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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 27, 2003
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
101 S. Main St., High Point, North Carolina 27261-2686
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
On Which Registered
------------------- ---------------------
Common Stock, par value $.05/ Share New York Stock Exchange
Rights for Purchase of Series A New York Stock Exchange
Participating Preferred Shares
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation SK is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
As of April 27, 2003, 11,515,459 shares of common stock were outstanding.
As of October 25, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant on that date was $56,410,634 based on the
closing sales price of such stock as quoted on the New York Stock Exchange
(NYSE), assuming, for purposes of this report, that all executive officers and
directors of the registrant are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Part III
Portions of the company's Proxy Statement to be filed pursuant to
Regulation 14A of the Securities and Exchange Commission in connection with
its Annual Meeting of Shareholders to be held on September 23, 2003 are
incorporated by reference into Items 10, 11, 12 and 13.
CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
Item No. Page
- ------- ----
PART I
1. Business
Overview............................................................3
Segments............................................................4
Capital Expenditures................................................5
Overview of Industry................................................5
Overview of Residential Furniture Industry..........................6
Overview of Commercial Furniture Industry...........................7
Overview of Bedding Industry........................................7
Products............................................................8
Manufacturing......................................................10
Product Design and Styling.........................................10
Distribution.......................................................11
Sources and Availability of Raw Materials..........................11
Competition........................................................11
Technology.........................................................12
Environmental and Other Regulations................................12
Employees..........................................................13
Customers and Sales................................................13
Net Sales by Geographic Area.......................................14
Backlog............................................................14
2. Properties............................................................15
3. Legal Proceedings.....................................................16
4. Submission of Matters to a Vote of Security Holders...................16
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters.....................................16
6. Selected Financial Data...............................................17
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................18
7A. Quantitative and Qualitative Disclosures
About Market Risk...................................................28
8. Consolidated Financial Statements and Supplementary Data..............32
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................56
PART III
10. Directors and Executive Officers of the
Registrant..........................................................56
11. Executive Compensation................................................56
12. Security Ownership of Certain
Beneficial Owners and Management....................................56
13. Certain Relationships and Related
Transactions........................................................56
14. Controls and Procedures...............................................56
PART IV
15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.............................................57
Documents filed as part of this report................................57
Exhibits..............................................................58
Reports on Form 8-K...................................................61
Financial Statement Schedules.........................................61
Signatures ...........................................................62
Exhibit Index........................................................ 63
PART I
ITEM 1. BUSINESS
Overview
Culp, Inc., which we sometimes refer to as the company, manufactures and
markets upholstery fabrics and mattress tickings primarily for use in the
furniture (residential and commercial) and bedding industries. 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."
Culp is one of the three largest marketers of furniture upholstery
fabrics as measured by total sales and one of the four largest producers of
mattress fabrics (known as mattress ticking), again measured by total sales.
The company's fabrics are used principally in the production of residential
and commercial furniture and bedding products, including sofas, recliners,
chairs, loveseats, sectionals, sofa-beds, office seating, panel systems and
mattress sets. Culp markets one of the broadest product lines in its
industry, with a wide range of fabric constructions, patterns, colors,
textures and finishes. This breadth is made possible by Culp's extensive
manufacturing capabilities, which include a variety of weaving, printing and
finishing operations and the ability to produce various yarns and unfinished
base fabrics (known as greige goods) used in its products. Although most of
the company's competitors emphasize one particular type of fabric, Culp
competes in every major category except leather. Culp's staff of over 55
designers and support personnel utilize computer aided design (CAD) systems to
develop the company's own patterns and styles. Culp's product line currently
includes more than 3,000 upholstery fabric patterns and 1,000 mattress-ticking
styles. Although Culp markets fabrics at most price levels, the company has
emphasized fabrics that have a broad appeal in the "good" and "better" price
categories of furniture and bedding.
Culp markets its products worldwide, with sales to customers in over 50
countries. Total net sales were $339.6 million in fiscal 2003, and the
company's international sales totaled $39.9 million during fiscal 2003.
Shipments to U.S.-based customers continue to account for most of the
company's sales. International sales accounted for 12% of net sales for fiscal
2003 compared to 14% of net sales in fiscal 2002.
Culp has ten (10) active manufacturing facilities, with a combined total
of approximately 2.0 million square feet that are located in North Carolina
(7), South Carolina (2), and Quebec, Canada (1). The company's distribution
system is designed to offer customers fast, responsive delivery. Products are
shipped directly to customers from the company's manufacturing facilities, as
well as from three regional distribution facilities strategically located in
High Point, North Carolina, Los Angeles, California, and Tupelo, Mississippi,
which are areas with a high concentration of furniture manufacturing.
Culp maintains an Internet website at www.culpinc.com. The company will
make this annual report, in addition to its other annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
these reports, available free of charge on its Internet site as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission. Information included on
the company's website is not incorporated by reference into this annual report.
Segments
The company's operating segments are upholstery fabrics and mattress
ticking, with related divisions organized within those segments. The
divisions within upholstery fabrics are Culp Decorative Fabrics, Culp
Velvets/Prints and Culp Yarn. The division within mattress ticking is Culp
Home Fashions. Each division is accorded considerable autonomy and is
responsible for designing, manufacturing and marketing its respective product
lines. Significant synergies exist among the divisions, including the sharing
of common raw materials made internally, such as polypropylene yarns, certain
dyed and spun yarns, greige goods and printed heat-transfer paper. Products
manufactured at one division's facility are commonly transferred to another
division's facility for additional value-added processing steps. The
following table sets forth certain information for each of the company's
segments/divisions.
Culp's Segments/Divisions
FISCAL 2003 PRODUCT LINES
NET SALES (BASE CLOTH, IF
SEGMENT DIVISION (in millions) APPLICABLE)
------- -------- ------------- -----------
Upholstery Fabrics Culp Decorative Fabrics $137.2 Woven jacquards
Woven dobbies
Culp Velvets/Prints $ 96.0 Heat-transfer prints
(jacquard, flock)
Woven velvets
Tufted velvets
(woven polyester)
Suede fabrics
Culp Yarn $ 6.8 Pre-dyed spun yarns
Chenille yarns
Mattress Ticking Culp Home Fashions $ 99.6 Woven jacquards
Heat-transfer prints
(jacquard, knit,
sheeting)
Pigment prints
(jacquard, knit,
sheeting, non-woven)
Knitted ticking
Culp Decorative Fabrics. Culp Decorative Fabrics manufactures and
markets jacquard and dobby woven fabrics used primarily for residential and
commercial furniture. For a description of the characteristics of these
fabrics, see "Products" below. During 2003, the company carried out a
restructuring plan designed to increase efficiencies and eliminate cost. The
company consolidated the operations from the Chattanooga, Tennessee facility
into the other Culp Decorative Fabrics manufacturing facilities, which
resulted in the closure of the Chattanooga operation during fiscal 2003 (note
additional discussion of restructuring activity in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
Culp Decorative Fabrics' manufacturing facilities are located in Burlington
and Graham, North Carolina, and Pageland, South Carolina. Culp Decorative
Fabrics is vertically integrated, complementing its extensive weaving
capabilities with the ability to extrude, dye and texturize yarn. The designs
marketed by Culp Decorative Fabrics range from intricate, complicated patterns
such as floral and abstract designs to patterns associated with casual living
styles that are popular with motion furniture.
Culp Velvets/Prints. Culp Velvets/Prints manufactures and markets a
broad range of printed and velvet fabrics. These include heat-transfer prints
on jacquard and flock base fabrics, woven velvets and tufted velvets. For a
description of the characteristics of these fabrics, see "Products" below.
These fabrics, which are manufactured at Burlington, North Carolina and
Anderson, South Carolina, typically offer manufacturers richly colored
patterns and textured surfaces.
Culp Yarn. Culp Yarn manufactures and markets a variety of pre-dyed
spun yarns, including WrapSpun TM, open-end spun and chenille yarns. Culp Yarn
operates manufacturing facilities in Shelby, Cherryville, and Lincolnton,
North Carolina. Most of the production of Culp Yarn is used internally by
other Culp divisions. The external sales, which totaled approximately $7.0
million, representing only 2.0% of the company's consolidated sales for fiscal
2003, are directed primarily to the upholstery fabric market. Culp Yarn
provides Culp more control over its supply of spun and chenille yarns and
complements the company's emphasis on developing new designs.
Culp Home Fashions. Culp Home Fashions markets mattress ticking to
bedding manufacturers. These fabrics encompass woven jacquard ticking as well
as heat-transfer and pigment-printed ticking on a variety of base fabrics,
including jacquard, knit, poly/cotton sheeting and non-woven materials.
Additionally, the division has begun to source knitted ticking from an outside
supplier. Culp Home Fashions blends its diverse printing and finishing
capabilities with its access to a variety of base fabrics to offer innovative
designs to bedding manufacturers for mattress products. Culp Home Fashions'
manufacturing facilities are located in Stokesdale, North Carolina and St.
Jerome, Quebec, Canada.
Capital Expenditures
Since fiscal 1999, the company has invested $58.3 million in capital
expenditures to expand its manufacturing capacity, install more efficient
production equipment and vertically integrate its operations. For this time
period, $41.1 million has been spent in the upholstery fabrics segment and
$17.2 million in the mattress ticking segment. The company spent approximately
$12.2 million in capital expenditures during fiscal 2003, primarily for weaving
modernization at the Pageland, S.C. facility, which related to the fiscal 2003
Culp Decorative Fabrics restructuring (described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations"), and the
weaving expansion in the Culp Home Fashions divisions. This level of capital
spending was significantly above the $4.7 and $8.1 million in capital
expenditures during fiscal 2002 and fiscal 2001, respectively. The company is
currently planning to make capital expenditures for fiscal 2004 of
approximately $8.0 million, with $3.0 million targeted for the company's new
operation in Shanghai, China and $2.0 million planned for weaving
modernization in the Culp Decorative Fabrics division.
Overview of Industry
Culp markets products worldwide to an array of manufacturers that
operate in three principal markets and several specialty markets:
Upholstery Fabrics Segment
Residential furniture. This market includes upholstered furniture sold
to consumers. Products include sofas, sleep sofas, chairs,
motion/recliners, sectionals and occasional furniture items.
Commercial furniture. This market includes upholstered office seating
and modular office systems sold primarily for use in offices (including
home offices) and other institutional settings.
Specialty markets. These markets include juvenile furniture (baby car
seats and other baby items), hospitality (furniture used in hotels and
other lodging establishments), outdoor furniture, recreational vehicle
seating, automotive aftermarket (slip-on seat covers), retail fabric
stores and specialty yarn.
Mattress Ticking Segment
Bedding. This market includes mattress sets as well as "top of the bed"
(comforters and bedspreads).
Overview of Residential Furniture Industry
According to the American Furniture Manufacturers Association (AFMA), a
trade association, the U.S. residential furniture industry has grown at a
compound annual growth rate of 4.4% over the last 20 years from $10.0 billion
in residential furniture wholesale shipments in 1982 to $23.8 billion in 2002,
with shipments declining in only three of those years. The residential
furniture industry experienced a 10.2% decline in 2001 principally due to
changes in economic conditions. While the residential furniture industry
recovered in 2002, the total level of residential furniture wholesale
shipments has not yet returned to the 2000 level.
The upholstered furniture segment has been outperforming the wood sector
in recent years. According to the AFMA, upholstered furniture has grown from
40.0% of total residential furniture wholesale shipments in 1997 to 45.1% in
2002. It has appeared in recent years that the upholstered furniture segment
is less vulnerable to economic downturns and more responsive to economic
recoveries than the wood sector. The company believes that consumers are more
willing to postpone wooden casegoods purchases in deference to upholstered
products, which receive a higher priority. Furthermore, upholstered products
have a shorter average life as they are more prone to everyday wear as well as
changes in design trends and home fashion. This phenomenon has been apparent
during the residential furniture industry's most recent downturn and
proceeding recovery. During 2001, a year in which residential furniture
wholesale shipments declined, the upholstery segment declined 9.3%, to $9.8
billion while the wood segment decreased 11.0%, to $10.9 billion. Amidst a
recovery in the residential furniture industry in 2002, the upholstery segment
grew 9.3% compared to a flat year for the wood sector, which reported a 0.1%
increase.
The company believes that demographic trends support the outlook for
continued long-term growth in the U.S. residential furniture and bedding
industries. In particular, as "baby boomers" (people born between 1946 to
1964) mature to the 46-to-64 year age range over the next decade, they will be
reaching their highest earning power. Consumers in these age groups tend to
spend more on home furnishings, and the increasing number of these individuals
favors higher demand for furniture and related home furnishings. Many of
these individuals are purchasing vacation and second homes, as evidenced by
the increasing number of such homes in the U.S. Additionally, the children of
the "baby boomers" are entering their college years and are expected to drive
the next wave of household formation in the U.S. According to the U.S. Census
Bureau, the home ownership rate is currently at an all-time high of 68%, and
the average size of homes in the U.S. continues to increase, further driving
purchases of furniture.
There are several key issues facing the residential furniture industry.
The first issue is the trend towards globalization and how businesses are
adapting to it. The sourcing of components and fully assembled furniture from
overseas continues to play a major role in the residential furniture
industry. According to Furniture/Today, imports of residential furniture into
the U.S. grew 13.0%, to $14.2 billion, in 2002. The main source for these
imports continues to be China, which accounted for 40.0% of total U.S. imports
in 2002. In 2002, wood casegoods comprised 49.2% of the residential furniture
imports coming into the U.S, while upholstered furniture only accounted for
14.8% of these imports, most of which is leather furniture. However, many
upholstered furniture manufacturers are now sourcing fabric and leather from
global sources, as well as outsourcing the "cut-and-sew kits" to factories
overseas, particularly in China. Additionally, leather upholstered furniture
has been gaining market share over the last ten years, at least. This trend
has increased over the last two to three years in large part because selling
prices of leather furniture have been declining significantly over this time
period.
Another key issue facing the residential furniture industry is
consolidation. Furniture/Today reports that the ten largest residential
furniture manufacturers (ranked by dollar value of shipments in 2002)
accounted for 40.0% of the industry's total wholesale shipments in 2002, which
is a significantly higher concentration than the comparable proportion ten or
twenty years ago. This trend is expected to continue, particularly because of
the need to invest increasing capital to maintain modern manufacturing and
distribution facilities as well as to provide the sophisticated computer-based
systems and processes necessary to interface in the supply chain between
retailers and suppliers. Also, many recent transactions have occurred in an
effort to broaden the acquirers' product offerings into new price points
and/or product types. The result of this consolidation trend is fewer, but
larger, customers for upholstery fabric manufacturers. The company believes
that this environment favors larger upholstery fabric manufacturers capable of
supplying a broad range of product choices at the volumes required by major
furniture manufacturers on a timely basis.
Overview of Commercial Furniture Industry
According to the Business and Institutional Furniture Manufacturer's
Association (BIFMA), a trade association, the commercial furniture market in
the U.S. totaled approximately $8.9 billion in 2002 in wholesale shipments by
manufacturers. This represents a significant decrease from the industry's
peak of $13.3 billion in 2000. From 1990 to 2000, the commercial furniture
industry grew at a compound annual growth rate of 6.3%. However, the
commercial furniture industry is largely affected by economic trends. The
commercial furniture industry has declined significantly over the past two
years in light of economic trends affecting corporations, who are the ultimate
customers in this industry.
Seating and office systems, which represent the primary uses of
upholstery in this industry, accounted for approximately $5.3 billion in sales
in 2002, or 59.1% of total commercial furniture sales. The commercial
furniture industry is highly concentrated, with over 80% of total industry
shipments coming from the top five manufacturers (ranked by sales).
Generally, the commercial furniture industry is not as affected by imports as
the residential furniture industry due to stringent timing demands often
placed on shipments in this segment. In 2002, imports of office furniture
totaled $1.8 billion, or 19.9%, of total commercial industry shipments.
Dealers aligned with specific furniture brands account for over half of
industry shipments of commercial furniture. Some shift in the distribution of
commercial furniture has occurred in recent years in conjunction with the
growth in national and regional chains featuring office supplies.
Overview of Bedding Industry
According to the International Sleep Products Association (ISPA), the
U. S. wholesale bedding industry accounted for an estimated $4.8 billion in
sales in 2002, a 3.8% increase over 2001. The industry is comprised of over
800 manufacturers, and in 2002 the largest four manufacturers (ranked by
sales) accounted for $2.9 million in wholesale shipments, or 60.6% of the
total shipments. A majority of bedding sales is traditional innerspring
bedding. Approximately 73% of the conventional bedding manufactured in the
U.S. is sold to furniture stores and specialty sleep shops. Most of the
remaining 27% is sold to department stores, national mass merchandisers,
membership clubs and factory direct stores. In recent years, warehouse clubs
have been gaining market share, growing from 3.0% of the market in 1998 to
5.0% in 2002.
A key trend in the bedding industry is the transition to selling
"one-sided" mattresses versus "two-sided" mattresses, which have been the
industry norm for many years. One of the four largest bedding manufacturers
initiated this product change over two years ago. Currently, most of the other
bedding manufacturers are at various stages in the process of transitioning to
the sale of "one-sided" mattresses. While no industry data is available, the
company believes that a majority of the mattresses that are currently being
sold are "one-sided," and that the industry is trending towards a very high
percentage of mattresses sold being "one-sided." Since a "one-sided" mattress
uses 25% to 30% less mattress ticking, the company believes that the overall
industry demand for mattress ticking has been affected by this trend and will
continue to be affected until the transition to "one-sided" mattresses is
substantially complete, which is an estimated one to two years away, based
upon the company's knowledge of its customers.
A product trend within mattress ticking is the increasing popularity of
knitted mattress tickings (not currently manufactured by the company), as
opposed to woven and printed tickings. Knitted ticking is currently being used
on premium mattresses. The company believes knitted ticking market share will
continue to grow for the foreseeable future. Since the company does not
manufacture knitted ticking, it began sourcing and marketing a line of these
products in fiscal 2003.
