ------- -------
gross profit 76,108 83,561 72,485
selling, general and administrative expenses 59,968 52,987 45,058
--------- ------- -------
income from operations 16,140 30,574 27,427
interest expense 9,615 7,117 4,671
interest income (195) (304) (280)
other expense 2,412 1,912 1,521
--------- ------- -------
income before income taxes 4,308 21,849 21,515
income taxes 1,206 6,336 7,745
--------- ------- -------
net income $ 3,102 15,513 13,770
========= ======= =======
net income per share $ 0.24 1.22 1.18
--------- ------- -------
net income per share, assuming dilution $ 0.24 1.19 1.15
========= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CAPITAL
FOR THE YEARS ENDED MAY 2, 1999, COMMON COMMON CONTRIBUTED TOTAL
MAY 3, 1998 AND APRIL 27, 1997 STOCK STOCK IN EXCESS OF RETAINED SHAREHOLDERS'
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMOUNT PAR VALUE EARNINGS EQUITY
balance, April 28, 1996 11,290,300 $ 565 16,878 64,003 81,446
proceeds from public offering of
1,200,000 shares 1,200,000 60 16,235 16,295
cash dividends ($0.13 per share) (1,513) (1,513)
net income 13,770 13,770
common stock issued in connection
with stock option plan 118,459 5 786 791
---------- ----------- ------ ------ -------
balance, April 27, 1997 12,608,759 630 33,899 76,260 110,789
cash dividends ($0.14 per share) (1,786) (1,786)
net income 15,513 15,513
common stock issued in connection
with stock option plans 114,051 6 997 1,003
common stock issued in connection
with acquisition of Artee
Industries, Incorporated's assets 284,211 14 5,386 5,400
stock options issued in connection
with acquisition of Phillips' assets 600 600
---------- ----------- ------ ------ -------
balance, May 3, 1998 13,007,021 650 40,882 89,987 131,519
cash dividends ($0.14 per share) (1,788) (1,788)
net income 3,102 3,102
common stock issued in connection
with stock option plans 10,750 1 34 35
common stock purchased (938,600) (47) (2,950) (2,545) (5,542)
---------- ----------- ------ ------ -------
balance, May 2, 1999 12,079,171 $ 604 37,966 88,756 127,326
========== =========== ====== ====== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 2, 1999,
MAY 3, 1998 AND APRIL 27, 1997
(DOLLARS IN THOUSANDS) 1999 1998 1997
------ ------ ------
cash flows from operating activities:
net income $ 3,102 15,513 13,770
adjustments to reconcile net income to net cash
provided by operating activities:
depreciation 18,549 14,808 12,688
amortization of intangible assets 1,570 1,371 810
provision for deferred income taxes 1,064 1,416 966
changes in assets and liabilities, net of effects of
businesses acquired:
accounts receivable 3,133 (13,207) (4,653)
inventories 12,124 (17,684) (6,068)
other current assets 522 (660) (348)
other assets (106) (380) (205)
accounts payable (8,893) 6,477 2,586
accrued expenses 2,736 1,506 2,510
income taxes payable (1,282) (298) 1,383
-------- ------ ------
net cash provided by operating activities 32,519 8,862 23,439
-------- ------ ------
cash flows from investing activities:
capital expenditures (10,689) (35,879) (26,958)
purchase of restricted investments (119) (8,770) (9,770)
purchase of investments to fund deferred
compensation liability (735) (581) (563)
sale of restricted investments 800 15,767 4,002
payments for businesses acquired -- (42,966) --
-------- ------ ------
net cash used in investing activities (10,743) (72,429) (33,289)
-------- ------ ------
cash flows from financing activities:
proceeds from issuance of long-term debt 2,637 86,246 54,500
principal payments on long-term debt (16,284) (17,100) (59,900)
cash dividends paid (1,788) (1,786) (1,513)
proceeds from common stock issued 35 562 17,086
payments to acquire common stock (5,542) -- --
change in accounts payable - capital expenditures (2,637) (2,873) 9
-------- ------ ------
net cash provided by (used in)
financing activities (23,579) 65,049 10,182
-------- ------ ------
increase (decrease) in cash and cash investments (1,803) 1,482 332
cash and cash investments, beginning of year 2,312 830 498
-------- ------ ------
cash and cash investments, end of year $ 509 2,312 830
======== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
accounts of the company and its subsidiary, which is wholly-owned. All
significant intercompany balances and transactions are eliminated in
consolidation.
Description of Business - The company primarily manufactures and markets
furniture upholstery fabrics and mattress ticking for the furniture, bedding,
and related industries, with the majority of its business conducted in the
United States.
Fiscal Year - The company's fiscal year is the 52 or 53 week period ending on
the Sunday closest to April 30. Fiscal years 1999 and 1997 included 52 weeks and
fiscal year 1998 included 53 weeks.
Statements of Cash Flows - For purposes of reporting cash flows, the company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash investments.
Accounts Receivable - Substantially all of the company's accounts receivable are
due from manufacturers and distributors in the markets noted above. The company
grants credit to customers, a substantial number of which are located in the
United States. Management performs credit evaluations of the company's customers
and generally does not require collateral.
Inventories - Principally all inventories are valued at the lower of last-in,
first-out (LIFO) cost or market.
Restricted Investments - Restricted investments were purchased with proceeds
from industrial revenue bond issues and are invested pending application of such
proceeds to project costs or repayment of the bonds. The investments are stated
at cost which approximates market value.
Property, Plant and Equipment - Property, plant and equipment is recorded at
cost. Depreciation is generally computed using the straight-line method over the
estimated useful lives of the respective assets. Major renewals and betterments
are capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. When properties are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts. Amounts received on
disposal less the book value of assets sold are charged or credited to income.
Interest costs of $365,000 and $678,000 incurred during the years ended May 2,
1999 and May 3, 1998, respectively, for the purchase and construction of
qualifying fixed assets were capitalized and are being amortized over the
related assets' estimated useful lives.
Foreign Currency Translation - The United States dollar is the functional
currency for the company's Canadian subsidiary. Translation gains or losses for
this subsidiary are reflected in net income.
Goodwill and Other Intangible Assets - Goodwill, which represents the
unamortized excess of the purchase price over the fair values of the net assets
acquired, is being amortized using the straight-line method over 40 years. The
company assesses the recoverability of goodwill by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired businesses. The
assessment of the recoverability of goodwill will be impacted if estimated cash
flows are not achieved.
Other intangible assets are included in other assets and consist principally
of debt issue costs. Amortization is computed using the straight-line method
over the respective terms of the debt agreements.
Income Taxes - Deferred taxes are recognized for the temporary differences
between the financial statement carrying amounts and the tax bases of the
company's assets and liabilities and operating loss and tax credit carryforwards
at income tax rates expected to be in effect when such amounts are realized or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
No provision is made for income taxes which may be payable if undistributed
income of the company's Canadian subsidiary were to be paid as dividends to the
company, since the company intends that such earnings will continue to be
invested. At May 2, 1999, the amount of such undistributed income was $15.3
million. Foreign tax credits may be available as a reduction of United States
income taxes in the event of such distributions.
Revenue Recognition - Revenue is recognized when products are shipped to
customers. Provision is made currently for estimated product returns, claims and
allowances.
Stock Option Plans - On April 29, 1996, the company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which requires disclosure of the fair
value and other characteristics of stock options (see note 12). The company has
chosen under the provisions of SFAS No. 123 to continue using the
intrinsic-value method of accounting for employee
15
stock-based compensation in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees.
Fair Value of Financial Instruments - The carrying amount of cash and cash
investments, accounts receivable, other current assets, accounts payable and
accrued expenses approximates fair value because of the short maturity of these
financial instruments.
The fair value of the company's long-term debt is estimated by discounting the
future cash flows at rates currently offered to the company for similar debt
instruments of comparable maturities. The fair value of the company's long-term
debt approximates the carrying value of the debt at May 2, 1999.
Interest Rate Swap Agreements - Interest rate swap agreements generally involve
the exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. These agreements are used to
effectively fix the interest rates on certain variable rate borrowings. Net
amounts paid or received are reflected as adjustments to interest expense.
Forward Contracts - Gains and losses related to qualifying hedges of firm
commitments are deferred and included in the measurement of the related foreign
currency transaction when the hedged transaction occurs.
Per Share Data - During fiscal 1998, the company adopted Statement of Financial
Accounting Standards No. 128 that requires the reporting of both net income per
share and net income per share, assuming dilution. The following table
reconciles the numerators and denominators of net income per share and net
income per share, assuming dilution:
(Amounts in thousands, Income Shares Per Share
except per share data) (Numerator) (Denominator) Amount
1999
Net income per share $ 3,102 12,909 $ 0.24
Effect of dilutive securities:
Options 0 155
------- ------ -------
Net income per share,
assuming dilution $ 3,102 13,064 $ 0.24
======= ====== =======
1998
Net income per share $15,513 12,744 $ 1.22
Effect of dilutive securities:
Options 0 298
------- ------ -------
Net income per share,
assuming dilution $15,513 13,042 $ 1.19
======= ====== =======
1997
Net income per share $13,770 11,624 $ 1.18
Effect of dilutive securities:
Options 0 305
------- ------ -------
Net income per share,
assuming dilution $13,770 11,929 $ 1.15
======= ====== =======
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification - Certain items in the 1998 consolidated financial statements
have been reclassified to conform with the presentation adopted in the current
year. The reclassifications did not impact net income as previously reported.
2 ACQUISITIONS
On August 5, 1997, the company purchased the operations and certain assets
relating to an upholstery fabric business operating as Phillips Weaving Mills,
Phillips Velvet Mills, Phillips Printing and Phillips Mills (Phillips). The
transaction was valued at approximately $39.5 million and involved the purchase
of assets for cash, the assumption of certain notes, liabilities and contracts,
the payments under the terms of certain obligations to Phillips and the issuance
of an option for 100,000 shares of common stock. Goodwill on the transaction was
approximately $30.8 million, which is being amortized on the straight-line
method over 40 years.
On December 30, 1997, the company purchased the operations and certain assets
relating to the Wetumpka spun yarn operation of Dan River Inc. The transaction
was valued at approximately $1.4 million and involved the purchase of assets for
cash.
On February 2, 1998, the company purchased the operations and certain assets
relating to a yarn manufacturing business operating as Artee Industries,
Incorporated (Artee). The transaction was valued at approximately $17.9 million
and involved the purchase of assets for cash, the assumption of certain
liabilities and the issuance of a note payable and common stock of the company.
Goodwill on the transaction was approximately $800,000, which is being amortized
on the straight-line method over 40 years.
The three acquisitions mentioned above were accounted for as purchases, and
accordingly, the net assets and operations have been included in the company's
consolidated financial statements since the dates of the acquisitions.