Products
As described above, the company's products include upholstery fabrics
and mattress ticking, which are the company's identified operating segments.
Upholstery Fabrics Segment. The company derives the majority of its
revenues from the sale of upholstery fabrics, primarily to the residential and
commercial (contract) furniture markets. Upholstery fabrics segment sales
totaled 70.7% of consolidated sales for fiscal 2003. The company has
emphasized fabrics and patterns that have broad appeal at promotional to
medium prices, generally ranging from $3.00 per yard to $9.00 per yard.
Mattress Ticking Segment. The company also manufactures mattress
ticking (fabric used for covering mattresses and box springs) for sale to
bedding manufacturers. Mattress ticking segment sales constituted 29.3% of
consolidated sales in fiscal 2003. The company has emphasized fabrics and
patterns that have broad appeal at prices generally ranging from $1.25 to
$6.00 per yard.
The following table indicates the product lines within each segment and
division, and a brief description of their characteristics and identification of
their principal end-use market.
Culp Fabric Categories By Segment and Division
Upholstery Fabrics Characteristics Principal Markets
- ------------------ --------------- -----------------
Culp
Decorative Fabrics:
Woven jacquards Elaborate, complex designs such as florals Residential
and tapestries in traditional, transitional furniture
and contemporary styles. Woven on Commercial
intricate looms using a wide variety of furniture
synthetic and natural yarns.
Woven dobbies Fabrics that use straight lines to produce Residential
geometric designs such as plaids, stripes furniture
and solids in traditional and country Commercial
styles. Woven on less complicated looms furniture
using a variety of weaving constructions
and primarily synthetic yarns.
Culp Velvet/Prints:
Heat-transfer Sharp, intricate designs on flock or Residential
prints jacquard base fabrics. Plush feel furniture
(flocks), deep colors (jacquards) and Juvenile
excellent wearability. Produced by using furniture
heat and pressure to transfer color from
printed paper onto base fabric.
Woven velvets Basic designs such as plaids in traditional Residential
and contemporary styles with a plush feel. furniture
Woven with a short-cut pile using various
weaving methods and synthetic yarns.
Tufted velvets Lower cost production process of velvets in Residential
which synthetic yarns are punched into a furniture
base polyester fabric for texture. Similar
designs as woven velvets.
Suede fabrics Fabrics woven or knitted using microdenier Residential
yarns, which are piece dyed and finished, furniture
usually by sanding, to resemble suede
leather. The fabrics are typically plain
or with small jacquard designs.
Mattress Ticking Characteristics Principal Markets
- ---------------- --------------- -----------------
Culp Home Fashions:
Woven jacquards Florals and other intricate designs. Woven Bedding
on complex looms using a variety of
synthetic and natural yarns.
Heat-transfer Sharp, detailed designs. Produced by using Bedding
prints heat and pressure to transfer color from
printed paper onto base fabrics, including
woven jacquards, knits and poly/cotton
sheetings.
Pigment prints Variety of designs produced economically by Bedding
screen printing pigments onto a variety of
base fabrics, including jacquards, knits,
poly/cotton sheeting and non-wovens.
================================================================================
The company's products include all major types of coverings, except for
leather, that manufacturers use today for furniture and bedding. The company
also markets fabrics for certain specialty markets, but these do not currently
represent a material portion of the company's business. See "Overview of
Industry."
Manufacturing
Substantially all of the upholstery fabric and mattress ticking
currently marketed by Culp is produced at the company's ten (10) active
manufacturing facilities. These plants encompass a total of approximately
2.0 million square feet and include yarn extrusion, spinning, dyeing and
texturizing equipment, narrow and wide-width jacquard looms, dobby and woven
velvet looms, tufting machines, printing equipment for pigment, heat-transfer
printing, fabric finishing equipment and various types of surface finishing
equipment (such as washing, softening and embossing).
The company's woven fabrics, which include jacquards, dobby, and velvet,
are made from various types of synthetic and natural yarn, such as
polypropylene, polyester, acrylic, rayon, nylon or cotton. Yarn is woven into
various fabrics on jacquard, dobby or velvet weaving equipment. Once the
weaving is completed, the fabric can be printed or finished using a variety of
processes. The company currently extrudes and spins a portion of its own
needs for yarn and purchases the remainder from outside suppliers. Culp
produces internally a substantial amount of its needs for spun and chenille
yarns.
Tufted velvet fabrics are produced by tufting machines, which insert an
acrylic or polypropylene yarn through a polyester woven base fabric, creating
loop pile surface material that is then sheared to create a velvet surface.
Tufted velvet fabrics are typically lower-cost fabrics utilized in the
company's lower-priced product mix.
The company's printing operations include pigment and heat-transfer
methods. The company also produces its own printed heat-transfer paper,
another component of vertical integration.
Product Design and Styling
Consumer tastes and preferences related to upholstered furniture and
bedding change, although gradually, over time. The use of new fabrics and
designs remains an important consideration for manufacturers to distinguish
their products at retail and to capitalize on changes in preferred colors,
patterns and textures. Culp's success is largely dependent on the company's
ability to market fabrics with appealing designs and patterns. Culp has an
extensive staff of designers and support personnel involved in the design and
development of new patterns and styles. Culp uses computer aided design (CAD)
systems in the development of new fabrics, which assists the company in
providing a flexible design program. These systems have enabled the company's
designers to experiment with new ideas and involve customers more actively in
the process. The use of CAD systems also has supported the company's emphasis
on integrating manufacturing considerations into the early phase of a new
design. The company's designers are located in the Howard L. Dunn, Jr. Design
Center to support the sharing of design ideas and CAD and other technologies.
The Design Center has enhanced the company's merchandising and marketing
efforts by providing an environment in which customers can be shown new
products as well as participate in product development initiatives.
The process of developing new designs involves maintaining an awareness
of broad fashion and color trends both in the United States and
internationally. These concepts are blended with input from the company's
customers to develop new fabric designs and styles. These upholstery fabric
designs are introduced by Culp at major fabric trade conferences that occur
twice a year in the United States (January and July).
The mattress ticking designs are introduced, once annually, during the
summer to fall timeframe. Every other year, the designs are introduced twice
during the year in conjunction with events associated with the International
Sleep Products Association (ISPA). Additionally, the company works closely
with its customers, throughout the year, on new line introductions.
Distribution
Upholstery Fabrics Segment
The majority of the company's products are shipped directly from its two
distribution centers at or near manufacturing facilities. This "direct ship"
program is primarily utilized by large manufacturers. Generally, small and
medium-size residential furniture manufacturers use one of the company's three
regional distribution facilities, which have been strategically positioned in
areas that have a high concentration of residential furniture manufacturers -
High Point, North Carolina, Los Angeles, California and Tupelo, Mississippi.
The company closely monitors demand in each distribution territory to decide
which patterns and styles to hold in inventory. These products are generally
available on demand by customers and are usually shipped within 48 hours of
receipt of an order.
Mattress Ticking Segment
Substantially all of the company's shipments of mattress ticking are
made from its manufacturing facilities in Stokesdale, North Carolina and St.
Jerome, Quebec, Canada.
Sources and Availability of Raw Materials
Raw materials account for more than half of the company's total
production costs. The company purchases various types of synthetic and
natural yarns (polypropylene, polyester, acrylic, rayon and cotton), synthetic
staple fibers (acrylic, rayon, polyester), various types of greige goods
(poly/cotton wovens and flocks, polyester wovens, poly/rayon and poly/cotton
jacquard wovens, polyester knits, poly/cotton sheeting and non-wovens),
polypropylene resins, latex adhesives, dyes and chemicals from a variety of
suppliers. The company is generally vertically integrated and produces
internally a significant portion of raw materials, such as chenille, pile and
other filling yarns, polypropylene yarns and printed heat-transfer paper. As
a result, a large portion of its raw materials are comprised of more basic
commodities such as rayon staple, undyed yarns, polypropylene resin chips,
polyester warp yarns, unprinted heat-transfer paper and polyester woven
substrates. Although the company is currently dependent upon one supplier for
its acrylic staple, most of the company's raw materials are available from
more than one primary source. The prices of such materials fluctuate
depending upon current supply and demand conditions and the general rate of
inflation. Many of the company's basic raw materials are petrochemical
products or are produced from such products, and therefore the company's raw
material costs are likely to be sensitive to changes in petrochemical prices.
Generally, the company has not had significant difficulty in obtaining raw
materials.
Competition
Competition for the company's products is based primarily on price,
design, quality, timing of delivery and service.
Upholstery Fabrics Segment
In spite of the trend toward consolidation in the upholstery fabric
market, the company competes against a large number of producers, ranging from
a few large manufacturers comparable in size to the company to small producers
and converters of fabrics. The company believes its principal domestic
upholstery fabric competitors are Joan Fabrics Corporation (including its
Mastercraft division), Richloom Fabrics, Microfibres and Quaker Fabric
Corporation.
Overseas producers have not historically been a source of significant
competition for the company, but recent trends have shown increased competition
in U.S. markets by foreign producers of upholstery fabric, furniture components
and finished upholstery furniture, as well as increased sales in the U.S. of
leather furniture produced overseas (which competes with upholstered furniture
for market share). Foreign manufacturers often are able to produce upholstery
fabric and other components of furniture with significantly lower raw material
and production costs than those of the company and other U.S.-based
manufacturers. The company competes with lower cost foreign goods on the basis
of design, quality, reliability and speed of delivery.
Mattress Ticking Segment
The mattress ticking market is concentrated in a few relatively large
suppliers. The company believes its principal mattress ticking competitors
are Bekaert Textiles B.V., Blumenthal Print Works, Inc., Microfibres and
Tietex, Inc.
Technology
Culp views the proper use of technology as an integral part of an
effective and responsive business. The company employs technology that will
help to achieve higher levels of service to customers and bring operating
efficiencies to the manufacturing process. Some key areas include:
- - Use of the Internet has continued to be an important component of the
company's work. CulpLink provides real-time information for the
company's customers, including order status, shipping and invoice
documentation, sales history, and inventory availability.
- - Culp has continued to invest in technology to aid the design process.
CAD, digital printing, digital imaging, and electronic interfaces to the
production equipment have allowed significant savings in terms of speed
and ease of development.
- - Culp continues to expand shop floor systems in the use of scanners,
radio frequency devices, bar-coding, and process documentation
throughout the company's manufacturing and distribution systems.
Inventories and manufacturing processes are tracked by these systems to
provide customer service and operational management with real time
information for better customer service and a more efficient operation.
All of these systems operate on redundant computer hardware and fiber
optic backbones to effectively minimize downtime to the company's
production processes.
Environmental and Other Regulations
The company is subject to various federal and state laws and
regulations, including the Occupational Safety and Health Act and federal and
state environmental laws, as well as similar laws governing its manufacturing
facility in Canada, which is sometimes referred to as the Rayonese facility.
The company periodically reviews its compliance with such laws and regulations
in an attempt to minimize the risk of violations.
The company's operations involve a variety of materials and processes
that are subject to environmental regulation. Under current law,
environmental liability can arise from previously owned properties, leased
properties and properties owned by third parties, as well as from properties
currently owned and leased by the company. Environmental liabilities can also
be asserted by adjacent landowners or other third parties in toxic tort
litigation.
In addition, under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), and analogous
state statutes, liability can be imposed for the disposal of waste at sites
targeted for cleanup by federal and state regulatory authorities. Liability
under CERCLA is strict as well as joint and several.
The company provides for environmental matters based on information
presently available. Based on this information, the company does not believe
that environmental matters will have a material adverse effect on either the
company's financial condition or results of operations. However, there can be
no assurance that the costs associated with environmental matters will not
increase in the future.
Employees
As of April 27, 2003, the company had approximately 2,500 employees,
compared to approximately 3,000 at the end of fiscal 2002. All of the hourly
employees at the Rayonese facility in Canada (approximately 8% of the
company's workforce) are represented by a local, unaffiliated union. The
collective bargaining agreement for the Rayonese hourly employees was renewed
in 2002 and expires on February 1, 2005. The company is not aware of any
efforts to organize any more of its employees and believes its relations with
its employees are good.
Customers and Sales
Upholstery Fabrics Segment
In the upholstery fabrics segment, Culp's customer base is approximately
2,000 customers. For fiscal 2003, over 90% of upholstery fabrics sales were
concentrated among approximately 400 customers. Major customers are leading
manufacturers of upholstered furniture, including Bassett, Furniture Brands
International (Broyhill, Thomasville, and Lane /Action), Berkline, Benchcraft,
Flexsteel and La-Z-Boy (La-Z-Boy Residential, Bauhaus, England, and Clayton
Marcus). Representative customers for the company's fabrics for commercial
furniture include Herman Miller, HON Industries, Global Upholstery and
Steelcase. The company's two largest customers in this segment are La-Z-Boy
Incorporated and Furniture Brands International, Inc., the loss of either of
which would have a material adverse effect on the company.
In international markets, Culp sells upholstery fabrics to distributors
that maintain inventories for resale to furniture manufacturers.
Mattress Ticking Segment
In the mattress ticking segment, Culp's customer base totals approximately
500 customers. During fiscal 2003, over 90% of mattress ticking sales were
concentrated among approximately 100 customers. Major customers include the
leading bedding manufacturers: Sealy, Serta (National Bedding), Simmons and
Spring Air (various licensees). The loss of one or more of these customers would
have a material adverse effect on the company. Culp's mattress ticking customers
also include many small and medium-size bedding manufacturers. In international
markets, Culp sells mattress ticking primarily to distributors that maintain
inventories for resale to bedding manufacturers.
The following table sets forth the company's net sales by geographic
area by amount and percentage of total net sales for the three most recent
fiscal years.
Net Sales by Geographic Area
----------------------------
(dollars in thousands)
Fiscal 2003 Fiscal 2002 Fiscal 2001
--------------- ---------------- ----------------
United States $299,768 88.3% $329,073 86.0% $332,785 81.0%
North America
(Excluding USA) 30,375 8.9 32,033 8.4 34,049 8.3
Far East and Asia 4,926 1.5 10,703 2.8 15,497 3.8
All other areas 4,577 1.3 10,765 2.8 28,278 6.9
-------- ----- -------- ----- -------- -----
Subtotal (International) 39,878 11.7 53,501 14.0 77,824 19.0
-------- ----- -------- ----- -------- -----
Total $339,646 100.0% $382,574 100.0% $410,609 100.0%
======== ===== ======== ===== ======== =====
Backlog
Upholstery Fabrics Segment
Because a large portion of the company's upholstery fabric customers
have an opportunity to cancel orders, it is difficult to predict the amount of
the backlog that is "firm." Many customers may cancel orders before goods are
placed into production, and some may cancel at a later time. In addition, the
company markets a significant portion of its sales through its regional
warehouse system from in-stock order positions. On April 27, 2003, the
portion of the upholstery fabric backlog with confirmed shipping dates prior
to June 1, 2003 was $20.1 million, as compared to $24.1 million as of the end
of fiscal 2002 (for confirmed shipping dates prior to June 2, 2002).
Mattress Ticking Segment
The backlog for mattress ticking is not a reliable predictor of future
shipments because the majority of sales are on a just-in-time basis.
ITEM 2. PROPERTIES
The company's headquarters are located in High Point, North Carolina, and
the company currently owns or leases ten (10) active manufacturing facilities
and four (4) inactive facilities, a central design facility and three (3)
regional distribution facilities. The following is a list of the company's
principal administrative, manufacturing and distribution facilities. The
manufacturing facilities and distribution centers are organized by segment.
Approx.
Total Area Expiration
Location Principal Use (Sq. Ft.) of Lease (2)
- -------- ------------- --------- -------------
o Administrative and Design Facilities:
High Point, North Carolina (1) Corporate headquarters 40,000 2015
Burlington, North Carolina (1) Design center 30,000 Owned
o Upholstery Fabrics:
Graham, North Carolina (1) Manufacturing 341,000 Owned
Burlington, North Carolina Manufacturing 302,000 Owned
Pageland, South Carolina Manufacturing 204,000 Owned
Cherryville, North Carolina Manufacturing 135,000 Owned
Shelby, North Carolina Manufacturing 101,000 Owned
Anderson, South Carolina Manufacturing 99,000 Owned
Lincolnton, North Carolina Manufacturing 78,000 Owned
Burlington, North Carolina Manufacturing and
distribution 275,000 2006
Burlington, North Carolina Distribution and
yarn warehouse 112,500 Owned
High Point, North Carolina Regional distribution 65,000 Monthly
Tupelo, Mississippi Regional distribution 57,000 2018
Los Angeles, California Regional distribution 33,000 2007
Chattanooga, Tennessee (3) Inactive 290,000 2008
West Hazelton, Pennsylvania Inactive 110,000 2003
Lumberton, North Carolina (4) Inactive 107,000 Owned
Shanghai, China (5) Inactive 65,000 2006
o Mattress Ticking:
Stokesdale, North Carolina Manufacturing and
distribution 220,000 Owned
St. Jerome, Quebec, Canada Manufacturing and
distribution 202,500 Owned
___________________________________________
(1) Properties are used jointly by Upholstery Fabrics and Mattress Ticking
(2) Includes all options to renew, except for inactive properties
(3) The company is seeking to sublease this property
(4) The company is seeking to sell this property
(5) Currently upfitting facility
The company believes that its facilities are in good condition, well
maintained and suitable and adequate for present utilization. In the upholstery
fabric segment, the company has manufacturing capacity to produce approximately
15% more products (measured in yards) than it sold during fiscal 2003. In the
mattress ticking segment, the company has manufacturing capacity to produce 18%
more products (measured in yards) than it manufactured in fiscal 2003. In
addition, the company has the ability to source additional upholstery fabrics
and mattress ticking from outside suppliers, further increasing its ultimate
output of finished goods.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the company, or its
subsidiaries, is a party or of which any of their property is the subject that
are required to be disclosed under this item.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during
the fourth quarter ended April 27, 2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
Registrar and Transfer Agent
EquiServe Trust Company, N.A.
c/o EquiServe
Post Office Box 43023
Providence, Rhode Island 02940-3023
(800) 633-4236
www.equiserve.com
Stock Listing
Culp, Inc. common stock is traded on the New York Stock Exchange under
the symbol CFI. As of April 27, 2003, Culp, Inc. had approximately 2,500
shareholders based on the number of holders of record and an estimate of
individual participants represented by security position listings.
Analyst Coverage
These analysts cover Culp, Inc.:
BB&T Capital Markets - Joel Havard
C.L. King & Associates - Tom Lewis
Morgan Keegan - Laura Champine, CFA
Raymond, James & Associates - Budd Bugatch, CFA
Value Line - Craig Sirois
Wachovia Securities, Inc. - John Baugh, CFA
See Item 6, Selected Financial Data, for market and dividend information
regarding the company's common stock.
ITEM 6 - SELECTED ANNUAL FINANCIAL DATA
percent five-year
fiscal fiscal fiscal fiscal fiscal change growth
(amounts in thousands, except per share amounts) 2003 2002 2001 2000 1999 2003/2002 rate (4)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
net sales $ 339,646 382,574 410,609 488,079 483,084 (11.2)% (6.6)%
cost of sales 282,073 319,717 354,622 403,414 406,976 (11.8) (6.4)
- -----------------------------------------------------------------------------------------------------------------------------------
gross profit 57,573 62,857 55,987 84,665 76,108 (8.4) (7.2)
S G & A expenses 40,040 48,059 50,366 59,935 59,968 (16.7) (5.4)
goodwill amortization 0 1,395 1,395 1,395 1,370 (100.0) (100.0)
restructuring expense and asset impairments 12,981 10,368 5,625 0 0 25.2 N.M.
- -----------------------------------------------------------------------------------------------------------------------------------
income (loss) from operations 4,552 3,035 (1,399) 23,335 14,770 50.0 (31.1)
interest expense 6,636 7,907 9,114 9,521 9,615 (16.1) (1.4)
interest income (596) (176) (46) (51) (195) 238.6 14.4
other expense 805 1,444 1,941 171 494 (44.3) 44.9
- -----------------------------------------------------------------------------------------------------------------------------------
income (loss) before income taxes (2,293) (6,140) (12,408) 13,694 4,856 62.7 N.M
income taxes (1,557) (2,700) (4,097) 4,314 1,206 (42.3) N.M
- -----------------------------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of
accounting change (736) (3,440) (8,311) 9,380 3,650 78.6 N.M
cumulative effect of accounting change, net
of income tax (24,151) 0 0 0 0 (100.0) N.M
- -----------------------------------------------------------------------------------------------------------------------------------
net income (loss) (24,887) (3,440) (8,311) 9,380 3,650 (623.5) N.M
- -----------------------------------------------------------------------------------------------------------------------------------
depreciation 13,990 17,274 19,391 19,462 18,549 (19.0) (1.1)
cash dividends 0 0 1,177 1,611 1,788 0.0 (100.0)
- -----------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,462 11,230 11,210 11,580 12,909 2.1 (2.1)
weighted average shares outstanding,
assuming dilution 11,462 11,230 11,210 11,681 13,064 2.1 (2.5)
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
basic income (loss) per share:
income (loss) before cumulative effect of
accounting change $ (0.06) (0.31) (0.74) 0.81 0.28 79.0 N.M
cumulative effect of accounting change (2.11) 0 0 0 0 (100.0) N.M
- -----------------------------------------------------------------------------------------------------------------------------------
net income (loss) (2.17) (0.31) (0.74) 0.81 0.28 (608.8) N.M
- -----------------------------------------------------------------------------------------------------------------------------------
diluted income (loss) per share:
income (loss) before cumulative effect of
accounting change $ (0.06) (0.31) (0.74) 0.80 0.28 79.0 N.M
cumulative effect of accounting change (2.11) 0 0 0 0 (100.0) N.M
- -----------------------------------------------------------------------------------------------------------------------------------
net income (loss) (2.17) (0.31) (0.74) 0.80 0.28 (608.8) N.M
- -----------------------------------------------------------------------------------------------------------------------------------
cash dividends 0.0 0.0 0.105 0.14 0.14 0.0 (100.0)
book value 8.33 10.52 10.85 11.57 10.63 (20.8) (3.9)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (5) $ 61,937 76,938 90,475 112,407 111,886 (19.5)% (11.7)%
property, plant and equipment, net 84,962 89,772 112,322 126,407 123,310 (5.4) (8.0)
total assets 218,153 287,713 289,580 343,980 331,714 (24.2) (9.3)
capital expenditures 12,229 4,729 8,050 22,559 10,689 158.6 (19.4)
long-term debt (1) 76,500 108,484 111,656 137,486 138,650 (29.5) (12.8)
shareholders' equity 95,765 119,065 121,802 129,640 128,428 (19.6) (6.2)
capital employed (3) 172,265 227,549 233,458 267,126 267,078 (24.3) (9.5)
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA
gross profit margin 17.0% 16.4% 13.6% 17.3% 15.8%
operating income (loss) margin 1.3 0.8 (0.3) 4.8 3.1
net income (loss) margin before cumulative
effect of accounting change (0.2) (0.9) (2.0) 1.9 0.8
effective income tax rate 67.9 44.0 33.0 31.5 24.8
long-term debt-to-total capital ratio (1) 44.4 47.7 47.8 51.5 51.9
operating working capital turnover (5) 5.5 5.0 4.5 4.4 4.3
days sales in receivables 35 41 51 49 49
inventory turnover 5.3 5.4 5.3 5.4 5.6
- ---------------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 17.89 10.74 7.25 11.06 19.13
low 3.75 2.12 1.63 5.00 5.13
close 5.00 9.30 4.95 5.81 8.25
P/E ratio (2)
high (4) N.M N.M. N.M. 13.7 67.6
low (4) N.M N.M. N.M. 6.2 18.1
daily average trading volume (shares) 92.3 24.9 16.2 15.8 30.4
- ---------------------------------------------------------------------------------------------------------------
(1) Long-term debt includes long- and short-term debt
(2) P/E ratios based on trailing 12-month net income (loss) per share
(3) Capital employed includes long-term debt and shareholders' equity
(4) N.M - Not meaningful
(5) Operating working capital for this calculation is accounts receivable, inventories and accounts payable
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
should be read in conjunction with the Financial Statements and Notes attached
thereto.
Overview
Culp is one of the three largest marketers of upholstery fabrics for furniture
(as measured by total sales) and one of the four largest producers of mattress
fabrics (known as mattress ticking), again measured by sales. 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.
The company's operating segments are upholstery fabrics and mattress ticking,
with related divisions organized within those segments. In upholstery
fabrics, Culp Decorative Fabrics markets jacquard and dobby woven fabrics for
residential and commercial furniture. Culp Velvets/Prints markets velvet and
printed fabrics used primarily for residential furniture. Culp Yarn
manufactures specialty filling yarns that are primarily used by Culp
divisions. In mattress ticking, Culp Home Fashions 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 (loss) as a percentage of net sales.
2003 2002 2001
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 83.0 83.5 86.3
------ ------ ------
Gross profit 17.0 16.5 13.7
Selling, general and administrative
expenses 11.8 12.6 12.3
Goodwill amortization 0.0 0.4 0.3
Restructuring expense and asset impairments 3.8 2.7 1.4
------ ------ ------
Income (loss) from operations 1.4 0.8 (0.3)
Interest expense, net 1.8 2.1 2.2
Other expense 0.2 0.4 0.5
------ ------ ------
Loss before income taxes (0.6) (1.7) (3.0)
Income taxes * 67.9 44.0 33.0
Loss before cumulative effect
of accounting change (0.2)% (0.9)% (2.0)%
====== ====== ======
* Calculated as a percent of income (loss) before income tax
Restructuring Actions
The financial results for fiscal 2003 include a total of $15.9 million in
restructuring and related charges, all of which reflect previously announced
restructuring initiatives in the upholstery fabrics segment. As reflected in the
financial statements for fiscal 2003, restructuring and related charges were
recorded as $13.0 million in the line item "restructuring expense" and $2.9
million in "cost of sales," reducing net income by $9.7 million, net of taxes
(or $0.85 per share). The $15.9 million is made up of the following: (1) $12.1
million of restructuring expenses related to the Culp Decorative Fabrics ("CDF")
division, the largest items of which are lease termination expenses and
personnel costs; (2) $2.9 million of "restructuring related" costs for CDF,
which include inventory mark-downs and equipment moving expense (charged to
"cost of sales"); and (3) $1.3 million of restructuring expenses related to
further write-downs of equipment in connection with the exit from the wet
printed flock business by the Culp Velvets/Prints ("CVP") division, offset by a
restructuring credit of $354,000 for over accrued employee benefit and plant
security costs. The additional write-down of equipment, which is a non cash
item, was recorded to more closely estimate the current market value of this
equipment, which has continued to deteriorate since April 2002. Of the charges
related to CDF, approximately $4.1 million are non-cash items, which relate to
write-downs of equipment and inventory mark-downs, while the remaining $10.9
million relates to cash expenditures.
Fiscal 2003 CDF Restructuring. The restructuring and related charges for CDF
reflect the restructuring initiative announced in August 2002. The objectives of
this initiative were to lower manufacturing costs, simplify the dobby fabric
upholstery line, increase asset utilization and enhance the division's
manufacturing competitive position. This restructuring plan principally involved
(1) consolidation of the division's weaving, finishing, yarn making and
distribution operations by closing the facility located in Chattanooga,
Tennessee and integrating these functions into CDF's Pageland, South Carolina,
Graham, North Carolina and Burlington, North Carolina plants; (2) a significant
reduction in the number of stock keeping units (SKUs) offered in the dobby
product line, representing about 70% of the finished goods SKUs (but only 10% of
sales); and (3) a net reduction in workforce of approximately 300 positions.
The fiscal 2003 CDF restructuring is projected to result in annual cost savings
of approximately $12 million, which began in the third quarter of fiscal 2003.
Approximately $8 million of these savings relate to fixed manufacturing costs
and the remaining $4 million relate to variable manufacturing costs. Realization
of the savings from lower fixed manufacturing costs was achieved upon the
closing of the Chattanooga, Tennessee operation at the end of the second
quarter. However, while there has been progress on savings of variable
manufacturing costs, the company expects the potential benefits to be realized
over the next two to three fiscal quarters as operations within CDF achieve
higher levels of efficiency. The company currently estimates that the fiscal
2003 CDF restructuring will result in minimal additional charges during fiscal
2004, most of which relate to equipment relocation costs.
Exit of Wet Printed Flock Product Line. During March 2002, the company
announced that it was evaluating strategic alternatives for the capital
invested in its wet printed flock upholstery fabrics product line. Management
took this action because of the significant decline in sales and profitability
of wet printed flocks in recent years, a decline related principally to the
strength of the U.S. dollar relative to foreign currencies as well as a shift
in consumer preferences to other styles of upholstery fabrics. In April 2002,
management approved a plan to exit the wet printed flock upholstery fabric
business and has been actively seeking to sell the assets related to this
product line. The exit plan involved closing a printing facility and flocking
operation within the Culp Velvets/Prints division, a reduction in related
selling and administrative expenses, and termination of 86 employees. The
company also recognized certain inventory write-downs related to this product
line. The total charge from the exit plan and inventory write-down was $9.7
million, of which approximately $8.2 million represented non-cash items,
consisting of a $7.6 million write-down of property, plant and equipment to
its estimated net realizable value of $2.3 million and a $619,000 write-down
of inventory. The company recorded the total charge in the fourth quarter of
fiscal 2002. Of this total, $9.1 million was recorded in the line item
"restructuring expense" and $619,000, related to the inventory write-downs, was
recorded in "cost of sales," reducing net income by $5.8 million, net of taxes
(or $0.51 per share). For fiscal 2003, additional restructuring charges
related to wet printed flocks were recorded as explained earlier in this
report. During the fiscal year ended April 28, 2002, sales of wet printed
flocks contributed $17.1 million, or 4.5%, of the company's total sales and
resulted in an operating loss of $2.1 million. The company estimates that the
net loss attributable to these operations on an after-tax basis was
approximately $0.12 per share during fiscal 2002.
Other Restructuring Actions. During fiscal 2001and continuing into fiscal
2002, the company undertook a restructuring plan in its upholstery fabric
segment intended to lower operating expenses, increase manufacturing
utilization, raise productivity and position the company to operate profitably
on a lower level of sales. The plan involved (1) the consolidation of certain
fabric manufacturing capacity within the Culp Decorative Fabrics (CDF)
division, (2) closing one of the company's four yarn manufacturing plants
within Culp Yarn, (3) an extensive reduction in selling, general and
administrative expenses including the termination of 110 employees and (4) a
comprehensive stock keeping unit (SKU) reduction initiative related to
finished goods and raw materials in CDF. Additionally, the plan included
consolidation of the CDF design operation into the company's Design Center and
the implementation of a common set of raw material components for CDF. The
company also recognized certain inventory write-downs related to the closed
facilities as part of this initiative. The total charge from the
restructuring, cost reduction and inventory write-down initiatives was $9.9
million, about $3.6 million of which represented non-cash items. The company
recognized $7.4 million of restructuring and related charges during fiscal
2001, which were recorded as $5.6 million in the line item "restructuring
expense" and $1.8 million in "cost of sales," reducing net income by $5.0
million, net of taxes (or $0.44 per share). In fiscal 2002 the company
recognized $2.5 million of restructuring and related charges recorded as $1.3
million in the line item "restructuring expense" and $1.2 million in "cost of
sales." These restructuring and related charges reduced net income by $1.5
million, net of taxes (or $0.14 per share). The costs reflected in "cost of
sales" are principally related to the relocation of manufacturing equipment.
Due to this restructuring plan, the company has realized annualized reductions
of at least $14 million in fixed manufacturing costs and SG&A expenses.
China Initiative
On March 31, 2003, the company announced a strategic marketing initiative to
establish manufacturing and distribution operations in China. The company's
strategy is to link its customer relationships, design expertise and
production technology with low-cost fabric manufacturers in China in order to
deliver enhanced value to its customers throughout the world.
The company is currently in the process of establishing its operations in
China. A general manager for the China operations relocated to Shanghai,
China in May, and is in the process of hiring a small number of additional
personnel. The company received the required business licenses in mid July
2003. The company has signed a lease on a 65,000 square-foot facility and the
building was ready for equipment installation and office occupancy in July
2003. Along with the installation of finishing equipment, the company plans
to begin doing business at the China facility during the second fiscal quarter
of fiscal 2004, which is expected to include fabric inspection, testing and
distribution. Limited finishing operations are anticipated to begin in the
third fiscal quarter of fiscal 2004.
2003 Compared with 2002
The company's net sales for fiscal 2003 decreased 11.2% to $339.6 million as
compared with fiscal 2002; and the company reported a net loss before
cumulative effect of accounting change of $736,000, or $0.06 per share
diluted, versus a net loss $3.4 million, or $0.31 share diluted, a year ago.
Including the cumulative effect of accounting change, the company reported a
loss of $2.17 per share for fiscal 2003. Restructuring and related charges
and credits of $9.7 million, net of tax (or $0.85 per share) and $7.5 million,
net of tax (or $0.66 per share) were included in net income for fiscal 2003
and fiscal 2002, respectively.
The company reported further substantial improvement in its balance sheet by
reducing long-term debt by $32 million during fiscal 2003 and ended the year
with $24.4 million in cash and cash equivalents and short-term investments.
As of April 29, 2002, Culp adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." As a result the company recorded during the first quarter of fiscal
2003 a non-operating non-cash goodwill impairment charge of $37.6 million ($24.2
million net of taxes of $13.4 million), or $2.11 per share diluted, related to
the goodwill associated with the Culp Decorative Fabrics division.
Upholstery Fabric Segment
Net Sales. Upholstery fabric sales for fiscal 2003 decreased 13.4% to $240.1
million. Domestic upholstery fabric sales decreased $22.7 million, or 9.6%, to
$214.3 million, due primarily to overall weakness in consumer demand for
upholstered furniture, and other factors discussed below. International sales
decreased 36.0% to $25.8 million, due primarily to the exiting of the wet
printed flock fabric business in April 2002.
In addition to the overall softness in demand during fiscal 2003, the sales
decrease in upholstery fabrics is attributable to the company's strategy to
focus on improving the profitability of its sales mix by reducing or eliminating
products generating little or no profit. In the Culp Velvets/Prints division,
the company discontinued its unprofitable wet printed flock business at the end
of last fiscal year. This product line produced annual sales in fiscal 2002 of
approximately $17.0 million with approximately $2.0 million in operating losses.
In the CDF division, the company discontinued about half of its finished goods
SKUs (or approximately 10,000) over the last eighteen months, most of which were
small volume items and were very costly to produce. These discontinued SKUs
include the dobby product line SKUs that were recently eliminated as part of the
fiscal 2003 CDF restructuring. The company expects this process of identifying
and dropping its low profit items to continue into fiscal 2004.
The company believes additional factors that are likely impacting upholstery
fabric sales are (1) the increasing market share of leather furniture being
sold in the U.S.; and (2) the increase in imported fabrics, both in "piece
goods" and "cut and sewn kits."
Gross Profit. In spite of weak furniture demand and the operational disruption
in connection with the fiscal 2003 CDF restructuring, the upholstery fabric
segment improved its gross profit dollars and margins in fiscal 2003. Gross
profit for fiscal 2003 was $34.7 million, or 14.5%, versus $33.6 million, or
12.1%, for fiscal 2002. Restructuring related charges of $2.9 million and $1.8
million were included in gross profit for fiscal 2003 and fiscal 2002,
respectively. The key factors behind this improvement were (1) a more
profitable sales mix; (2) the elimination of losses related to the wet printed
flock business; (3) the increasing productivity benefits from the CDF 2001
restructuring; and (4) the fixed cost reduction benefits from the closing of
the Chattanooga plant as part of the fiscal 2003 CDF restructuring.