3 ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
(dollars in thousands) 1999 1998
-------- ------
customers $ 73,089 75,695
allowance for doubtful accounts (1,452) (1,244)
reserve for returns and allowances (1,134) (678)
-------- ------
$ 70,503 73,773
======== ======
16
4 INVENTORIES
A summary of inventories follows:
(dollars in thousands) 1999 1998
- ---------------------- ---- ----
inventories on the FIFO cost method
raw materials $ 40,728 45,319
work-in-process 6,790 6,608
finished goods 24,885 31,017
-------- ------
total inventories on the
FIFO cost method 72,403 82,944
adjustments of certain inventories
to the LIFO cost method (1,478) (2,364)
adjustments of certain inventories
to market (3,855) (1,986)
-------- ------
$ 67,070 78,594
======== ======
5 PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
depreciable lives
(dollars in thousands) (in years) 1999 1998
- ---------------------- ---------- ---- ----
land and improvements 10 $ 2,227 2,205
buildings and improvements 7-40 30,098 21,548
leasehold improvements 7-10 2,511 1,544
machinery and equipment 3-12 182,189 162,070
office furniture and equipment 3-10 15,548 13,508
capital projects in progress 2,788 23,659
--------- -------
235,361 224,534
accumulated depreciation (112,051) (95,729)
--------- -------
$ 123,310 128,805
========= =======
6 GOODWILL
A summary of goodwill follows:
(dollars in thousands) 1999 1998
- ---------------------- ---- ----
goodwill $ 55,547 58,351
accumulated amortization (4,278) (3,189)
-------- ------
$ 51,269 55,162
======== ======
7 ACCOUNTS PAYABLE
A summary of accounts payable follows:
(dollars in thousands) 1999 1998
- ---------------------- ---- ----
accounts payable - trade $25,450 34,340
accounts payable - capital expenditures 237 2,874
------- ------
$25,687 37,214
======= ======
8 ACCRUED EXPENSES
A summary of accrued expenses follows:
(dollars in thousands) 1999 1998
- ---------------------- ---- ----
compensation and benefits $13,136 12,212
other 7,890 5,724
------- ------
$21,026 17,936
======= ======
9 INCOME TAXES
A summary of income taxes follows:
(dollars in thousands) 1999 1998 1997
- ---------------------- ---- ---- ----
current
federal $(1,508) 2,698 5,109
state (442) 493 881
Canadian 2,092 1,729 789
------- ----- -----
142 4,920 6,779
------- ----- -----
deferred
federal 612 563 (26)
state 279 102 (12)
Canadian 173 751 1,004
------- ----- -----
1,064 1,416 966
------- ----- -----
$ 1,206 6,336 7,745
======= ===== =====
Income before income taxes related to the company's Canadian operation for the
years ended May 2, 1999, May 3, 1998, and April 27, 1997 were $6,900,000,
$8,000,000 and $5,500,000, respectively.
The following schedule summarizes the principal differences between income
taxes at the federal income tax rate and the effective income tax rate reflected
in the consolidated financial statements:
1999 1998 1997
---- ---- ----
federal income tax rate 35.0% 35.0% 35.0%
state income taxes, net of federal
income tax benefit (2.5) 1.8 2.6
exempt income of foreign
sales corporation (3.1) (6.4) (1.7)
other (1.4) (1.4) 0.1
---- ---- ----
28.0% 29.0% 36.0%
==== ==== ====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities consist of the following:
(dollars in thousands) 1999 1998
- ---------------------- ---- ----
deferred tax liabilities:
property, plant and equipment, net $(13,038) (10,526)
goodwill (2,431) (1,651)
other (108) (326)
-------- -------
total deferred tax liabilities (15,577) (12,503)
deferred tax assets:
accounts receivable 840 590
inventories 1,733 1,356
compensation 1,995 1,515
liabilities and reserves 1,841 1,673
alternative minimum tax 849 0
-------- -------
gross deferred tax assets 7,258 5,134
valuation allowance 0 0
-------- -------
total deferred tax assets 7,258 5,134
-------- -------
$ (8,319) (7,369)
======== =======
17
Deferred taxes are classified in the accompanying consolidated balance sheet
captions as follows:
(dollars in thousands) 1999 1998
- ---------------------- ---- ----
other current assets $ 6,264 3,858
deferred income taxes (14,583) (11,227)
-------- ------
$ (8,319) (7,369)
======== ======
At May 2, 1999, the company had an alternative minimum tax credit carryforward
of approximately $849,000 for federal income tax purposes. The company believes
that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the remaining deferred tax assets.
Income taxes paid, net of income tax refunds, were $2,217,000 in 1999;
$5,218,000 in 1998; and $5,396,000 in 1997.
10 LONG-TERM DEBT
A summary of long-term debt follows:
(dollars in thousands) 1999 1998
- ---------------------- ---- ----
senior unsecured notes $ 75,000 75,000
industrial revenue bonds and
other obligations 35,278 34,787
revolving credit facility 25,000 30,000
revolving line of credit 0 6,000
obligations to sellers 6,712 9,850
--------- -------
141,990 155,637
current maturities (1,678) (3,325)
--------- -------
$ 140,312 152,312
========= =======
The senior unsecured notes have a fixed coupon rate of 6.76% and an average
remaining term of 9 years. The principal payments become due from March 2006 to
March 2010 with interest payable semi-annually.