Mattress Ticking Segment
Net Sales. Mattress ticking sales for fiscal 2003 decreased 5.5% to $99.6
million. Sales to U.S. bedding manufacturers fell 7.2% to $85.5 million, while
sales to international customers increased by 6.8% to $14.1 million. The overall
sales decrease is principally due to the weakness in consumer demand for
mattresses. Additional factors that could be affecting ticking demand for the
company's products from bedding manufacturers are: (1) the gradual shift by many
customers to "one-sided" mattresses, which generally require one-third less
mattress ticking and (2) a growing consumer preference at the higher end of the
bedding market for knitted tickings (which the company does not manufacture)
rather than woven or printed tickings (although the company has begun to source
knitted tickings from an outside supplier).
Gross Profit. For fiscal 2003, the mattress ticking segment reported gross
profit dollars and margins of $22.8 million and 22.9%, respectively, compared
with $29.2 million and 27.7 % for fiscal 2002. The principal reasons for the
decline were (1) lower sales volume and reduced production schedules, which
resulted in less absorption of fixed costs; (2) pricing pressures related to
the overall competitive situation in the bedding industry; and (3) the high
cost of a European sourcing agreement. Culp Home Fashions entered into an
agreement with a European supplier in October 2001 as part of the termination
of a long-term supply relationship. The agreement required, among other
things, that the company maintain a certain level of weekly purchases through
the end of the second quarter of fiscal 2003. Consequently, during the first
and second quarters of fiscal 2003, the company was required to source
products from this supplier that were significantly more expensive than
products manufactured at the company's U.S. and Canadian plants in order to
meet the agreement's minimum purchase levels. This supply agreement was
concluded on October 31, 2002.
Selling, General and Administrative Expenses. SG&A expenses were $40.0 million
for fiscal 2003 and decreased $8.0 million, or 16.7%, from fiscal 2002. As a
percent of net sales, SG&A expenses decreased to 11.8% from 12.6% the previous
year. SG&A expenses in fiscal 2003 included a credit to bad debt expense in
the amount of $571,000 due to a significant decrease in past due receivable
balances. This amount compares with bad debt expense of $4.2 million in the
year-earlier period. Additionally, SG&A expenses for fiscal 2003 were lower
due to reduced sampling charges and reduced sales expenses due to lower sales
volume.
Goodwill Amortization. At the beginning of fiscal 2003, the company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires
that goodwill no longer be amortized.
Interest Expense. Interest expense for fiscal 2003 declined to $6.6 million
from $7.9 million due to significantly lower borrowings outstanding, offset
somewhat by a $750,000 increase in interest expense associated with the
company's $75 million term loan, as a result of an amendment in February 2002.
Interest Income. Interest income increased to $596,000 from $176,000 due to
significantly higher average invested cash for the year as compared with the
average for the prior year.
Other Expense. Other expense for the fiscal 2003 totaled $805,000, compared
with $1.4 million in the prior year. The decrease was principally due to
lower legal and debt issue expenses.
Income Taxes. The effective tax rate for fiscal 2003 was 67.9% compared with
44.0% for fiscal 2002. The higher rate on the pretax loss in each period
reflects the benefit from a reduction in estimated accruals as well as a lower
proportion of earnings in fiscal 2003 from the company's Canadian subsidiary
that is taxed at a lower effective rate.
2002 Compared with 2001
The company's net sales for fiscal 2002 decreased by $28.0 million, or 6.8%,
compared with fiscal 2001; and the company reported a net loss of $3.4
million, or $0.31 per share, compared with a net loss of $8.3 million, or
$0.74 per share, in fiscal 2001. Restructuring and related charges of $7.4
million, net of tax (or $0.66 per share) and $5.0 million, net of tax (or
$0.44 per share) were included in net income for fiscal 2002 and fiscal 2001,
respectively. Below is additional discussion regarding segment financial
performance.
Upholstery Fabric Segment
Net Sales. For fiscal 2002, upholstery fabrics sales decreased 9.2% to $277.3
million. This decline was due to a 3.3%, or $8.1 million, decline in domestic
upholstery fabric sales, and a 33.2%, or $40.3 million, decline in
international upholstery fabric sales. The decline in domestic upholstery
fabric sales related primarily to a decline in sales to the external yarn
market ($7.3 million), where the company discontinued producing yarns for the
apparel and carpet markets, and to a decline in sales to the commercial
furniture market ($4.5 million). The decline in international upholstery
fabric sales was caused by the company's products becoming less competitive
with goods produced internationally due to the strong U.S. dollar and
additionally to a fashion trend away from wet printed flock fabrics, which have
constituted a significant portion of the company's international sales.
Gross Profit. For fiscal 2002, gross profit was $33.6 million, or 12.1%,
versus 29.5 million, or 9.7%, for fiscal 2001. Restructuring related charges
of $1.8 million were included in gross profit for each of fiscal 2002 and
fiscal 2001. This improvement reflected strong gross profit dollar and margin
growth in Culp Velvets/Prints and Culp Yarn divisions. Offsetting these gains
somewhat was a decrease in gross profit dollars and margin in Culp Decorative
Fabrics, which occurred in the first half of fiscal 2002.
Mattress Ticking Segment
Net Sales. Compared with fiscal 2001, mattress ticking sales increased 0.2% to
$105.3 million for fiscal 2002. Sales to U.S. bedding manufacturing increased
5.0% to $91.7 million for fiscal 2002. International mattress ticking sales
for fiscal 2002 were $13.2 million, down 24.5% from $17.5 million in fiscal
2001.
Gross Profit. For fiscal 2002, the mattress ticking segment reported gross
profit dollars and margins of $29.2 and 27.7%, respectively, compared with
$26.5 and 25.2%, respectively, for fiscal 2001. This improvement was due
primarily to continued strong manufacturing operating efficiencies.
Selling, General and Administrative Expenses (SG&A). SG&A expenses were $48.1
million for fiscal 2002 and decreased $2.3 million, or 4.6%, from fiscal 2001.
The significant factors affecting the year to year comparisons were bad debt
expense of $4.2 million in fiscal 2002 versus $309,000 in fiscal 2001 and
incentive compensation expense of $1.8 million in fiscal 2002 versus $0.0 in
fiscal 2001. Without considering these factors in both years, SG&A expenses
were $42.1 million, or 11.1% of net sales, for fiscal 2002, compared with
$50.0 million, or 12.2% of net sales, for fiscal 2001. This reflects a 15.8%
decrease and primarily resulted from the company's decision to reduce SG&A
expenses significantly as part of the 2001 restructuring plan.
Interest Expense. Interest expense for fiscal 2002 declined from $9.1 million
to $7.9 million due to lower average borrowings outstanding and lower average
interest rates over the course of the fiscal year.
Interest Income. Interest income increased from $46,000 to $176,000 due to the
significant build-up in cash and cash investments during fiscal 2002,
particularly in the fourth quarter.
Other Expense. Other expense for fiscal 2002 totaled $1.4 million compared
with $1.9 million in the prior year.
Income Taxes. The effective tax rate for fiscal 2002 was 44.0% compared with
33.0% for the year-earlier period. The higher rate resulted from increased tax
benefits in 2002 related to the company's loss in the U.S., including
restructuring and related charges, and to a lower proportion of earnings from
the company's Canadian subsidiary, as well as the recognition in 2001 of gain
from terminated life insurance contracts.
Handling Costs
The company records warehousing costs in Selling, General & Administrative
Expenses. These costs were $4.9 million, $5.0 million and $5.2 million in
fiscal 2003, fiscal 2002 and fiscal 2001, respectively. Warehousing costs
include the operating expenses of the company's various finished goods
distribution centers, such as personnel costs, utilities, building rent and
material handling equipment lease expense. Had these costs been included in
cost of sales, gross profit would have been $52.7 million, or 15.5% in fiscal
2003, $57.9 million, or 15.1% in fiscal 2003 and $50.8 million, or 12.4% in
fiscal 2001.
Liquidity and Capital Resources
The company's sources of liquidity include cash, cash equivalents, short-term
investments, cash flow from operations and amounts available under its revolving
credit line. These sources have been adequate for day-to-day operating and
capital expenditures. The company expects these sources of liquidity to continue
to be adequate for the foreseeable future. Cash, cash equivalents and short-term
investments as of April 27, 2003 decreased to $24.4 million from $32.0 million
at the end of fiscal 2002, reflecting cash flow from operations of $31.1 million
for fiscal 2003, capital expenditures of $6.8 million, payments on
vendor-financed capital expenditures of $1.3 million, debt repayment of $32.0
million and stock issuance from the exercise of stock options of $1.4 million.
Cash flow from operations totaled $31.1 million for fiscal 2003, $42.2 million
for fiscal 2002 and $36.1 million for fiscal 2001, for a three year total of
$109.4 million. Significantly contributing to cash flow from operations for this
three year period were reductions in accounts receivable and inventories
totaling $67.9 million, due primarily to lower sales volume and improvements in
working capital management.
For fiscal 2004, the company believes cash flow from operations will be
substantially less than fiscal 2003 primarily because the company does not
expect continued significant reduction in working capital reflected in each of
the previous three years.
Financing Arrangements
During fiscal 2003, the company reduced its long-term debt (current maturities
plus long-term debt) by $32.0 million by repaying all of its Industrial Revenue
Bonds. Long-term debt was $76.5 million at April 27, 2003, down $32.0 million
from $108.5 million at April 28, 2002. The ratio of the company's long-term debt
to tangible capitalization (defined as long-term debt plus shareholders' equity
minus goodwill) was 47.0% at fiscal 2003 year end versus 60.1% at the end of
last year. The company was in compliance with all financial covenants in its
loan agreements as of April 27, 2003.
The company's long-term debt at April 27, 2003 is totally unsecured and is
comprised of a $75 million term loan, which includes term notes from several
insurance companies, with a fixed interest rate of 7.76%, and a $1.5 million,
non-interest bearing term loan with the Canadian government. Additionally, the
company has a $15.0 million revolving credit line with a bank, including
letters of credit up to $2.5 million. Borrowings under the credit facility
generally bear interest at the London Interbank Offered Rate plus an
adjustable margin based upon the company's debt/EBITDA ratio, as defined by
the agreement. As of April 27, 2003, there were $354,000 in outstanding
letters of credit in support of inventory purchases and no borrowings
outstanding under the agreement. The credit facility expires in August 2004.
The first scheduled principal payment on the $75 million term loan is due
March 2006 in the amount of $11.0 million. The Canadian government loan is
repaid in annual installments of approximately $500,000 per year.
Commitments
The following table summarizes the company's contractual payment obligations
and commitments (in thousands):
2004 2005 2006 2007 2008 Thereafter Total
-------------------------------------------------------------------------------
Capital expenditure
commitments $ 573 $ - $ - $ - $ - $ - $ 573
Accounts payable-
capital expenditures 4,389 1,096 5,485
Operating leases 4,900 3,791 2,260 1,293 1,065 112 13,421
Long-term debt 500 500 11,500 11,000 31,000 22,000 76,500
-------------------------------------------------------------------------------
Total $10,362 $5,387 $13,760 $12,293 $32,065 $ 22,112 $95,979
-------------------------------------------------------------------------------
Note: Payment Obligations by Fiscal Year Ending April
Capital Expenditures
Capital spending for fiscal 2003 was $12.2 million. This compares with $4.7
million in fiscal 2002. The larger projects for fiscal 2003 were weaving
modernization and a building addition at the Pageland, S.C. facility related
to the fiscal 2003 CDF restructuring and weaving expansion in the Culp Home
Fashions division. Depreciation expense for fiscal 2003 was $14.0 million.
For fiscal 2004, the company's capital expenditure budget is $8.0 million, of
which $3.0 million is related to the company's China initiative. Depreciation
expense for fiscal 2004 is estimated to be comparable with fiscal
2003.
Inflation
The cost of certain of the company's raw materials, principally fibers from
petroleum derivatives, and utility/energy costs have increased somewhat; but
overall operating expenses are remaining generally stable. Factors that
reasonably can be expected to influence margins in the future include changes
in raw material prices, trends in other operating costs and overall
competitive conditions.
Seasonality
The company's business is 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 of July 4th and Christmas.
Critical Accounting Policies
Accounting principles generally accepted in the United States of America require
the company to make estimates and assumptions that affect the reported amounts
in the 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 April 27, 2003, accounts receivable from furniture manufacturers totaled
approximately $25.4 million and from bedding manufacturers approximately $9.1
million. Approximately $6.7 million of the company's total accounts receivable
was due from international customers. Additionally, as of April 27, 2003, the
aggregate accounts receivable balance of the company's ten largest customers was
$10.9 million, or 31.7% 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. While management believes
that adequate allowances for doubtful accounts have been provided in the
consolidated financial statements, it is possible that the company could
experience additional unexpected credit losses.
Inventory Valuation. The company operates as a "make-to-order" and
"make-to-stock" business. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
gradual shifts in consumer preferences expose the company to write-downs of
inventory.
Management continually examines inventory to determine if there are indicators
that the carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory write-downs is the
age of the inventory. As a result, the company provides inventory valuation
write-downs based upon set percentages for inventory aging categories, generally
using 6, 9 and 12 month categories. While management believes that adequate
write-downs for excess and obsolete inventory have been made in the consolidated
financial statements, significant unanticipated changes in demand or changes in
consumer tastes and preferences could result in additional excess and obsolete
inventory in the future.
Long-lived Assets. The company adopted the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective April
29, 2002. SFAS No. 144 establishes a single accounting model for long-lived
assets to be disposed of by sale, and also resolves implementation issues
related to SFAS 121. Adoption of SFAS No. 144 did not have a significant impact
on the company's financial position, results of operations or cash flows.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Unforeseen events
and changes in circumstances and market conditions could negatively affect the
value of assets and result in an impairment charge.
The company's assessment at April 27, 2003 indicated that the net undiscounted
future operating cash flows of the company's businesses were sufficient to
recover the carrying amount of the long-lived assets under SFAS No. 144. The
determination of future operating cash flows involve considerable estimation and
judgment about future market conditions and future sales and profitability.
Although the company believes it has based the impairment testing on reasonable
estimates and assumptions, the use of different estimates and assumptions could
result in materially different results.
Goodwill. As of April 29, 2002, Culp adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." For the initial application of SFAS No. 142, an independent
business valuation specialist was engaged to assist the company in the
determination of the fair market value of Culp Decorative Fabrics, one of the
company's three divisions within the upholstery fabric segment, because of the
significance of the goodwill associated with the division and due to its
operating performance. As a result of the adoption of SFAS No. 142, during the
first quarter of fiscal 2003 the company recorded a non-operating, non-cash
goodwill impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million), or $2.11 per share diluted, related to the goodwill associated with
the Culp Decorative Fabrics division. After the goodwill impairment charge, the
company's remaining goodwill relates to the following divisions: Culp Decorative
Fabrics - $4.4 million, Culp Yarn - $0.7 million and Culp Home Fashions - $4.1
million.
The company updated its goodwill impairment test as of April 27, 2003. This
impairment test, which was prepared by an independent business valuation
specialist, did not indicate any further impairment of goodwill. The
determination of fair value involves considerable estimation and judgment. In
particular, determining the fair value of a business unit involves, among other
things, developing forecasts of future cash flows and appropriate discount
rates. Although the company believes it has based the impairment testing on
reasonable estimates and assumptions, the use of different estimates and
assumptions could result in materially different results. As a result of a
continuing difficult business environment, there is a potential for further
impairment of the goodwill of Culp Decorative Fabrics.
Restructuring Charges. The upholstery fabric industry continues to be under
significant pressure from a variety of external forces, such as an increase in
the market share of leather furniture, an increase in customers buying fabric
and "cut and sew" fabric kits from China, increasing pricing demands, global
competition and the overall weakness of the economy. In an effort to reduce
operating expenses and increase manufacturing utilization, the company has
undertaken four restructuring initiatives, two within Culp Decorative Fabrics,
one related to the exit of the wet printed flock product line, which was part of
the Culp Velvets Prints division within the upholstery fabric segment, and one
related to a yarn manufacturing plant within its Culp Yarn division, which 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 as the company continues to scale its
U.S productive capacity in lines with demand. Severance and related charges are
accrued based on an estimate of amounts that will be paid to affected employees.
Asset impairment charges related to the consolidation or closure of
manufacturing facilities are based on an estimate of expected sales prices for
the real estate and equipment. The exit of facilities has also resulted in
charges for lease termination and losses may also result from termination of
existing contracts.
The company reassesses the individual accrual requirements at the end of each
reporting period. If circumstances change, causing current estimates to differ
from original estimates, adjustments are recorded in the period of change.
Restructuring charges, and adjustments of those charges, are summarized in
note 2 to the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." A
liability for a cost associated with an exit or disposal activity shall be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for certain qualifying employee termination
benefits. This Statement became effective for exit or disposal activities
initiated after December 31, 2002.
Income Taxes. The company is required to estimate its actual current tax
exposure and to assess temporary differences resulting from differing treatment
of items for tax and accounting purposes. No valuation allowance has been
recorded to reduce the company's deferred tax assets. Management has concluded
that it is more likely than not that the company will be able to realize the
benefit of the deferred tax assets. Considerable judgment is involved in this
process as ultimate realization of benefits is dependent on the generation of
future taxable income.
Forward-Looking Information
This Report contains 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 of 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 sales, gross profit
margins, SG&A or other expenses, and earnings. Factors that could influence the
matters discussed in such statements include the level of housing starts and
sales of existing homes, consumer confidence, trends in disposable income, and
general economic conditions. Decreases in these economic indicators could have a
negative effect on the company's business and prospects. Likewise, increases in
interest rates, particularly home mortgage rates, and increases in consumer debt
or the general rate of inflation, could affect the company adversely. In
addition, strengthening of the U. S. dollar against other currencies could make
the company's products less competitive on the basis of price in markets outside
the United States. Also, economic and political instability in international
areas could affect the company's operations or sources of goods in those areas,
as well as demand for the company's products in international markets. Finally,
unanticipated delays or costs in executing restructuring actions could cause the
cumulative effect of restructuring actions to fail to meet the objectives set
forth by management.