The company's revolving credit agreement (the "Credit Agreement") provides an
unsecured multi-currency revolving credit facility, which expires in April 2002,
with a syndicate of banks in the United States. The Credit Agreement provides
for a revolving loan commitment of $88,000,000. The agreement requires payment
of a quarterly facility fee in advance. In October 1998, the company amended the
Credit Agreement to amend certain covenants. Additionally, the amendment
increased the interest rate 0.375% to LIBOR plus 1.125%. On borrowings
outstanding at May 2, 1999, the interest rate was 6.26%.
The company's $6,000,000 revolving line of credit expires on May 31, 2000.
However, the line of credit will automatically be extended for an additional
three-month period on each August 31, November 30, February 28 and May 31 unless
the bank notifies the company that the line of credit will not be extended. At
May 2, 1999, no borrowings were outstanding under the revolving line of credit.
The industrial revenue bonds (IRB) are generally due in balloon maturities
which occur at various dates from 2006 to 2013. All of the bonds bear interest
at variable rates of approximately 66% of the prime rate (prime at May 2, 1999
was 7.75%). The IRBs are collateralized by restricted investments of $3,340,000
and letters of credit for the outstanding balance of the IRBs and certain
interest payments due thereunder.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At May 2, 1999, the company
was in compliance with these amended financial covenants.
At May 2, 1999, the company had three interest rate swap agreements with a
bank in order to reduce its exposure to floating interest rates on a portion of
its variable rate borrowings.
The following table summarizes certain data regarding the interest rate swaps:
NOTIONAL AMOUNT INTEREST RATE EXPIRATION DATE
- --------------- ------------- ---------------
$ 15,000,000 7.3% April 2000
$ 5,000,000 6.9% June 2002
$ 5,000,000 6.6% July 2002
The estimated amount at which the company could terminate these agreements as of
May 2, 1999 is approximately $478,000. Net amounts paid under these agreements
increased interest expense by approximately $308,000 in 1999; $232,000 in 1998;
and $301,000 in 1997. Management believes the risk of incurring losses resulting
from the inability of the bank to fulfill its obligation under the interest rate
swap agreements to be remote and that any losses incurred would be immaterial.
The principal payment requirements of long-term debt during the next five
years are: 2000 - $1,678,000; 2001 - $1,678,000; 2002 - $27,051,000; 2003 -
$2,051,000; and 2004 - $373,000.
Interest paid during 1999, 1998 and 1997 totaled $9,579,000, $7,067,000, and
$4,834,000, respectively.
11 COMMITMENTS AND CONTINGENCIES
The company leases certain office, manufacturing and warehouse facilities and
equipment, primarily computer, and vehicles, under noncancellable operating
leases. Lease terms related to real estate range from five to ten years with
renewal options for additional periods ranging from five to fifteen years. The
leases generally require the company to pay real estate taxes, maintenance,
insurance and other expenses. Rental expense for operating leases, net of
sublease income, was $7,440,000 in 1999, $6,065,000 in 1998; and $4,590,000 in
1997. Future minimum rental commitments for noncancellable operating leases are
$6,356,000 in 2000; $4,480,000 in 2001; $2,968,000 in 2002; $2,302,000 in 2003;
$1,825,000 in 2004; and $5,571,000 in later years.
The company is involved in several legal proceedings and claims which have
arisen in the ordinary course of its business. These actions, when ultimately
concluded and settled, will not, in the opinion of management, have a material
adverse effect upon the financial position, results of operations or liquidity
of the company.
The company has outstanding capital expenditure commitments of approximately
$5,068,000 as of May 2, 1999.
18
12 STOCK OPTION PLANS
The company has a fixed stock option plan under which options to purchase common
stock may be granted to officers, directors and key employees. At May 2, 1999,
789,927 shares of common stock were authorized for issuance under the plan.
Options are generally exercisable one year after the date of grant and generally
expire beginning ten years after the date of grant.
No compensation cost has been recognized for this stock option plan as options
are granted under the plan at an option price not less than fair market value at
the date of grant.
A summary of the status of the plan as of May 2, 1999, May 3, 1998 and April
27, 1997 and changes during the years ended on those dates is presented below:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 529,427 $12.30 407,228 $8.69 443,437 $ 7.46
Granted 209,375 7.62 187,250 18.89 82,250 12.61
Exercised (10,750) 3.28 (65,051) 8.63 (118,459) 6.81
Canceled/expired (6,000) 10.56 - - - -
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 722,052 11.09 529,427 12.30 407,228 8.69
======================================================================================================================
Options exercisable at year-end 522,052 12.42 453,427 10.97 336,228 7.91
Weighted-average fair value
of options granted
during the year $ 2.88 $ 6.72 $ 4.55
======================================================================================================================
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 5/2/99 Contractual Life Exercise Price at 5/2/99 Exercise Price
- ---------------------------------------------------------------------------------------------------------
$ 2.82 - $ 7.50 108,052 3.4 years $ 4.60 108,052 $ 4.60
$ 7.63 - $ 7.63 200,000 9.4 7.63 0 0
$ 7.75 - $12.75 195,375 5.5 10.31 195,375 10.31
$13.34 - $20.94 218,625 6.1 18.17 218,625 18.17
- ---------------------------------------------------------------------------------------------------------
722,052 6.5 11.09 522,052 12.42
- ---------------------------------------------------------------------------------------------------------
During fiscal 1995, the company adopted a stock option plan which provided for
the one-time grant to officers and certain senior managers of options to
purchase 121,000 shares of the company's common stock at $.05 (par value) per
share. Coincident with the adoption of this plan, the company's 1993 stock
option plan was amended to reduce the number of shares issuable under that plan
by 121,000 shares. The accelerated vesting provisions of this plan were achieved
and all options vested 45 days after the end of fiscal 1997 and, as a result,
the compensation expense recorded under APB Opinion No. 25 was approximately
$1,026,000 for the three-year period ended April 27, 1997. Since these options
were granted in fiscal 1995, the provisions of SFAS No. 123 are not applicable.
As of May 2, 1999, the 65,000 options outstanding under the plan have exercise
prices of $0.05 and a weighted-average remaining contractual life of 4.7 years.
Options exercised during fiscal 1999 and 1998 were 0 and 49,000, respectively.
During September 1997, the company's shareholders approved the 1997
performance-based option plan which provides for the one-time grant to certain
officers and certain senior managers of options to purchase 106,000 shares of
the company's common stock at $1.00 per share. Options under the plan are
exercisable on January 1, 2006 due to the company not achieving net income per
share of $1.50 for fiscal 1999. During fiscal 1999 and 1998, the compensation
expense recorded under APB Opinion No. 25 was $250,000 in each year.
As of May 2, 1999, the 106,000 options outstanding under the plan have
exercise prices of $1.00 and a weighted-average remaining contractual life of
7.7 years. The weighted-average fair value of the 106,000 options granted during
1998 was $19.10. Had compensation cost for this stock-based compensation
19
plan and the fixed stock option plan with 722,052 options outstanding at May 2,
1999 been determined consistent with SFAS No. 123, the company's net income, net
income per share and net income per share, assuming dilution would have been
reduced to the pro forma amounts indicated below:
(dollars in thousands,
except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------
Net income As reported $3,102 15,513 13,770
Pro forma 2,827 15,377 13,637
- ---------------------------------------------------------------------------
Net income per share As reported $0.24 1.22 1.18
Pro forma 0.22 1.21 1.17
- ---------------------------------------------------------------------------
Net income per share, As reported $0.24 1.19 1.15
assuming dilution Pro forma 0.22 1.18 1.14
- ---------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of 1.5%, 1% and 1%; risk-free interest rates of 5.4%, 5.5% and 5%; expected
volatility of 47%, 42% and 44%; and expected lives of 4 years, 5.3 years and 3
years.
13 BENEFIT PLANS
The company has a defined contribution plan which covers substantially all
employees and provides for participant contributions on a pre-tax basis and
discretionary matching contributions by the company, which are determined
annually. Company contributions to the plan were $1,091,000 in 1999; $1,103,000
in 1998; and $875,000 in 1997.
In addition to the defined contribution plan, the company has a nonqualified
deferred compensation plan covering officers and certain other associates. The
company's nonqualified plan liability of $4,044,000 and $3,059,000 at May 2,
1999 and May 3, 1998, respectively, is included in accrued expenses in the
accompanying consolidated balance sheets. The company also had assets related to
the nonqualified plan of $3,091,000 and $2,355,000 at May 2, 1999 and May 3,
1998, respectively, which are included in other assets in the accompanying
consolidated balance sheets.
14 SEGMENT INFORMATION
The company's operations are classified into two business segments: upholstery
fabrics and mattress ticking. The upholstery fabrics segment principally
manufactures and sells woven jacquards and dobbies, wet and heat-transfer
prints, and woven and tufted velvets primarily to residential and commercial
(contract) furniture manufacturers. The mattress ticking segment principally
manufactures and sells woven jacquards, heat-transfer prints and pigment prints
to bedding manufacturers.
International sales, of which 94%, 94%, and 91% were denominated in U.S.
dollars in 1999, 1998, and 1997, accounted for 23% of net sales in 1999, 29% in
1998, and 25% in 1997, and are summarized by geographic area as follows:
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------
North America (excluding USA) $31,102 31,160 27,479
Europe 19,578 30,775 25,245
Middle East 33,996 34,412 23,505
Asia and Pacific Rim 21,371 32,344 19,646
South America 3,484 5,158 2,604
All other areas 3,823 3,374 3,092
- ------------------------------------------------------------------
$113,354 137,223 101,571
==================================================================
In 1999, 1998 and 1997, no customer represented over 10% of consolidated net
sales. In addition, company assets located outside the United States are not
material for any of the three years presented.
The company internally manages and reports selling, general and administrative
expenses, interest expense, interest income, other expense and income taxes on a
total company basis. Thus, profit by business segment represents gross profit.
In addition, the company internally manages and reports cash and cash
investments, accounts receivable, other current assets, restricted investments,
property, plant and equipment, goodwill and other assets on a total company
basis. Thus, identifiable assets by business segment represent inventories.
Sales, gross profit and inventories for the company's operating segments are
as follows:
(dollars in thousands) 1999 1998 1997
Net sales
Upholstery Fabrics $387,644 389,430 324,197
Mattress Ticking 95,440 87,285 74,682
-------- ------- -------
$483,084 476,715 398,879
======== ======= =======
Gross profit
Upholstery Fabrics $52,286 61,922 56,994
Mattress Ticking 23,822 21,639 15,491
-------- ------- -------
$76,108 83,561 72,485
======== ======= =======
Inventories
Upholstery Fabrics $55,565 66,336 44,239
Mattress Ticking 11,505 12,258 9,224
-------- ------- -------
$67,070 78,594 53,463
======== ======= =======
20
15 RELATED PARTY TRANSACTIONS
A director of the company is also an officer and director of a major customer of
the company. The amount of sales to this customer was approximately $34,313,000
in 1999; $30,545,000 in 1998; and $27,549,000 in 1997. The amount due from this
customer at May 2, 1999 was approximately $4,517,000 and at May 3, 1998 was
approximately $2,413,000.