ITEM 7A. 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. The company's floating debt interest rate risk was
eliminated in the fourth quarter of fiscal 2003 after the remaining industrial
revenue bonds were paid.
The company's exposure to fluctuations in foreign currency exchange rates is
due primarily to a foreign subsidiary domiciled in Canada and firmly committed
and anticipated purchases of certain machinery, equipment and raw materials in
foreign currencies. The company's Canadian subsidiary uses the United States
dollar as its functional currency. The company generally does not use
financial derivative instruments to hedge foreign currency exchange rate risks
associated with the Canadian subsidiary. However, the company generally
enters into foreign exchange forward and option contracts as a hedge against
its exposure to currency fluctuations on firmly committed and anticipated
purchases of certain machinery, equipment and raw materials. The amount of
Canadian-denominated sales and manufacturing costs are not material to the
company's consolidated results of operations; therefore, a 10% change in the
exchange rate at April 27, 2003 would not have a significant impact on the
company's results of operations or financial position. Additionally, as the
company utilizes foreign currency instruments for hedging anticipated and
firmly committed transactions, a loss in fair value for those instruments is
generally offset by increases in the value of the underlying exposure.
CULP, INC.
SALES / GROSS PROFIT BY SEGMENT/DIVISION
FOR THE TWELVE MONTHS ENDED APRIL 27, 2003, APRIL 28, 2002 AND APRIL 29, 2001
(Amounts in thousands)
TWELVE MONTHS ENDED
----------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- ------------------------
April 27, April 28, % Over
Segment/Division Sales 2003 2002 (Under) 2003 2002
- ------------------------------ ------------ ----------- ----------- ----------- -----------
Upholstery Fabrics
Culp Decorative Fabrics $ 137,215 152,783 (10.2) % 40.4 % 39.9 %
Culp Velvets/Prints 96,051 119,180 (19.4) % 28.3 % 31.2 %
Culp Yarn 6,830 5,309 28.6 % 2.0 % 1.4 %
------------ ----------- ----------- ----------- -----------
240,096 277,272 (13.4) % 70.7 % 72.5 %
Mattress Ticking
Culp Home Fashions 99,550 105,302 (5.5) % 29.3 % 27.5 %
------------ ----------- ----------- ----------- -----------
$ 339,646 382,574 (11.2) % 100.0 % 100.0 %
============ =========== =========== =========== ===========
Segment Gross Profit Gross Profit Margin
- ------------------------------ ------------------------
Upholstery Fabrics (1) $ 34,738 33,648 3.2 % 14.5 % 12.1 %
Mattress Ticking 22,835 29,209 (21.8) % 22.9 % 27.7 %
------------ ----------- ----------- ----------- -----------
Gross Profit 57,573 62,857 (8.4) % 17.0 % 16.4 %
============ =========== =========== =========== ===========
TWELVE MONTHS ENDED
----------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- ------------------------
April 28, April 29, % Over
Segment/Division Sales 2002 2001 (Under) 2002 2001
- ------------------------------ ------------ ----------- ----------- ----------- -----------
Upholstery Fabrics
Culp Decorative Fabrics $ 152,783 170,675 (10.5) % 39.9 % 41.6 %
Culp Velvets/Prints 119,180 122,256 (2.5) % 31.2 % 29.8 %
Culp Yarn 5,309 12,581 57.8) % 1.4 % 3.1 %
------------ ----------- ----------- ----------- -----------
277,272 305,512 (9.2) % 72.5 % 74.4 %
Mattress Ticking
Culp Home Fashions 105,302 105,097 0.2 % 27.5 % 25.6 %
------------ ----------- ----------- ----------- -----------
$ 382,574 410,609 (6.8) % 100.0 % 100.0 %
============ =========== =========== =========== ===========
Segment Gross Profit Gross Profit Margin
- ------------------------------ ------------------------
Upholstery Fabrics (2) $ 33,648 29,511 14.3 % 12.1 % 9.7 %
Mattress Ticking 29,209 26,476 10.3 % 27.7 % 25.2 %
------------ ----------- ----------- ----------- -----------
Gross Profit 62,857 55,987 12.3 % 16.4 % 13.6 %
============ =========== =========== =========== ===========
(1) Gross profit includes $2.9 and $1.8 million of restructuring related charges
for fiscal 2003 and 2002, respectively
(2) Gross profit includes $1.8 million of restructuring related charges for both
fiscal 2002 and 2001
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Management's Statement of Responsibility
The management of Culp, Inc. is responsible for the accuracy and
consistency of all the information contained in this annual report on Form
10-K, including the financial statements. These statements have been prepared
to conform with accounting principles generally accepted in the United States
of America. 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 auditing standards generally accepted in the United States of
America and provides an opinion on the financial statements prepared by
management. Their report for 2003 is presented on the following page.
The Audit Committee of the Board of Directors reviews the scope of the
audit and the findings of the independent auditors. The internal auditor and
the independent auditors meet with the Audit Committee to discuss audit and
financial reporting issues. The Audit Committee also reviews the company's
principal accounting policies, significant internal accounting controls,
quarterly financial information releases, Annual Report and annual SEC filings
(Form 10-K and Proxy Statement).
Robert G. Culp, III Franklin N. Saxon
Chairman and Chief Executive Officer Executive Vice President and
May 30, 2003 Chief Financial Officer
May 30, 2003
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 April 27, 2003 and April 28, 2002, and the related consolidated
statements of income (loss), shareholders' equity, and cash flows for each of
the years in the three-year period ended April 27, 2003. 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 auditing standards generally accepted
in the United States of America. 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 April 27, 2003 and April 28, 2002, and the results of their
operations and their cash flows for each of the years in the three-year ended
April 27, 2003, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in note 19 to the consolidated financial statements, effective
April 29, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
KPMG LLP
Greensboro, North Carolina
May 30, 2003
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
April 27, 2003 and April 28, 2002 (dollars in thousands, except share data) 2003 2002
ASSETS
current assets:
cash and cash equivalents $ 14,355 31,993
short-term investments 10,043 0
accounts receivable 32,259 43,366
inventories 49,552 57,899
deferred income taxes 12,303 9,447
- ----------------------------------------------------------------------------------------------
other current assets 3,204 3,966
total current assets 121,716 146,671
property, plant and equipment, net 84,962 89,772
goodwill 9,240 47,083
other assets 2,235 4,187
- ----------------------------------------------------------------------------------------------
total assets $ 218,153 287,713
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt $ 500 1,483
accounts payable 19,874 24,327
accrued expenses 14,071 16,460
accrued restructuring expenses 7,743 2,445
income taxes payable 349 0
- ----------------------------------------------------------------------------------------------
total current liabilities 42,537 44,715
long-term debt 76,000 107,001
deferred income taxes 3,851 16,932
- ----------------------------------------------------------------------------------------------
total liabilities 122,388 168,648
- ----------------------------------------------------------------------------------------------
commitments and contingencies (note 11)
shareholders' equity:
preferred stock, $.05 par value, authorized 10,000,000
shares 0 0
common stock, $.05 par value, authorized 40,000,000
shares, issued and outstanding 11,515,459 at
April 27, 2003 and 11,319,584 at April 28, 2002 576 566
capital contributed in excess of par value 39,749 38,375
unearned compensation (559) (769)
retained earnings 55,999 80,886
accumulated other comprehensive income 0 7
- ----------------------------------------------------------------------------------------------
total shareholders' equity 95,765 119,065
- ----------------------------------------------------------------------------------------------
total liabilities and shareholders' equity $ 218,153 287,713
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended April 27, 2003, April 28, 2002
and April 29, 2001 (dollars in thousands, except per share data) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
net sales $ 339,646 382,574 410,609
cost of sales 282,073 319,717 354,622
- -------------------------------------------------------------------------------------------------------------------
gross profit 57,573 62,857 55,987
selling, general and administrative expenses 40,040 48,059 50,366
goodwill amortization 0 1,395 1,395
restructuring expense and asset impairments 12,981 10,368 5,625
- -------------------------------------------------------------------------------------------------------------------
income (loss) from operations 4,552 3,035 (1,399)
interest expense 6,636 7,907 9,114
interest income (596) (176) (46)
other expense 805 1,444 1,941
- -------------------------------------------------------------------------------------------------------------------
loss before income taxes (2,293) (6,140) (12,408)
income taxes (1,557) (2,700) (4,097)
- -------------------------------------------------------------------------------------------------------------------
loss before cumulative effect of accounting change (736) (3,440) (8,311)
cumulative effect of accounting change, net of income taxes (24,151) 0 0
- -------------------------------------------------------------------------------------------------------------------
net loss $ (24,887) (3,440) (8,311)
- -------------------------------------------------------------------------------------------------------------------
basic loss per share:
- -------------------------------------------------------------------------------------------------------------------
loss before cumulative effect of accounting change $ (0.06) (0.31) (0.74)
cumulative effect of accounting change (2.11) 0 0
- -------------------------------------------------------------------------------------------------------------------
net loss $ (2.17) (0.31) 0.74)
- -------------------------------------------------------------------------------------------------------------------
diluted loss per share:
- -------------------------------------------------------------------------------------------------------------------
loss before cumulative effect of accounting change $ (0.06) (0.31) (0.74)
cumulative effect of accounting change (2.11) 0 0
- -------------------------------------------------------------------------------------------------------------------
net loss $ (2.17) (0.31) (0.74)
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended April 27, 2003, capital accumulated
April 28, 2002 and April 29, 2001 common common contributed other total
(dollars in thousands, except stock stock in excess of unearned retained comprehensive shareholders'
share data) shares amount par value compensation earnings income equity
- -----------------------------------------------------------------------------------------------------------------------------
balance, April 30, 2000 11,208,720 $ 560 36,682 (1,416) 93,814 0 129,640
cash dividends ($0.105 per share) (1,177) (1,177)
net loss (8,311) (8,311)
stock-based compensation 360 360
common stock issued in connection
with stock option plans 12,438 1 1,289 1,290
- -----------------------------------------------------------------------------------------------------------------------------
balance, April 29, 2001 11,221,158 561 37,971 (1,056) 84,326 0 121,802
net loss (3,440) (3,440)
net gain on cash flow hedges 7 7
stock-based compensation 144 144
forfeiture of stock options (143) 143 0
common stock issued in connection
with stock option plans 98,426 5 547 552
- -----------------------------------------------------------------------------------------------------------------------------
balance, April 28, 2002 11,319,584 566 38,375 (769) 80,886 7 119,065
net loss (24,887) (24,887)
net loss on cash flow hedges (7) (7)
stock-based compensation 210 210
common stock issued in connection
with stock option plans 195,875 10 1,374 1,384
- -----------------------------------------------------------------------------------------------------------------------------
balance, April 27, 2003 11,515,459 $ 576 39,749 (559) 55,999 0 95,765
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 27 2003, April 28, 2002 and April 29, 2001
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002 2001
cash flows from operating activities:
net loss $ (24,887) (3,440) (8,311)
adjustments to reconcile net loss to net cash
provided by operating activities:
cumulative effect of accounting change,
net of income taxes 24,151 0 0
depreciation 13,990 17,274 19,391
amortization of intangible and other assets 457 1,575 1,591
stock-based compensation 210 144 360
provision for deferred income taxes (2,507) (1,452) (5,394)
restructuring expense 12,981 10,368 5,625
changes in assets and liabilities:
accounts receivable 11,107 14,483 17,374
inventories 8,347 2,098 14,474
other current assets 763 2,504 827
other assets 366 (311) 171
accounts payable (8,558) 998 (4,530)
accrued expenses (2,126) 1,727 (6,065)
accrued restructuring expenses (3,514) (2,523) (702)
income taxes payable 349 (1,268) 1,268
- ----------------------------------------------------------------------------------------------------
net cash provided by operating activities 31,129 42,177 36,079
- ----------------------------------------------------------------------------------------------------
cash flows from (used in) investing activities:
capital expenditures (6,830) (3,779) (6,571)
purchases of short-term investments (10,043) 0 0
- ----------------------------------------------------------------------------------------------------
sale of investments related to deferred compensation plan 0 0 4,547
net cash used in investing activities (16,873) (3,779) (2,024)
- ----------------------------------------------------------------------------------------------------
cash flows from financing activities:
payments on vendor-financed capital expenditures (1,294) (4,992) (6,865)
proceeds from issuance of long-term debt 0 0 564
principal payments of long-term debt (31,984) (3,172) (26,394)
cash dividends paid 0 0 (1,177)
proceeds from common stock issued 1,384 552 17
- ----------------------------------------------------------------------------------------------------
net cash used in financing activities (31,894) (7,612) (33,855)
- ----------------------------------------------------------------------------------------------------
increase (decrease) in cash and cash equivalents (17,638) 30,786 200
cash and cash equivalents, beginning of year 31,993 1,207 1,007
- ----------------------------------------------------------------------------------------------------
cash and cash equivalents, end of year $ 14,355 31,993 1,207
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of the company and its subsidiary, which is
wholly-owned. All significant intercompany balances and transactions are
eliminated in consolidation.
Description of Business - The company primarily manufactures and markets
upholstery fabrics and mattress fabrics ("ticking") primarily for the
furniture and bedding industries, with the majority of its business
conducted in North America.
Fiscal Year - The company's fiscal year is the 52 or 53 week period
ending on the Sunday closest to April 30. Fiscal years 2003, 2002 and
2001 included 52 weeks.
Cash and Cash Equivalents - Cash and cash equivalents include demand
deposit and money market accounts. For purposes of the consolidated
statements of cash flows, the company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.
Short-Term Investments - Short-term investments consist of two mutual
bond funds. The investments were originally purchased in February 2003
at a cost of $10.0 million. The contractual maturities of these
investments are less than one year. Realized and unrealized gains and
losses for the year ended April 27, 2003 were not significant, and
accordingly, the cost of these investments approximated fair value.
Short-term investments are classified as available-for-sale and reported
at fair value based on current market quotes with unrealized gains and
losses, net of any tax effect, recorded as a separate component of
comprehensive income in shareholders' equity until realized. Interest
income is included in interest income. Gains and losses on investments
sold are determined based on the specific identification method and are
included in other expense, net. Unrealized losses that are other than
temporary are recognized in net income. No investments are held for
speculative or trading purposes.
Accounts Receivable - Substantially all of the company's accounts
receivable are due from manufacturers in the furniture and bedding
industries. The company grants credit to customers, a substantial number
of which are located in North America and generally does not require
collateral. Management continuously performs credit evaluations of its
customers, considering numerous inputs including financial position, past
payment history, cash flows and management ability, historical loss
experience and economic conditions and prospects. While management
believes that adequate allowances for doubtful accounts have been
provided in the consolidated financial statements, it is possible that
the company could experience additional unexpected credit losses.
Inventories - Principally all inventories are valued at the lower of
last-in, first-out (LIFO) cost or market. Management continually
examines inventory to determine if there are indicators that the carrying
value exceeds its net realizable value. Experience has shown that the
most significant indicator of the need for inventory write-downs is the
age of the inventory. As a result, the company provides inventory
valuation write-downs based upon set percentages for inventory aging
categories, generally using six, nine and twelve month categories. While
management believes that adequate write-downs for inventory obsolescence
have been made in the consolidated financial statements, consumer tastes
and preferences will continue to change and the company could experience
additional inventory write-downs in the future.
Property, Plant and Equipment - Property, plant and equipment is recorded
at cost. Depreciation is generally computed using the straight-line
method over the estimated useful lives of the respective assets. Major
renewals and betterments are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts. Amounts received on disposal less the book
value of assets sold are charged or credited to income (loss).
The company adopted the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective April 29, 2002.
SFAS No. 144 establishes a single accounting model for long-lived assets
to be disposed of by sale, and also resolves implementation issues
related to SFAS No. 121. In accordance with SFAS No. 144, management
reviews long-lived assets, which consist principally of property, plant
and equipment, for impairment whenever events or changes in circumstances
indicate that the carrying value of the asset may not be recovered.
Recoverability of long-lived assets to be held and used is measured by a
comparison of the carrying amount of the asset to future net undiscounted
cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge
is recognized for the excess of the carrying amount over the fair value
of the asset. Assets to be disposed of are reported at the lower of the
carrying value or fair value less cost to sell when the company has
committed to a disposal plan.
The company's assessment at April 27, 2003 indicated that net
undiscounted future operating cash flows of the company's businesses were
sufficient to recover the carrying amount of long-lived assets under SFAS
No. 144. The determination of future operating cash flows involves
considerable estimation and judgment about future market conditions and
future sales and profitability. Although the company believes it has
based the impairment assessment on reasonable estimates and assumptions,
the use of different estimates and assumptions could result in materially
different results.
Interest costs of $74,000, $36,000 and $99,000 incurred during the years
ended April 27, 2003, April 28, 2002 and April 29, 2001, respectively,
for the construction of qualifying fixed assets were capitalized and are
being amortized over the related assets' estimated useful lives.
Foreign Currency Translation - The United States dollar is the functional
currency for the company's Canadian subsidiary. Translation gains
(losses) for this subsidiary of ($60,000), ($33,000) and $37,000 are
included in the other expense line item in the consolidated statements of
income (loss) for the fiscal years ended April 27, 2003, April 28, 2002
and April 29, 2001, respectively.
Goodwill - The company adopted the provisions of SFAS 142, Goodwill and
Other Intangible Assets, effective April 29, 2002. In accordance with
SFAS No. 142, the company ceased amortizing goodwill beginning fiscal
2003. Instead, the company tests goodwill for impairment on an annual
basis by comparing the fair value of each reporting unit to its carrying
value. As a result of the initial application of SFAS No. 142, the
company recorded an impairment charge of $37.6 million ($24.2 million net
of taxes of $13.4 million) (see note 19). For periods presented through
April 28, 2002, goodwill was amortized using the straight-line method
over 40 years, and tested for impairment by comparison of the carrying
value of the goodwill to estimated future undiscounted cash flows
expected to be generated by the related assets, when events and
circumstances indicated that the assets might be impaired.