A director of the company is also an officer and director of the lessor of the
company's office facilities in High Point. Rent expense for the company's office
facilities was approximately $555,000 in 1999; $482,000 in 1998; and $436,000 in
1997.
Rents paid to entities owned by certain shareholders and officers of the
company and their immediate families were $752,000 in 1999; $724,000 in 1998;
and $680,000 in 1997.
16 FOREIGN EXCHANGE FORWARD CONTRACTS
The company generally enters into foreign exchange forward and option contracts
as a hedge against its exposure to currency fluctuations on firm commitments to
purchase certain machinery and equipment and raw materials. The company had $0
and $519,000 of outstanding foreign exchange forward and option contracts as of
May 2, 1999 and May 3, 1998, respectively (denominated in Belgian francs at May
3, 1998). Due to the short maturity of these financial instruments, the fair
values of these contracts approximate the contract amounts at May 2, 1999 and
May 3, 1998, respectively.
17 STOCK OFFERING
In February of 1997, the company completed the sale of 1,200,000 shares of
common stock at a per share price of $15 less commissions and expenses of
approximately $1,700,000 which resulted in net proceeds realized of
approximately $16,300,000. The net proceeds received from the offering were used
to reduce outstanding borrowings under the company's revolving credit line.
The stock offering also included 640,000 shares of common stock sold by two
non-management shareholders at a per share price of $15 less commissions of
approximately $576,000 which resulted in net proceeds realized of approximately
$9,024,000 by the selling shareholders.
21
SELECTED QUARTERLY DATA
fiscal fiscal fiscal fiscal fiscal fiscal
(amounts in thousands, 1999 1999 1999 1999 1998 1998
except per share amounts) 4th quarter 3rd quarter 2nd quarter 1st quarter 4th quarter 3rd quarter
- -------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA (8)
net sales $132,165 112,093 128,159 110,667 135,834 118,457
cost of sales 109,324 92,911 107,685 97,056 112,644 97,554
- -------------------------------------------------------------------------------------------------------------------------------
gross profit 22,841 19,182 20,474 13,611 23,190 20,903
SG & A expenses 15,921 14,100 15,474 14,473 15,277 13,162
- -------------------------------------------------------------------------------------------------------------------------------
income (loss) from operations 6,920 5,082 5,000 (862) 7,913 7,741
interest expense 2,482 2,308 2,464 2,361 1,837 2,180
interest income (113) (10) (19) (53) (69) (73)
other expense 546 492 604 770 753 492
- -------------------------------------------------------------------------------------------------------------------------------
income (loss) before income taxes 4,005 2,292 1,951 (3,940) 5,392 5,142
income taxes 1,109 753 644 (1,300) 1,236 1,140
- -------------------------------------------------------------------------------------------------------------------------------
net income (loss) 2,896 1,539 1,307 (2,640) 4,156 4,002
- -------------------------------------------------------------------------------------------------------------------------------
EBITDA (4) $11,534 9,522 9,649 3,142 11,796 11,390
depreciation 4,764 4,587 4,822 4,376 4,148 3,791
cash dividends 423 455 455 455 453 444
- -------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 12,645 12,995 12,995 13,000 12,993 12,692
weighted average shares outstanding,
assuming dilution 12,742 13,124 13,120 13,203 13,284 12,986
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (8)
net income (loss) (7) $ 0.23 0.12 0.10 (0.20) 0.32 0.32
net income (loss), assuming dilution (7) 0.23 0.12 0.10 (0.20) 0.31 0.31
cash dividends 0.035 0.035 0.035 0.035 0.035 0.035
book value 10.54 10.02 9.94 9.87 10.11 9.58
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (8)
working capital $99,324 95,712 102,336 103,406 102,730 104,026
property, plant and equipment, net 123,310 125,885 126,050 127,287 128,805 113,658
total assets 330,612 326,448 342,022 342,698 354,815 327,322
capital expenditures 2,189 2,057 3,585 2,858 7,696 8,967
long-term debt 140,312 140,210 150,210 154,383 152,312 144,079
funded debt (1) 138,650 138,472 148,479 153,559 151,616 141,223
shareholders' equity 127,326 130,208 129,124 128,272 131,519 121,613
capital employed (5) 265,976 268,680 277,603 281,831 283,135 262,836
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA (8)
gross profit margin 17.3% 17.1% 16.0% 12.3% 17.1% 17.6%
operating income (loss) margin 5.2 4.5 3.9 (0.8) 5.8 6.5
net income (loss) margin 2.2 1.4 1.0 (2.4) 3.1 3.4
EBITDA margin 8.7 8.5 7.5 2.8 8.7 9.6
effective income tax rate 27.7 32.9 33.0 33.0 22.9 22.2
funded debt-to-total capital ratio (1) 52.1 51.5 53.5 54.5 53.5 53.7
working capital turnover 4.3 4.4 4.4 4.5 4.7 4.7
days sales in receivables 49 47 52 48 49 52
inventory turnover 6.4 5.2 5.7 4.9 5.9 5.4
- -------------------------------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 8.50 8.94 10.44 19.13 21.75 21.00
low 5.13 6.50 5.94 9.19 18.63 18.38
close 8.25 6.56 7.25 9.19 18.88 20.00
P/E ratio (2)
high 35.4 26.6 19.8 24.5 17.8 16.2
low 21.3 19.4 11.2 11.8 15.3 14.1
daily average trading
volume (shares) (6) 34.9 20.3 27.5 38.5 16.9 17.5
- -------------------------------------------------------------------------------------------------------------------------------