Income Taxes - Deferred taxes are recognized for temporary differences
between the financial statement carrying amounts and the tax bases of the
company's assets and liabilities and operating loss and tax credit
carryforwards at income tax rates expected to be in effect when such
amounts are realized or settled. The effect on deferred taxes of a
change in tax rates is recognized in income (loss) in the period that
includes the enactment date.
No provision is made for income taxes which may be payable if
undistributed income of the company's Canadian subsidiary were to be paid
as dividends to the company, since the company intends that such earnings
will continue to be invested. At April 27, 2003, the amount of such
undistributed income was $27.5 million. Foreign tax credits may be
available as a reduction of United States income taxes in the event of
such distributions.
Revenue Recognition - Revenue is recognized upon shipment, when title and
risk of loss pass to the customer. Provision is made currently for
estimated product returns, claims and allowances. Management considers
historical claims and return experience, among other things, when
establishing the allowance for returns and allowances. While management
believes that adequate allowance has been established for returns and
allowances, it is possible that the company could experience levels
higher than provided for in the consolidated financial statements.
Shipping and Handling Costs - Revenue received for shipping and handling
costs, which is immaterial for all periods presented, is included in net
sales. Shipping costs, principally freight, that comprise payments to
third-party shippers are classified as cost of sales. Handling costs,
which consist principally of finished goods warehousing costs in the
company's various distribution facilities, were $4.9 million, $5.0
million and $5.2 million in 2003, 2002 and 2001, respectively, and are
included in selling, general and administrative expenses.
Stock-Based Compensation - Compensation costs related to employee stock
option plans are recognized utilizing the intrinsic value-based method
prescribed by APB No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. The company has adopted the disclosure
requirements of SFAS No. 123, Accounting for Stock- Based Compensation,
as amended by SFAS No. 148. Accordingly, compensation cost is recorded
over the vesting period of the options based upon the difference in
option price and fair market price at the date of grant, if any.
At April 27, 2003, the company had stock-based compensation plans, which
are described more fully in note 12 to the consolidated financial
statements.
The following table illustrates the effect on net loss and loss per share
if the company had applied the fair value recognition provisions of SFAS
No. 123 for the past three fiscal years:
(dollars in thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------
Net loss, as reported $ (24,887) (3,440) (8,311)
Add: Total stock-based employee
compensation expense included in
net loss, net of tax 67 81 241
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of tax 225 363 478
- --------------------------------------------------------------------------------
Pro forma net loss $ (25,045) (3,722) (8,548)
- --------------------------------------------------------------------------------
Loss per share:
Basic - as reported $ (2.17) (0.31) (0.74)
Basic - pro forma (2.19) (0.33) (0.76)
Diluted - as reported $ (2.17) (0.31) (0.74)
Diluted - pro forma (2.19) (0.33) (0.76)
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments - The carrying amount of cash and
cash equivalents, accounts receivable, other current assets, accounts
payable and accrued expenses approximates fair value because of the short
maturity of these financial instruments.
The fair value of the company's long-term debt is estimated by
discounting the future cash flows at rates currently offered to the
company for similar debt instruments of comparable maturities. The fair
value of the company's long-term debt is approximately $73 million at
April 27, 2003.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassification - Certain items in the fiscal 2002 and 2001 consolidated
financial statements have been reclassified to conform with the
presentation adopted in the current year, one of which is to reflect
vendor-financed capital expenditures as supplemental non-cash investing
activities, and payments on vendor-financed capital expenditures as
financing activities. The effect of this change on the fiscal 2002 and 2001
consolidated statements of cash flows is presented below. These
reclassifications did not impact net loss as previously reported.
2002 2001
------------------------------------------- -------------------------------------------
As Previously As Previously
Reported Adjustment As Reclassified Reported Adjustment As Reclassified
------------- ---------- --------------- ------------- ---------- ----------------
Net cash provided by
operating activities $ 42,177 0 42,177 36,079 0 36,079
Net cash used in
investing activities (4,729) 950 (3,779) (3,503) 1,479 (2,024)
Net cash used in financing
activities (6,662) (950) (7,612) (32,376) (1,479) (33,855)
2. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
Fiscal 2003 CDF Restructuring
In August 2002, management approved a restructuring plan within the Culp
Decorative Fabrics division aimed at lowering manufacturing costs,
simplifying the dobby fabric upholstery line, increasing asset
utilization and enhancing the division's manufacturing competitiveness.
The restructuring plan principally involved (1) consolidation of the
division's weaving, finishing, yarn making and distribution operations by
closing the facility in Chattanooga, Tennessee and integrating these
functions into other plants, (2) a significant reduction in the number of
stock keeping units (SKUs) offered in the dobby product line and (3) a
net reduction in workforce of approximately 300 positions. During fiscal
2003, the total restructuring and related charges incurred were $15.0
million, of which approximately $4.1 million represented non-cash items,
including $2.8 million in impairment of property, plant and equipment and
$1.3 million in inventory write-downs. Of the total charge, $12.0
million was recorded in restructuring expense in the 2003 Consolidated
Statement of Income (Loss); and $1.3 million, related to inventory
write-downs, and $1.7 million, related to equipment moving and relocation
expense, were recorded in cost of sales in the 2003 Consolidated
Statement of Income (Loss).
The following summarizes the activity in the restructuring accrual
(dollars in thousands):
------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
------------------------------------------------------------------------
Accrual established in
fiscal 2003 $ 1,972 $ 7,194 $ 9,166
Paid in fiscal 2003 (1,228) (949) (2,177)
------------------------------------------------------------------------
Balance April 27, 2003 $ 744 $ 6,245 $ 6,989
------------------------------------------------------------------------
As of April 27, 2003, assets classified as held for sale consisted of
machinery and equipment with a value of $166,000 and are included in other
assets. Management anticipates the successful disposal of these assets.
Wet Printed Flock Restucturing
In April 2002, management approved a plan to exit the wet printed flock
upholstery fabric business and has been actively seeking to sell the
assets related to this product line. The exit plan involved closing a
printing facility and flocking operation within the Culp Velvets/Prints
division, reduction in related selling and administrative expenses and
termination of 86 employees. The total charge for the exit plan was $9.7
million, of which approximately $8.2 million represented non-cash items,
including $7.6 million in impairment of property, plant and equipment and
$619,000 in inventory write-downs. Of the total charge, $9.1 million was
recorded in restructuring expense in the 2002 Consolidated Statement of
Income (Loss), and $619,000, related to inventory write-downs, was
recorded in cost of sales in the 2002 Consolidated Statement of Income
(Loss). During the fiscal year ended April 28, 2002, sales of the wet
printed flock product contributed $17.1 million, or 4.5%, of the
company's total sales and resulted in an operating loss of approximately
$2.1 million.
During fiscal 2003, an additional restructuring expense of $1.3 million
was recorded for the non-cash write-down of assets to reflect the
deterioration in market value experienced since April 2002.
Due to management's continual evaluation of the restructuring accrual,
the reserve was reduced $313,000 to reflect current estimates of future
health care claims. Additionally, the reserve was reduced $42,000 to
reflect current estimates of future security expenses and other costs.
The following summarizes the activity in the restructuring accrual
(dollars in thousands):
- -------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- -------------------------------------------------------------------------
Accrual established in
fiscal 2002 $ 842 $ 610 $ 1,452
Paid in fiscal 2002 (5) (5) (10)
- ------------------------------------------------------------------------
Balance April 28, 2002 $ 837 $ 605 $ 1,442
- -------------------------------------------------------------------------
Adjustments in fiscal 2003 (313) (42) (355)
Paid in fiscal 2003 (428) (116) (544)
- -------------------------------------------------------------------------
Balance April 27, 2003 $ 96 $ 447 $ 543
- -------------------------------------------------------------------------
As of April 27, 2003, assets classified as held for sale consisted of a
building, machinery and equipment with an aggregate value of $484,000 and
are included in other assets. Management is actively marketing these
assets and anticipates the successful disposal of these assets.
Fiscal 2001 CDF Restructuring
During fiscal 2001 and continuing into fiscal 2002, the company undertook
a restructuring plan in its upholstery fabric segment which involved (1)
the consolidation of certain fabric manufacturing capacity within the
Culp Decorative Fabrics (CDF) division, (2) closing one of the company's
four yarn manufacturing plants within the Culp Yarn division, (3) an
extensive reduction in selling, general and administrative expenses
including the termination of 110 employees and (4) a comprehensive SKU
reduction initiative related to finished goods and raw materials in CDF.
The 2001 charge from the restructuring and related costs was $7.4
million, approximately $3.4 million of which represented non-cash items,
including $2.5 million in impairment of property, plant and equipment and
$874,000 in inventory write-downs. Of the total charge, $5.6 million was
recorded in restructuring expense in the 2001 Consolidated Statement of
Income (Loss); and $874,000, related to inventory write-downs, and
$931,000, related to equipment relocation costs, were recorded in cost of
sales in the 2001 Consolidated Statement of Income (Loss). The 2002
charge from restructuring and related expenses was $2.5 million,
approximately $160,000 of which represented the non-cash impairment of
property, plant and equipment. Of the total charge, $1.3 million was
included in restructuring expense in the 2002 Consolidated Statement of
Income (Loss), and $1.2 million, related to equipment relocation costs,
was recorded in cost of sales in the 2002 Consolidated Statement of Income
(Loss).
During fiscal 2003, as a result of management's continual evaluation of
the restructuring accrual, the reserve was reduced $275,000 to reflect
current estimates of future health care claims and increased $276,000 to
reflect current estimates of remaining lease expenses, property taxes,
insurance and other exit costs.
The following summarizes the activity in the restructuring accrual
(dollars in thousands):
- -------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- -------------------------------------------------------------------------
Accrual established in
fiscal 2001 $ 969 $ 2,116 $ 3,085
Paid in fiscal 2001 (491) (211) (702)
- -------------------------------------------------------------------------
Balance April 29, 2001 $ 478 $ 1,905 $ 2,383
- -------------------------------------------------------------------------
Additions in fiscal 2002 925 218 1,143
Paid in fiscal 2002 (891) (1,632) (2,523)
- -------------------------------------------------------------------------
Balance April 28, 2002 $ 512 $ 491 $ 1,003
- -------------------------------------------------------------------------
Adjustments in fiscal 2003 (275) 276 1
Paid in fiscal 2003 (202) (591) (793)
- -------------------------------------------------------------------------
Balance April 27, 2003 $ 35 $ 176 $ 211
- -------------------------------------------------------------------------
As of April 27, 2003, there were no assets classified as held for sale
related to the fiscal 2001 CDF restructuring.
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
April 27, April 28,
(dollars in thousands) 2003 2002
- ------------------------------------------------------------------------
customers $ 34,580 46,886
allowance for doubtful accounts (1,558) (2,465)
reserve for returns and allowances (763) (1,055)
- ------------------------------------------------------------------------
$ 32,259 43,366
- ------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful
accounts follows:
(dollars in thousands) 2003 2002
- ------------------------------------------------------------------------
beginning balance $ (2,465) (1,282)
provision for bad debt 570 (4,172)
net write-offs 337 2,989
- ------------------------------------------------------------------------
ending balance $ (1,558) (2,465)
- ------------------------------------------------------------------------
4. INVENTORIES
A summary of inventories follows:
April 27, April 28,
(dollars in thousands) 2003 2002
- ------------------------------------------------------------------------
inventories on the FIFO cost method
raw materials $ 23,269 27,081
work-in-process 2,917 3,830
finished goods 23,366 27,233
- ------------------------------------------------------------------------
total inventories on the FIFO
cost method 49,522 58,144
adjustments of certain inventories
to the LIFO cost method 0 (245)
- ------------------------------------------------------------------------
$ 49,522 57,899
- ------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
depreciable lives April 27, April 28,
(dollars in thousands) (in years) 2003 2002
- ------------------------------------------------------------------------
land and improvements 10 $ 2,244 2,213
buildings and improvements 7-40 32,791 30,325
leasehold improvements 7-10 1,435 2,537
machinery and equipment 3-12 171,087 175,972
office furniture and equipment 3-10 9,868 11,370
capital projects in progress 1,893 987
- ------------------------------------------------------------------------
219,318 223,404
accumulated depreciation (134,356) (133,632)
- ------------------------------------------------------------------------
$ 84,962 89,772
- ------------------------------------------------------------------------
The company incurred total capital expenditures of $12,229,000, $4,729,000
and $8,050,000 in the fiscal years 2003, 2002 and 2001, respectively. The
non-cash portion of these capital expenditures representing vendor
financing totaled $5,366,000, $1,363,000 and $1,951,000 in the fiscal
years 2003, 2002 and 2001, respectively.
In connection with the fiscal 2003 CDF restructuring (see note 2),
machinery and equipment with a carrying value of $3.0 million was written
down to its net realizable value of $166,000 and reclassified to assets
held for sale. In connection with the wet printed flock restructuring in
fiscal 2002 (see note 2), property, plant and equipment with a carrying
value of $9.9 million was written down to its net realizable value of
approximately $2.3 million and reclassified to assets held for sale. Assets
held for sale are included in the other assets line item in the
consolidated balance sheets. As of April 27, 2003, the total carrying
value of these assets is $650,000.
6. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands) 2003 2002
- ---------------------------------------------------------------------------
beginning balance $ 47,083 $48,478
amortization 0 (1,395)
impairment charge (37,580) 0
adjustment to cost of acquired business (263) 0
- ---------------------------------------------------------------------------
ending balance $ 9,240 $47,083
- ---------------------------------------------------------------------------
As further discussed in notes 1 and 19, the company ceased recording goodwill
amortization and recorded a goodwill impairment charge as a result of the
initial adoption of SFAS 142, Goodwill and Other Intangible Assets, effective
April 29, 2002.
7. ACCOUNTS PAYABLE
A summary of accounts payable follows:
April 27, April 28,
(dollars in thousands) 2003 2002
- --------------------------------------------------------------------------
accounts payable - trade $ 14,389 22,947
accounts payable - capital expenditures 5,485 1,380
- --------------------------------------------------------------------------
$ 19,874 24,327
- --------------------------------------------------------------------------
8. ACCRUED EXPENSES
A summary of accrued expenses follows:
April 27, April 28,
(dollars in thousands) 2003 2002
- --------------------------------------------------------------------------
compensation, commissions and related benefits $ 9,683 10,122
interest 763 1,111
other 3,625 5,227
- --------------------------------------------------------------------------
$ 14,071 16,460
- --------------------------------------------------------------------------
9. INCOME TAXES
Total income taxes (benefits) were allocated as follows:
(dollars in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
income from continuing operations $ (1,557) (2,700) (4,097)
cumulative effect of accounting change 13,429 0 0
shareholders' equity, related to
the tax benefit arising from the
exercise of stock options (402) (145) 0
- --------------------------------------------------------------------------------
$ 11,470 (2,845) (4,097)
- --------------------------------------------------------------------------------
Income tax expense (benefit) attributable to income from continuing
operations consists of:
(dollars in thousands) 2003 2002 2001
- ---------------------------------------------------------------------------
current
federal $ 350 (2,655) (315)
state 25 0 11
Canadian 575 1,407 1,601
- ---------------------------------------------------------------------------
950 (1,248) 1,297
- ---------------------------------------------------------------------------
deferred
federal (2,298) (635) (4,565)
state (300) (600) (905)
Canadian 91 (217) 76
- ---------------------------------------------------------------------------
(2,507) (1,452) (5,394)
- ---------------------------------------------------------------------------
$(1,557) (2,700) (4,097)
- ---------------------------------------------------------------------------
Income before income taxes related to the company's Canadian operation for
the years ended April 27, 2003, April 28, 2002, and April 29, 2001 was
$2,300,000, $4,000,000 and $4,400,000, respectively.
The following schedule summarizes the principal differences between
income taxes (benefits) at the federal income tax rate and the effective
income tax rate reflected in the consolidated financial statements:
2003 2002 2001
- ------------------------------------------------------------------------------
federal income tax rate (35.0)% (35.0)% (35.0)%
state income taxes, net of federal
income tax benefit (7.8) (6.3) (4.7)
extraterritorial income or
foreign sales corporation benefit (2.3) (0.8) (0.4)
adjustment to estimated income tax accruals (19.6) 0.0 0.0
gains on life insurance contracts 0.0 0.0 5.0
other (3.2) (1.9) 2.1
- ------------------------------------------------------------------------------
(67.9)% (44.0)% (33.0)%
- ------------------------------------------------------------------------------
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) 2003 2002
- -------------------------------------------------------------------
deferred tax assets:
accounts receivable $ 799 1,188
inventories 2,427 2,904
goodwill 7,611 (4,701)
compensation 740 783
liabilities and reserves 3,717 1,705
alternative minimum tax 1,320 1,416
net operating loss carryforwards 5,520 3,878
- -------------------------------------------------------------------
gross deferred tax assets 22,134 7,173
valuation allowance 0 0
- -------------------------------------------------------------------
total deferred tax assets 22,134 7,173
- -------------------------------------------------------------------
deferred tax liabilities:
property, plant and equipment, net (12,853) (13,783)
other (829) (875)
- -------------------------------------------------------------------
total deferred tax liabilities (13,682) (14,658)
- -------------------------------------------------------------------
$ 8,452 (7,485)
- -------------------------------------------------------------------
At April 27, 2003, the company had an alternative minimum tax credit
carryforward of approximately $1,320,000 for federal income tax
purposes. Federal and state net operating loss carryforwards with
related tax benefits of $5,520,000 at April 27, 2003 expire in varying
amounts through fiscal 2023. The company believes that it is more likely
than not that the results of future operations will generate sufficient
taxable income to realize the existing deferred tax assets.
Income tax refunds, net of income tax payments, were $1,470,000 in 2003,
$2,280,000 in 2002 and $369,000 in 2001.
10. LONG-TERM DEBT
A summary of long-term debt follows:
April 27, April 28,
(dollars in thousands) 2003 2002
- --------------------------------------------------------------------
unsecured term notes $ 75,000 75,000
industrial revenue bonds 0 30,612
canadian government loan 1,500 1,852
obligation to sellers 0 1,020
- --------------------------------------------------------------------
76,500 108,484
current maturities (500) (1,483)
- --------------------------------------------------------------------
$ 76,000 107,001
- --------------------------------------------------------------------
In August 2002, the company entered into an agreement with its principal
bank lender that provides for a revolving loan commitment of $15.0
million, including letters of credit up to $2.5 million. Borrowings
under the credit facility generally bear interest at the London Interbank
Offered Rate plus an adjustable margin based upon the company's
debt/EBITDA ratio, as defined by the agreement. As of April 27, 2003,
there were $354,000 in outstanding letters of credit in support of
inventory purchases and no borrowings outstanding under the agreement.
Letter of credit and commitment fees are also determined by the company's
debt/EBITDA ratio, as defined by the agreement. The credit facility
expires in August 2004.
The unsecured term notes have an average remaining term of 5 years. The
principal payments become due from March 2006 to March 2010. Interest is
payable semi-annually at a fixed coupon rate of 7.76%.
The company's loan agreements require, among other things, that the
company maintain compliance with certain financial ratios. At April 27,
2003, the company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
years are: 2004 - $500,000; 2005 - $500,000; 2006 - $11,500,000; 2007 -
$11,000,000; and 2008 - $31,000,000.
Interest paid during 2003, 2002 and 2001 totaled $7,058,000, $8,199,000,
and $8,950,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The company leases certain office, manufacturing and warehouse facilities
and equipment, primarily computers and vehicles, under noncancellable
operating leases. Lease terms related to real estate range from one to
ten years with renewal options for additional periods ranging from two to
ten years. The leases generally require the company to pay real estate
taxes, maintenance, insurance and other expenses. Rental expense for
operating leases was $5,673,000 in 2003; $6,605,000 in 2002; and
$7,907,000 in 2001. Future minimum rental commitments for noncancellable
operating leases are $4,900,000 in 2004; $3,791,000 in 2005; $2,260,000
in 2006; $1,293,000 in 2007; $1,065,000 in 2008; and $112,000 in later
years. Management expects that in the normal course of business, these
leases will be renewed or replaced by other operating leases.
The company is involved in legal proceedings and claims which have arisen
in the ordinary course of its business. These actions, when ultimately
concluded and settled, will not, in the opinion of management, have a
material adverse effect upon the financial position, results of
operations or cash flows of the company.
The company has outstanding capital expenditure commitments of
approximately $6.1 million as of April 27, 2003.
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
April 27, 2003, 893,375 shares of common stock were authorized for
issuance under the plan. Of this total, 117,875 remain available for
grant. Options are generally exercisable from one to five years after
the date of grant and generally expire five to ten years after the date
of grant.
No compensation cost has been recognized for this stock option plan as
options are granted at an option price not less than fair market value at
the date of grant.
A summary of the status of the plan as of April 27, 2003, April 28, 2002
and April 29, 2001 and changes during the years ended on those dates is
presented below:
2003 2002 2001
- -------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------
Outstanding at beginning
of year 922,875 $ 7.73 788,926 $ 8.87 661,114 $ 9.98
Granted 0 0 290,375 4.07 130,250 3.11
Exercised (145,375) 6.74 (91,426) 4.45 (2,438) 2.82
Canceled/expired (2,000) 9.00 (65,000) 9.86 0 O
- -------------------------------------------------------------------------------------------
Outstanding at end of year 775,500 7.91 922,875 7.73 788,926 8.87
- -------------------------------------------------------------------------------------------
Options exercisable at
year-end 475,250 10.21 491,625 10.64 549,926 10.41
Weighted-average fair
value of options granted
during the year $0.00 $2.14 $1.60
- -------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 4/27/03 Contractual Life Exercise Price at 4/27/03 Exercise Price
- -------------------------------------------------------------------------------------------
$ 3.03 - $ 3.05 106,250 3.3 years $ 3.03 48,750 $ 3.03
$ 4.00 - $ 7.50 271,125 3.4 4.26 60,375 4.82
$ 7.63 - $ 7.63 112,000 5.4 7.63 80,000 7.63
$ 7.75 - $ 12.75 180,500 2.5 10.29 180,500 10.29
$ 13.34 - $ 20.94 105,625 4.0 18.43 105,625 18.43
- -------------------------------------------------------------------------------------------
775,500 3.5 $ 7.91 475,250 $ 10.21
- -------------------------------------------------------------------------------------------
During fiscal 1995, the company adopted a stock option plan which
provided for the one-time grant to officers and certain senior managers
of options to purchase 121,000 shares of the company's common stock at
$.05 (par value) per share. As of April 27, 2003, the 1,000 options
outstanding under the plan have exercise prices of $0.05 and a
weighted-average remaining contractual life of 0.7 years. Options
exercised during fiscal 2003, 2002 and 2001 were 50,500, 7,000 and 0,
respectively. As all outstanding options under this plan have been fully
vested, no compensation expense was recorded in fiscal 2003, 2002 and
2001.
During September 1997, the company's shareholders approved the 1997
option plan which provides for the one-time grant to certain officers and
senior managers of options to purchase 106,000 shares of the company's
common stock at $1.00 per share. Options under the plan are generally
exercisable on January 1, 2006. As of April 27, 2003, the 89,000 options
outstanding under the plan have exercise prices of $1.00 and a
weighted-average remaining contractual life of 3.7 years. Options
exercised during fiscal 2003, 2002 and 2001 were 0, 0, and 10,000,
respectively. During fiscal 2003, 2002 and 2001, the compensation
expense recorded under the plan was $210,000, $144,000 and $360,000,
respectively.
During September 2002, the company's shareholders approved the 2002
option plan under which options to purchase up to 1,000,000 shares of
common stock may be granted to officers, directors and key employees. At
April 27, 2003, 1,000,000 shares of common stock were authorized for
issuance under the plan. Of this total, 906,750 remain available for
grant. Options of 93,250 granted during fiscal 2003 have a
weighted-average exercise price of $13.43, a weighted-average fair value
of $7.29 and a weighted-average remaining contractual life of 4.8 years.
Options are generally exercisable from one to four years after the date
of grant and generally expire five to ten years after the date of grant.
No compensation cost has been recognized for this stock option plan as
options are granted under the plan at an option price not less than the
fair market value at the date of grant.
Had compensation cost for the fixed stock option plan with 775,500
options outstanding at April 27, 2003 and the 1997 and 2002 stock-based
compensation plans been determined consistent with SFAS No. 123, the
company's net loss, basic loss per share and diluted loss per share would
have been changed to the pro forma amounts indicated below:
(in thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------
Net loss As reported $(24,887) (3,440) (8,311)
Pro forma (25,045) (3,722) (8,548)
- --------------------------------------------------------------------------------
Net loss per As reported $ (2.17) (0.31) (0.74)
share, basic Pro forma (2.19) (0.33) (0.76)
- --------------------------------------------------------------------------------
Net loss per As reported $ (2.17) (0.31) (0.74)
share, diluted Pro forma (2.19) (0.33) (0.76)
- --------------------------------------------------------------------------------
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 2003, 2002 and 2001,
respectively: dividend yield of 0%, 0% and 0%; risk-free interest rates
of 4.2%, 4.8% and 4.6%; expected volatility of 78%, 62% and 54%; and
expected lives of 4 years, 5 years and 4 years.
13. DERIVATIVES
On April 30, 2001, the company adopted the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Adoption
of SFAS 133 did not have a significant impact on the company's financial
position, results of operations or cash flows. SFAS No. 133, as amended
by SFAS No. 137 and SFAS No. 138, requires the company to recognize all
derivative instruments on the balance sheet at fair value. These
statements also establish new accounting rules for hedging instruments,
which depend on the nature of the hedge relationship. A fair value hedge
requires that the effective portion of the change in the fair value of a
derivative instrument be offset against the change in the fair value of
the underlying asset, liability, or firm commitment being hedged through
earnings. A cash flow hedge requires that the effective portion of the
change in the fair value of a derivative instrument be recognized in
Other Comprehensive Income ("OCI"), a component of Shareholders' Equity,
and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The ineffective portion of a
derivative instrument's change in fair value is immediately recognized in
earnings.
The company uses foreign exchange option and forward contracts to manage
the exposure related to forecasted purchases of inventories denominated
in the EURO. The company utilizes cash flow hedge accounting for these
contracts. At April 27, 2003, there were no contacts outstanding.
The company also uses foreign exchange option and forward contracts to
manage the exposure related to firm commitments to purchase fixed assets
denominated in the EURO. The company has chosen not to utilize hedge
accounting for these contracts, and accordingly changes in the fair
value of these contracts are recorded currently in earnings. At April
27, 2003, the company had outstanding foreign exchange option and
forward contracts to purchase a total of 2.9 million EURO.
From time to time, the company used interest rate swap agreements to
effectively fix the interest rates on certain variable rate debt.
During 2001, the interest rate swaps no longer served as a hedge due to
the repayment of debt; consequently the interest rate swaps were
recorded at fair value. During 2002, the company paid $105,000 to
terminate the interest rate swap agreements.
14. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of shares outstanding during the period. Diluted net income per
share uses the weighted-average number of shares outstanding during the
period plus the dilutive effect of stock options calculated using the
treasury stock method. Weighted average shares used in the computation
of basic and diluted net income (loss) per share are as follows:
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding, basic 11,462 11,230 11,210
Effect of dilutive stock options 0 0 0
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding, diluted 11,462 11,230 11,210
- --------------------------------------------------------------------------------
Options to purchase 413,844 shares, 608,750 shares, and 769,926 shares of
common stock were not included in the computation of diluted net income
(loss) per share for fiscal 2003, 2002 and 2001, respectively, because
the exercise price of the options was greater than the average market
price of the common shares. Options to purchase 556,031 shares, 465,625
shares, and 177,500 shares were not included in the computation of
diluted net income (loss) per share for fiscal 2003, 2002 and 2001,
respectively, because the company incurred a net loss for each of these
fiscal years.
15. BENEFIT PLANS
The company has a defined contribution plan which covers substantially
all employees and provides for participant contributions on a pre-tax
basis and discretionary matching contributions by the company, which are
determined annually. Company contributions to the plan were $1,799,000
in 2003; $1,979,000 in 2002; and $2,301,000 in 2001.
In addition to the defined contribution plan, the company has a
nonqualified deferred compensation plan covering officers and certain
other associates.
16. SEGMENT INFORMATION
The company's operations are classified into two business segments:
upholstery fabrics and mattress ticking. The upholstery fabrics segment
principally manufactures and sells woven jacquards and dobbies,
heat-transfer prints, and woven and tufted velvets primarily to
residential and commercial (contract) furniture manufacturers. The
mattress ticking segment principally manufactures and sells woven
jacquards, heat-transfer prints and pigment prints to bedding
manufacturers.
International sales, of which 87%, 91% and 91% were denominated in U.S.
dollars in 2003, 2002 and 2001, respectively, accounted for 12%, 14% and
19% of net sales in 2003, 2002 and 2001, respectively and are summarized
by geographic area as follows:
(dollars in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------
North America (excluding USA) $ 30,375 32,033 34,049
Far East and Asia 4,926 10,703 15,497
All other areas 4,577 10,765 28,278
- ------------------------------------------------------------------------------
$ 39,878 53,501 77,824
- ------------------------------------------------------------------------------
One customer represented approximately 14%, 13% and 11% of consolidated
net sales for 2003, 2002 and 2001, respectively. Company assets located
outside North America are not material for any of the three years
presented.
The company internally manages and reports selling, general and
administrative expenses, interest expense, interest income, other expense
and income taxes on a total company basis. Thus, profit by business
segment represents gross profit. In addition, the company internally
manages and reports cash and cash equivalents, short-term investments,
other current assets and other assets on a total company basis. Thus,
identifiable assets by business segment represent accounts receivable,
inventories, property, plant and equipment and goodwill.
Sales and gross profit for the company's operating segments are as
follows:
(dollars in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 240,096 277,272 305,512
Mattress Ticking 99,550 105,302 105,097
- ------------------------------------------------------------------------------
$ 339,646 382,574 410,609
- ------------------------------------------------------------------------------
Gross profit
Upholstery Fabrics $ 34,738 33,648 29,511
Mattress Ticking 22,835 29,209 26,476
- ------------------------------------------------------------------------------
$ 57,573 62,857 55,987
- ------------------------------------------------------------------------------
Identifiable assets, including accounts receivable, inventories,
property, plant and equipment and goodwill, for the company's operating
segments are as follows:
(dollars in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------
Identifiable Assets
Upholstery Fabrics $ 124,889 182,316 47,129(1)
Mattress Ticking 51,124 55,804 12,868(1)
- ------------------------------------------------------------------------------
$ 176,013 238,120 59,997
- ------------------------------------------------------------------------------
(1) Includes inventory only for 2001. Inventory by operating segment
for fiscal 2003: $37,538 for Upholstery Fabrics and $12,014 for Mattress
Ticking. Inventory by operating segment for fiscal 2002: $44,453 for
Upholstery Fabrics and $13,446 for Mattress Ticking.
17. RELATED PARTY TRANSACTIONS
A director of the company is also an officer and director of a major
customer of the company. The amount of sales to this customer was
approximately $47,593,000 in 2003; $48,418,000 in 2002; and $45,230,000
in 2001. The amount due from this customer at April 27, 2003 was
approximately $2,690,000 and at April 28, 2002 was approximately
$2,177,000.
Rents paid to entities owned by certain shareholders and officers of the
company and their immediate families were approximately $708,000 in 2003,
$726,000 in 2002 and $695,000 in 2001.
18. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by
shareholders and distributions to shareholders not reflected in net
income (loss).
A summary of comprehensive loss follows:
(dollars in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------
Net loss $ (24,887) (3,440) (8,311)
Gain (loss) on foreign exchange
options, net of taxes:
Net changes in fair value 0 7 0
Net gains reclassified into earnings (7) 0 0
- ------------------------------------------------------------------------------
$ (24,894) (3,433) (8,311)
- ------------------------------------------------------------------------------
19. RECENTLY ADOPTED ACCOUNTING STANDARDS
The company adopted SFAS 142, Goodwill and Other Intangible Assets,
effective April 29, 2002. SFAS No. 142 requires that goodwill no longer
be amortized and that goodwill be tested for impairment by comparing each
reporting unit's carrying value to its fair value. SFAS No. 142 requires
that any goodwill impairment loss recognized as a result of initial
application be reported as a change in accounting principle, and that the
income per share effects of the accounting change be separately
disclosed.
As required by the standard, the company ceased recording goodwill
amortization for fiscal 2003. The following table reconciles fiscal 2002
and fiscal 2001 net (loss) to its amount adjusted to exclude goodwill:
(dollars in thousands, except per share data) 2002 2001
- ------------------------------------------------------------------------------
Reported net loss $ (3,440) (8,311)
Goodwill amortization, net of tax 921 935
Adjusted net loss (2,519) (7,376)
- ------------------------------------------------------------------------------
Basic
Reported net loss per share (.31) (.74)
Adjusted net loss per share (.22) (.66)
- ------------------------------------------------------------------------------
Diluted
Reported net loss per share (.31) (.74)
Adjusted net loss per share (.22) (.66)
- ------------------------------------------------------------------------------
For the initial application of SFAS No. 142, an independent business
valuation specialist was engaged to assist the company in the
determination of the fair market value of Culp Decorative Fabrics (CDF),
one of the company's three divisions within the upholstery segment,
because of the significance of the goodwill associated with the division
and due to its operating performance for fiscal 2002 and 2001. The fair
value of the CDF division determined using several different methods,
including comparable companies, comparable transactions and discounted
cash flow analysis, was less than the carrying value. Accordingly, the
company recorded a goodwill impairment charge of $37.6 million ($24.2
million net of taxes of $13.4 million), or $2.11 per share diluted,
related to the goodwill associated with the CDF division. After the
goodwill impairment charge, the company's remaining goodwill relates to
the following divisions: Culp Decorative Fabrics - $4.4 million, Culp
Yarn - $700,000 and Culp Home Fashions - $4.1 million.
The company updated its goodwill impairment test as of April 27, 2003.
This updated impairment test, which was prepared by an independent
business valuation specialist, did not indicate any further impairment of
goodwill. The determination of fair value involves considerable
estimation and judgment. In particular, determining the fair value of a
business unit involves, among other things, developing forecasts of
future cash flows and appropriate discount rates. Although the company
believes it has based the impairment testing on reasonable estimates and
assumptions, the use of different estimates and assumptions could result
in materially different results. As a result of a continuing difficult
business environment, there is a potential for further impairment of the
goodwill related to Culp Decorative Fabrics.
20. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. FIN No. 46
addresses the consolidation by business enterprises of variable interest
entities, as defined in the interpretation. FIN 46 expands existing
accounting guidance regarding when a company should include in its
financial statements the assets, liabilities and activities of another
entity. The consolidation requirements of FIN No. 46 apply immediately
to variable interest entities created before February 1, 2003 in the
first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to all financial statements
issued after January 31, 2003. The application of this interpretation is
not expected to have a material effect on the company's financial
position, results of operations or cash flows.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
SFAS No. 133. SFAS No. 149 clarifies the discussion around initial net
investment and when a derivative contains a financing component, and
amends the definition of the term underlying to conform it to language
used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. In addition, SFAS No. 149 also incorporates
certain Derivative Implementation Group Implementation Issues. The
provisions of SFAS No. 149 are effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The guidance is applied to hedging relationships on
a prospective basis.