fiscal fiscal
(amounts in thousands, 1998 1998
except per share amounts) 2nd quarter 1st quarter
- ----------------------------------------------------------------
INCOME STATEMENT DATA (8)
net sales 122,926 99,498
cost of sales 100,191 82,765
- ----------------------------------------------------------------
gross profit 22,735 16,733
SG & A expenses 13,632 10,916
- ----------------------------------------------------------------
income (loss) from operations 9,103 5,817
interest expense 1,820 1,280
interest income (72) (90)
other expense 425 242
- ----------------------------------------------------------------
income (loss) before income taxes 6,930 4,385
income taxes 2,425 1,535
- ----------------------------------------------------------------
net income (loss) 4,505 2,850
- ----------------------------------------------------------------
EBITDA (4) 12,643 9,012
depreciation 3,613 3,256
cash dividends 446 443
- ----------------------------------------------------------------
weighted average shares outstanding 12,668 12,631
weighted average shares outstanding,
assuming dilution 12,980 12,929
- ----------------------------------------------------------------
PER SHARE DATA (8)
net income (loss) (7) 0.36 0.23
net income (loss), assuming dilution (7) 0.35 0.22
cash dividends 0.035 0.035
book value 9.30 8.98
- ----------------------------------------------------------------
BALANCE SHEET DATA (8)
working capital 98,833 88,969
property, plant and equipment, net 107,377 97,128
total assets 320,979 253,319
capital expenditures 10,063 9,153
long-term debt 139,991 96,016
funded debt (1) 131,833 87,930
shareholders' equity 118,005 113,537
capital employed (5) 249,838 201,467
- ----------------------------------------------------------------
RATIOS & OTHER DATA (8)
gross profit margin 18.5% 16.8%
operating income (loss) margin 7.4 5.8
net income (loss) margin 3.7 2.9
EBITDA margin 10.3 9.1
effective income tax rate 35.0 35.0
funded debt-to-total capital ratio(1) 52.8 43.6
working capital turnover 4.8 5.1
days sales in receivables 55 50
inventory turnover 6.1 5.8
- ----------------------------------------------------------------
STOCK DATA
stock price
high 22.19 18.63
low 17.38 16.50
close 19.00 17.63
P/E ratio (2)
high 17.8 15.3
low 13.9 13.5
daily average trading 13.9 15.8
volume (shares) (6)
- ----------------------------------------------------------------
(1) Funded debt includes long- and short-term debt, less restricted investments.
(2) P/E ratios based on trailing 12-month net income per share.
(3) Rayonese included in consolidated results from its March 6, 1995 acquisition
by Culp.
(4) EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
(5) Capital employed includes funded debt and shareholders' equity.
(6) Culp's common shares were listed on the New York Stock Exchange on December
31, 1996.
(7) Net income per share data presented in accordance with SFAS No. 128 which
was adopted in 1998.
(8) Phillips, Wetumpka and Artee included in consolidated results from their
August 5, 1997, December 30, 1997 and February 2, 1998 acquisitions by Culp,
respectively.
22
SELECTED ANNUAL DATA
percent
change five-year
fiscal fiscal fiscal fiscal fiscal 1999- growth
(amounts in thousands, except per share amounts) 1999 1998 1997 1996 1995 1998 rate
- --------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA (3) (8)
net sales $483,084 476,715 398,879 351,667 308,026 1.3% 14.5%
cost of sales 406,976 393,154 326,394 289,129 253,345 3.5 15.0
- --------------------------------------------------------------------------------------------------------------------------------
gross profit 76,108 83,561 72,485 62,538 54,681 (8.9) 12.3
S G & A expenses 59,968 52,987 45,058 39,068 33,432 13.2 16.6
- --------------------------------------------------------------------------------------------------------------------------------
income from operations 16,140 30,574 27,427 23,470 21,249 (47.2) 1.8
interest expense 9,615 7,117 4,671 5,316 4,715 35.1 30.8
interest income (195) (304) (280) (92) (64) (35.9) 19.8
other expense 2,412 1,912 1,521 956 1,082 26.2 47.1
- --------------------------------------------------------------------------------------------------------------------------------
income before income taxes 4,308 21,849 21,515 17,290 15,516 (80.3) (18.5)
income taxes 1,206 6,336 7,745 6,310 5,741 (81.0) (22.5)
- --------------------------------------------------------------------------------------------------------------------------------
net income 3,102 15,513 13,770 10,980 9,775 (80.0) (16.6)
- --------------------------------------------------------------------------------------------------------------------------------
EBITDA (4) 33,847 44,841 39,404 35,610 32,052 (24.5) 7.8
depreciation 18,549 14,808 12,688 12,348 11,257 25.3 16.9
cash dividends 1,788 1,786 1,513 1,236 1,120 0.1 15.1
- --------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 12,909 12,744 11,624 11,234 11,203 1.3 3.1
weighted average shares outstanding,
assuming dilution 13,064 13,042 11,929 11,886 11,461 0.2 2.9
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (3) (8)
net income (7) 0.24 1.22 1.18 0.98 0.87 (80.3)% (19.0)%
net income, assuming dilution (7) 0.24 1.19 1.15 0.94 0.86 (79.8) (18.8)
cash dividends 0.14 0.14 0.13 0.11 0.10 0.0 11.8
book value 10.54 10.11 8.79 7.21 6.37 4.3 13.5
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (3) (8)
working capital $99,324 102,730 69,777 56,953 38,612 (3.3)% 21.2%
property, plant and equipment, net 123,310 128,805 91,231 76,961 75,805 (4.3) 14.0
total assets 330,612 354,815 243,952 211,644 194,999 (6.8) 14.9
capital expenditures 10,689 35,879 26,958 14,385 18,058 (70.2) (8.6)
businesses acquired 0 58,816 0 0 10,455 (100.0) (100.0)
long-term debt 140,312 152,312 76,541 74,941 62,187 (7.9) 19.1
funded debt (1) 138,650 151,616 65,623 76,791 72,947 (8.6) 18.8
shareholders' equity 127,326 131,519 110,789 81,446 71,396 (3.2) 15.2
capital employed (5) 265,976 283,135 176,412 158,237 144,343 (6.1) 17.0
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA (3) (8)
gross profit margin 15.8% 17.5% 18.2% 17.8% 17.8%
operating income margin 3.3 6.4 6.9 6.7 6.9
net income margin 0.6 3.3 3.5 3.1 3.2
EBITDA margin 7.0 9.4 9.9 10.1 10.4
effective income tax rate 28.0 29.0 36.0 36.5 37.0
funded debt-to-total capital ratio (1) 52.1 53.5 37.2 48.5 50.5
return on average total capital 3.4 8.4 10.1 9.5 9.6
return on average equity 2.4 13.0 15.2 14.4 14.6
working capital turnover 4.3 4.7 5.3 5.3 5.6
days sales in receivables 49 49 49 46 47
inventory turnover 5.6 5.8 6.4 6.0 6.0
- -------------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $19.13 22.19 19.63 13.25 12.50
low 5.13 16.50 11.50 7.75 7.25
close 8.25 18.88 16.63 13.00 9.75
P/E ratio (2)
high 79.6 18.2 16.6 13.5 14.3
low 21.3 13.5 9.7 7.9 8.3
daily average trading volume (shares) (6) 30.4 16.0 19.7 19.3 39.7
- -------------------------------------------------------------------------------------------------------------
(1) - (8) See selected quarterly data table footnote
23
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Culp, Inc.:
We have audited the accompanying consolidated balance sheets of Culp, Inc. and
subsidiary as of May 2, 1999 and May 3, 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended May 2, 1999. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Culp, Inc.
and subsidiary as of May 2, 1999 and May 3, 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 2, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Charlotte, North Carolina
June 2, 1999
MANAGEMENT'S RESPONSIBILITY
The management of Culp, Inc. is responsible for the accuracy and consistency
of all the information contained in this Annual Report, including the financial
statements. These statements have been prepared to conform with generally
accepted accounting principles. The preparation of financial statements and
related data involves estimates and the use of judgment.
Culp, Inc. maintains internal accounting controls designed to provide
reasonable assurance that the financial records are accurate, that the assets of
the company are safeguarded, and that the financial statements present fairly
the financial position and results of operations of the company.
KPMG LLP, the company's independent auditors, conducts an audit in accordance
with generally accepted auditing standards and provides an opinion on the
financial statements prepared by management. Their report for 1999 is presented
above.
The Audit Committee of the Board of Directors reviews the scope of the audit
and the findings of the independent auditors. The internal auditor and the
independent auditors meet with the Audit Committee to discuss audit and
financial reporting issues. The Committee also reviews the company's principal
accounting policies, significant internal accounting controls, the Annual Report
and annual SEC filings (Form 10-K and Proxy Statement).
/s/Robert G. Culp, III
Robert G. Culp, III
Chairman and Chief Executive Officer
/s/Phillip W. Wilson
Phillip W. Wilson
Vice President and Chief Financial Officer
June 2, 1999
shareholder information
CORPORATE ADDRESS
101 South Main Street
Post Office Box 2686
High Point, NC 27261
Telephone: (336) 889-5161
Fax: (336) 887-7089
REGISTRAR AND TRANSFER AGENT
Equiserve
150 Royall Street
Canton, MA 02021
(781) 575-3951
Written shareholder correspondence and transfers should be sent to:
Equiserve
P.O. Box 8217
Boston, MA 02266-8217
AUDITORS
KPMG LLP
Charlotte, NC 28282
LEGAL COUNSEL
Robinson, Bradshaw & Hinson, PA
Charlotte, NC 28246
FORM 10-K AND QUARTERLY REPORTS/INVESTOR CONTACT
The Form 10-K Annual Report of Culp, Inc., as filed with the Securities and
Exchange Commission, is available without charge to shareholders upon written
request. Shareholders may also obtain copies of the corporate news releases
issued in conjunction with the company's quarterly results. These requests and
other investor contacts should be directed to Kathy J. Hardy, Corporate
Secretary, at the corporate address.
ANALYST COVERAGE
These analysts cover Culp, Inc.:
First Union Capital Markets
- John Baugh, CFA
C.L. King & Associates
- Tom Lewis
Raymond, James & Associates
- Budd Bugatch, CFA
Wachovia Securities, Inc.
- Kay Norwood, CFA
Value Line
- Noah Goldner
STOCK LISTING
Culp, Inc. common stock is traded on the New York Stock Exchange under the
symbol CFI. As of May 2, 1999, Culp, Inc. had approximately 2,700 shareholders
based on the number of holders of record and an estimate of the number of
individual participants represented by security position listings.
ANNUAL MEETING
Shareholders are cordially invited to attend the annual meeting to be held
Tuesday, September 21, 1999 at the Radisson Hotel; 135 South Main Street; High
Point, North Carolina.