SELECTED QUARTERLY DATA
fiscal fiscal fiscal fiscal fiscal fiscal fiscal fiscal
(amounts in thousands, except per 2003 2003 2003 2003 2002 2002 2002 2002
share amounts) 4th quarter 3rd quarter 2nd quarter 1st quarter 4th quarter 3rd quarter 2nd quarter 1st quarter
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
net sales $ 90,406 79,492 83,740 86,008 108,586 90,749 96,591 86,648
cost of sales 74,218 65,704 69,997 72,154 85,568 77,241 81,049 75,859
- ----------------------------------------------------------------------------------------------------------------------------------
gross profit 16,188 13,788 13,743 13,854 23,018 13,508 15,542 10,789
SG & A expenses 10,324 9,798 9,481 10,437 14,236 11,038 11,550 11,235
goodwill amortization 0 0 0 0 349 349 349 348
restructuring expense and asset
impairments (25) (354) 13,360 0 9,065 0 0 1,303
- ----------------------------------------------------------------------------------------------------------------------------------
income (loss) from operations 5,889 4,344 (9,098) 3,417 (632) 2,121 3,643 (2,097)
interest expense 1,392 1,665 1,676 1,903 2,056 1,820 1,963 2,068
interest income (182) (143) (121) (150) (77) (42) (34) (23)
other expense 160 192 242 211 718 86 416 224
- ----------------------------------------------------------------------------------------------------------------------------------
income (loss) before income taxes 4,519 2,630 (10,895) 1,453 (3,329) 257 1,298 (4,366)
income taxes 1,247 963 (4,305) 538 (1,744) 87 441 (1,484)
- ----------------------------------------------------------------------------------------------------------------------------------
income (loss) before cumulative
effect of accounting change 3,272 1,667 (6,590) 915 (1,585) 170 857 (2,882)
cumulative effect of accounting
change, net of income taxes 0 0 0 (24,151) 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
net income (loss) 3,272 1,667 (6,590) (23,236) (1,585) 170 857 (2,882)
- ----------------------------------------------------------------------------------------------------------------------------------
depreciation 3,436 3,415 3,498 3,641 4,060 4,344 4,397 4,473
- ----------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,496 11,485 11,483 11,383 11,255 11,221 11,221 11,221
weighted average shares outstanding,
assuming dilution 11,616 11,714 11,483 11,765 11,255 11,304 11,281 11,221
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
basic income (loss) per share:
income (loss) before cumulative effect
of accounting change $ 0.28 0.15 (0.57) 0.08 (0.14) 0.02 0.08 (0.26)
cumulative effect of accounting change 0 0 0 (2.12) 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
net income (loss) 0.28 0.15 (0.57) (2.04) (0.14) 0.02 0.08 (0.26)
- ----------------------------------------------------------------------------------------------------------------------------------
diluted income (loss) per share:
income (loss) before cumulative
effect of accounting change $ 0.28 0.14 (0.57) 0.08 (0.14) 0.02 0.08 (0.26)
cumulative effect of accounting change 0 0 0 (2.12) 0 0 0 0
net income (loss) 0.28 0.14 (0.57) (2.04) (0.14) 0.02 0.08 (0.26)
- ----------------------------------------------------------------------------------------------------------------------------------
book value 8.33 8.02 7.87 8.45 10.52 10.62 10.68 10.59
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (5) $ 61,937 64,063 68,492 70,762 76,938 84,233 84,346 86,586
property, plant and equipment, net 84,962 85,396 85,049 89,201 89,772 102,547 105,697 109,417
total assets 218,153 236,753 235,598 235,959 287,713 276,781 283,817 281,058
capital expenditures 3,153 3,748 2,258 3,070 1,336 1,105 686 1,602
long-term debt (1) 76,500 96,141 96,558 96,533 108,484 110,087 110,583 110,652
shareholders' equity 95,765 92,075 90,326 97,007 119,065 120,013 119,838 118,809
capital employed (3) 172,265 188,216 186,884 193,540 227,549 230,999 230,421 229,461
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RATIOS & OTHER DATA
gross profit margin 17.9% 17.3% 16.4% 16.1% 21.2% 14.9% 16.1% 12.5%
operating income (loss) margin 6.5 5.5 (10.9) 4.0 (0.6) 2.3 3.8 (2.4)
net income (loss) margin before
cumulative effect of accounting change 3.6 2.1 (7.9) 1.1 (1.5) 0.2 0.9 (3.3)
effective income tax rate 27.6 36.6 39.5 37.0 2.4 34.0 34.0 34.0
long-term debt-to-total capital ratio (1) 44.4 51.1 51.7 49.9 47.7 47.8 48.0 48.2
operating working capital turnover (5) 5.0 4.9 4.8 4.7 4.5 4.2 4.1 4.1
days sales in receivables 32 34 36 34 36 43 47 51
inventory turnover 5.8 4.9 4.9 4.9 5.8 5.1 5.4 5.1
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STOCK DATA
stock price
high $ 8.10 9.97 14.95 17.89 10.74 5.10 4.15 4.75
low 3.75 6.21 3.81 8.00 5.60 2.12 2.38 3.20
close 5.00 7.19 6.50 11.40 9.30 5.01 2.60 3.95
P/E ratio (2)
high (4) N.M N.M N.M N.M N.M N.M N.M N.M
low (4) N.M N.M N.M N.M N.M N.M N.M N.M
daily average trading volume (shares) 65.5 59.9 97.4 145.5 59.7 17.0 15.6 9.1
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(1) Long-term debt includes long- and short-term debt
(2) P/E ratios based on trailing 12-month net income (loss) per share
(3) Capital employed includes long-term debt and shareholders' equity
(4) N.M - Not meaningful
(5) Operating working capital for this calculation is accounts receivable, inventories and accounts payable
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 27, 2003 and any subsequent interim
periods, there were no changes of accountants and/or disagreements on any
matters of accounting principles or practices or financial statement
disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers and directors of the company is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the caption "Nominees, Directors and
Executive Officers," which information is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included in the company's
definitive Proxy Statement to be filed within 120 days after the end of the
company's fiscal year pursuant to Regulation 14A of the Securities and Exchange
Commission, under the caption "Executive Compensation," which information is
herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain beneficial
owners and management is included in the company's definitive Proxy Statement
to be filed within 120 days after the end of the company's fiscal year
pursuant to Regulation 14A of the Securities and Exchange Commission, under
the caption "Voting Securities," which information is herein incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
included in the company's definitive Proxy Statement to be filed within 120
days after the end of the company's fiscal year pursuant to Regulation 14A of
the Securities and Exchange Commission, under the subcaption "Certain
Relationships and Related Transactions," which information is herein
incorporated by reference.
ITEM 14: CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, the company conducted a review
and evaluation of its disclosure controls and procedures, under the
supervision and with the participation of the company's Chief Executive
Officer and Chief Financial Officer. Based upon this review, the Chief
Executive Officer and Chief Financial Officer concluded that the company's
disclosure controls and procedures were adequate and effective to ensure that
information required to be disclosed is recorded, processed, summarized, and
reported in a timely manner .
There were no significant changes in the company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation described above, nor were there any significant
deficiencies or material weaknesses in the controls which required corrective
action.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated Financial Statements
The following consolidated financial statements of Culp, Inc. and
its subsidiaries are filed as part of this report.
Page of Annual
Report on
Item Form 10-K
- ---- ---------
Consolidated Balance Sheets - April 27, 2003 and................. 32
April 28, 2002
Consolidated Statements of Income (Loss) -
for the years ended April 27, 2003,
April 28, 2002, and April 29, 2001 ............................ 33
Consolidated Statements of Shareholders' Equity -
for the years ended April 27, 2003,
April 28, 2002, and April 29, 2001............................. 34
Consolidated Statements of Cash Flows -
for the years ended April 27, 2003,
April 28, 2002, and April 29, 2001............................. 35
Consolidated Notes to Financial Statements....................... 36
Report of Independent Auditors .................................. 31
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
The following exhibits are attached at the end of this report, or
incorporated by reference herein. Management contracts, compensatory plans, and
arrangements are marked with an asterisk (*).
3(i) Articles of Incorporation of the company, as
amended, were filed as Exhibit 3(i) to the company's
Form 10-Q for the quarter ended July 28, 2002, filed
September 11, 2002, and are incorporated herein by
reference.
3(ii) Restated and Amended Bylaws of the company, as
amended June 12, 2001, were filed as Exhibit 3(ii) to
the company's Form 10-Q for the quarter ended July 29,
2001, filed September 12, 2001, and are incorporated
herein by reference.
10(a) Lease Agreement, dated January 19, 1990, with Phillips
Interests, Inc. was filed as Exhibit 10(g) to the
company's Form 10-K for the year ended April 29, 1990,
filed on July 25, 1990, and is incorporated herein by
reference.
10(b) Management Incentive Plan of the company, dated August
1986 and amended July 1989, filed as Exhibit 10(o) to
the company's Form 10-K for the year ended May 3, 1992,
filed on August 4, 1992, and is incorporated herein by
reference. (*)
10(c) Lease Agreement, dated September 6, 1988, with
Partnership 74 was filed as Exhibit 10(h) to the
company's Form 10-K for the year ended April 28, 1991,
filed on July 25, 1991, and is incorporated herein by
reference.
10(d) First Amendment of Lease Agreement dated July 27, 1992
with Partnership 74 Associates was filed as Exhibit
10(n) to the company's Form 10-K for the year ended May
2, 1993, filed on July 29, 1993, and is incorporated
herein by reference.
10(e) Second Amendment of Lease Agreement dated June 15, 1994
with Partnership 74 Associates was filed as Exhibit
10(v) to the company's Form 10-Q for the quarter ended
October 29, 1995, filed on December 12, 1995, and is
incorporated herein by reference.
10(f) Second Amendment of Lease Agreement dated April 16,
1993, with Partnership 52 Associates was filed as
Exhibit 10(l) to the company's Form 10-K for the year
ended May 2, 1993, filed on July 29, 1993, and is
incorporated herein by reference.
10(g) 1993 Stock Option Plan was filed as Exhibit 10(o) to the
company's Form 10-K for the year ended May 2, 1993,
filed on July 29, 1993, and is incorporated herein by
reference. (*)
10(h) Amendments to 1993 Stock Option Agreement dated
September 26, 2000. This amendment was filed as Exhibit
10(rr) to the company's Form 10-Q for the quarter ended
October 29, 2000, and is incorporated herein by
reference. (*)
10(i) Performance-Based Stock Option Plan, dated June 21,
1994, was filed as Exhibit 10(bb) to the company's Form
10-K for the year ended April 30, 1995, filed on July
26, 1995, and is incorporated herein by reference. (*)
10(j) Form of Note Purchase Agreement (providing for the
issuance by Culp, Inc. of its $20 million 6.76% Series A
Senior Notes due 3/15/08 and its $55 million 6.76%
Series B Senior Notes due 3/15/10), each dated March 4,
1998, between Culp, Inc. and each of the following:
1. Connecticut General Life Insurance Company;
2. The Mutual Life Insurance Company of New York;
3. United of Omaha Life Insurance Company;
4. Mutual of Omaha Insurance Company;
5. The Prudential Insurance Company of America;
6. Allstate Life Insurance Company;
7. Life Insurance Company of North America; and
8. CIGNA Property and Casualty Insurance Company
This agreement was filed as Exhibit 10(ll) to the
company's Form 10-K for the year ended May 3, 1998, filed
on July 31, 1998, and is incorporated herein by
reference.
10(k) First Amendment, dated January 31, 2002 to Note Purchase
Agreement (providing for the issuance by Culp, Inc. of
its $20 million 6.76% Series A Senior Notes due 3/15/08
and its $55 million 6.76% Series B Senior Notes due
3/15/10), each dated March 4, 1998, between Culp, Inc.
and each of the following:
1. Connecticut General Life Insurance Company;
2. Life Insurance Company of North America;
3. ACE Property and Casualty;
4. J. Romeo & Co.;
5. United of Omaha Life Insurance Company;
6. Mutual of Omaha Insurance Company;
7. The Prudential Insurance of America; and
8. Allstate Life Insurance Company
This amendment was filed as Exhibit 10(a) to the
company's Form 10-Q for the quarter ended January 27,
2002, and is incorporated herein by reference.
10(l) Rights Agreement, dated as of October 8, 1999, between
Culp, Inc. and EquiServe Trust Company, N.A., as Rights
Agent, including the form of Articles of Amendment with
respect to the Series A Participating Preferred Stock
included as Exhibit A to the Rights Agreement, the forms
of Rights Certificate included as Exhibit B to the
Rights Agreement, and the form of Summary of Rights
included as Exhibit C to the Rights Agreement. The
Rights Agreement was filed as Exhibit 99.1 to the
company's Form 8-K dated October 12, 1999, and is
incorporated herein by reference.
10(m) Form of Change of Control and Noncompetition Agreement,
each dated December 11, 2001, by and between the company
and each of Robert G. Culp, III, Howard L. Dunn, Jr.,
Franklin N. Saxon, Kenneth M. Ludwig, and Rodney A.
Smith. (*)
10(n) 2002 Stock Option Plan was filed as Exhibit 10(a) to the
company's Form 10-Q for the quarter ended January 26, 2003,
filed on March 12, 2003, and is incorporated herein
by reference.(*)
10(o) Amended and Restated Credit Agreement dated as of August
23, 2002 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as Exhibit
10(a) to the company's Form 10-Q for the quarter ended
July 28, 2002, filed September 11, 2002, and is
incorporated herein by reference.
10(p) First Amendment to Amended and Restated Credit Agreement
dated as of March 17, 2003 among Culp, Inc. and Wachovia
Bank, National Association, as Agent and as Bank.
10(q) Second Amendment to Amended and Restated Credit
Agreement dated as of June 3, 2003 among Culp, Inc. and
Wachovia Bank, National Association, as Agent and as Bank.
21 List of subsidiaries of the company
23(a) Consent of Independent Public Auditors in connection with the
registration statements of Culp, Inc. on Form S-8 (File Nos.
33-13310, 33-37027, 33-80206, 33-62843, 333-27519,
333-59512 and 333-59514), dated March 20, 1987, September 18,
1990, June 13, 1994, September 22, 1995, May 21, 1997, April
25, 2001, and April 25, 2001.
24(a) Power of Attorney of Harry R. Culp, DDS, dated June 30, 2003
24(b) Power of Attorney of Howard L. Dunn, Jr., dated July 11, 2003
24(c) Power of Attorney of H. Bruce English, dated June 23, 2003
24(d) Power of Attorney of Patrick B. Flavin, dated June 30, 2003
24(e) Power of Attorney of Kenneth W. McAllister, dated June 23, 2003
24(f) Power of Attorney of Patrick H. Norton, dated June 30, 2003
24(g) Power of Attorney of Albert L. Prillaman, dated June 30, 2003
99(a) Certification of Chief Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
99(b) Certification of Chief Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
99(c) Certification of Chief Executive Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
99(d) Certification of Chief Financial Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K:
The company filed the following report on Form 8-K during the quarter
ended April 27, 2003:
(1) Form 8-K, dated February 24, 2003, included under Item 5, Other
Events, the company's press release for quarterly earnings and the
financial information release relating to certain financial
information for the quarter ended January 26, 2003.
c) Exhibits:
The exhibits to this Form 10-K are filed at the end of this Form 10-K
immediately preceded by an index. A list of the exhibits begins on page
63 under the subheading "Exhibits Index."
d) Financial Statement Schedules:
See Item 15(a) (2)
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, CULP, INC. has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 25th day of July
2003.
CULP, INC.
By /s/ Robert G. Culp, III
-------------------
Robert G. Culp, III
(Chairman and Chief Executive Officer)
By: /s/ Franklin N. Saxon
------------------
Franklin N. Saxon
(Executive Vice President and Chief Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 25th day of July 2003.
/s/ Robert G. Culp, III /s/ Patrick H. Norton *
---------------------- ------------------
Robert G. Culp, III Patrick H. Norton
(Chairman of the (Director)
Board of Directors)
/s/ Franklin N. Saxon /s/ Harry R. Culp *
----------------- -------------
Franklin N. Saxon Harry R. Culp
(Director) (Director)
/s/ Howard L. Dunn, Jr.* /s/ H. Bruce English*
------------------- ----------------
Howard L. Dunn, Jr. H. Bruce English
(Director) (Director)
/s/ Patrick B. Flavin* /s/ Albert L. Prilliman*
----------------- -------------------
Patrick B. Flavin Albert L. Prillaman
(Director) (Director)
/s/ Kenneth W. McAllister*
---------------------
Kenneth W. McAllister
(Director)
* By Franklin N. Saxon, Attorney-in-Fact, pursuant to Powers of Attorney
filed with the Securities and Exchange Commission.
EXHIBITS INDEX
Exhibit Number Exhibit
10(p) First Amendment to Amended and Restated Credit Agreement
dated as of March 17, 2003 among Culp, Inc. and Wachovia
Bank, National Association, as Agent and as Bank.
10(q) Second Amendment to Amended and Restated Credit
Agreement dated as of June 3, 2003 among Culp, Inc. and
Wachovia Bank, National Association, as Agent and as Bank.
21 List of subsidiaries of the company
23(a) Consent of Independent Public Auditors in connection with the
registration statements of Culp, Inc. on Form S-8 (File Nos.
33-13310, 33-37027, 33-80206, 33-62843, 333-27519, 333-59512,
333-59514 and 333-101850), dated March 20, 1987, September 18,
1990, June 13, 1994, September 22, 1995, May 21, 1997, April 25,
2001, April 25, 2001 and December 12, 2002.
24(a) Power of Attorney of Harry R. Culp, DDS, dated June 30, 2003
24(b) Power of Attorney of Howard L. Dunn, Jr., dated July 11, 2003
24(c) Power of Attorney of H. Bruce English, dated June 23, 2003
24(d) Power of Attorney of Patrick B. Flavin, dated June 30, 2003
24(e) Power of Attorney of Kenneth W. McAllister, dated June 23, 2003
24(f) Power of Attorney of Patrick H. Norton, dated June 30, 2003
24(g) Power of Attorney of Albert L. Prillaman, dated June 30, 2003
99(a) Certification of Chief Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
99(b) Certification of Chief Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
99(c) Certification of Chief Executive Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
99(d) Certification of Chief Financial Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.