=============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 30, 2006 COMMISSION FILE NO. 0-12781 CULP, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-1001967 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or other organization) 1823 EASTCHESTER DRIVE HIGH POINT, NORTH CAROLINA 27265-1402 (Address of principal executive offices) (zip code) (336) 889-5161 ---------------------------------------------------- (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS. [X] YES NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED FILER AND LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. (CHECK ONE); LARGE ACCELERATED FILER [_] ACCELERATED FILER [_] NON-ACCELERATED FILER [X] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED BY RULE 12B-2 OF THE EXCHANGE ACT). [_] YES NO [X] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE: COMMON SHARES OUTSTANDING AT JULY 30, 2006: 11,684,959 PAR VALUE: $0.05 ================================================================================
<TABLE> <CAPTION> INDEX TO FORM 10-Q FOR THE PERIOD ENDED JULY 30, 2006 PAGE ---- PART I - FINANCIAL STATEMENTS ----------------------------- ITEM 1. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS: - --------------------------------------------------------------- <S> <C> <C> Consolidated Statements of Net Income (Loss) -- Three Months Ended July 30, 2006 and July 31, 2005 I-1 Consolidated Balance Sheets -- July 30, 2006, July 31, 2005 and April 30, 2006 I-2 Consolidated Statements of Cash Flows -- Three Months Ended July 30, 2006 and July 31, 2005 I-3 Consolidated Statements of Shareholders' Equity I-4 Notes to Consolidated Financial Statements I-5 Cautionary Statement Concerning Forward-Looking Information I-18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS I-18 - ------------------------------------------------------------------------------------------------ ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK I-28 - --------------------------------------------------------------------- ITEM 4. CONTROLS AND PROCEDURES I-28 - ---------------------------------- PART II - OTHER INFORMATION --------------------------- ITEM 1A. II-1 - ------- ITEM 6. EXHIBITS II-1 - --------------- Signatures II-2 </TABLE>
<TABLE> <CAPTION> Item 1: Financial Statements - ---------------------------- CULP, INC. CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) FOR THE THREE MONTHS ENDED JULY 30, 2006 AND JULY 31, 2005 UNAUDITED (Amounts in Thousands, Except for Per Share Data) THREE MONTHS ENDED ----------------------------------------------------------------------------- Amounts Percent of Sales ------------------------------ ----------------------------- July 30, July 31, % Over July 30, July 31, 2006 2005 (Under) 2006 2005 --------------- -------------- ----------- ------------ -------------- <S> <C> <C> <C> <C> <C> Net sales $ 62,585 62,340 0.4 % 100.0 % 100.0 % Cost of sales 54,525 55,785 (2.3)% 87.1 % 89.5 % --------------- -------------- ----------- ------------ -------------- Gross profit 8,060 6,555 23.0 % 12.9 % 10.5 % Selling, general and administrative expenses 6,575 9,856 (33.3)% 10.5 % 15.8 % Restructuring expense 730 1,826 (60.0)% 1.2 % 2.9 % --------------- -------------- ----------- ------------ -------------- Income (loss) from operations 755 (5,127) 114.7 % 1.2 % (8.2)% Interest expense 950 948 0.2 % 1.5 % 1.5 % Interest income (46) (16) 187.5 % (0.1)% (0.0)% Other (income) expense (278) 133 (309.0)% (0.4)% 0.2 % --------------- -------------- ----------- ------------ -------------- Income (loss) before income taxes 129 (6,192) 102.1 % 0.2 % (9.9)% Income taxes * (3) (2,251) (99.9)% (2.3)% 36.4 % -------------- -------------- ----------- ------------ -------------- Net income (loss) $ 132 (3,941) 103.3 % 0.2 % (6.3) % =============== ============== =========== ============ -------------- Net income (loss) per share, basic $ 0.01 (0.34) 102.9 % Net income (loss) per share, diluted 0.01 (0.34) 102.9 % Average shares outstanding, basic 11,672 11,551 1.0 % Average shares outstanding, diluted 11,770 11,551 1.9 % * Percent of sales column is calculated as a % of income (loss) before income taxes. </TABLE> See accompanying notes to consolidated financial statements. I-1
<TABLE> <CAPTION> CULP, INC. CONSOLIDATED BALANCE SHEETS JULY 30, 2006, JULY 31, 2005 AND APRIL 30, 2006 UNAUDITED (Amounts in Thousands) Amounts ------------------------------- Increase July 30, July 31, (Decrease) ------------------------------ * April 30, 2006 2005 Dollars Percent 2006 --------------- -------------- -------------- ------------ -------------- Current assets: <S> <C> <C> <C> <C> <C> Cash and cash equivalents $ 8,387 5,238 3,149 60.1 % 9,714 Accounts receivable 26,044 23,019 3,025 13.1 % 29,049 Inventories 43,055 52,125 (9,070) (17.4)% 36,693 Deferred income taxes 7,120 7,054 66 0.9 % 7,120 Assets held for sale 2,531 - 2,531 100.0 % 3,111 Other current assets 2,789 1,660 1,129 68.0 % 1,287 --------------- -------------- -------------- ----------- -------------- Total current assets 89,926 89,096 830 0.9 % 86,974 Property, plant and equipment, net 42,835 60,190 (17,355) (28.8)% 44,639 Goodwill 4,114 4,114 - 0.0 % 4,114 Deferred income taxes 21,513 12,268 9,245 75.4 % 20,176 Other assets 1,542 1,519 23 1.5 % 1,564 --------------- -------------- -------------- ----------- -------------- Total assets $ 159,930 167,187 (7,257) (4.3)% 157,467 =============== ============== ============== =========== ============== Current liabilities: Current maturities of long-term debt $ 7,739 8,126 (387) (4.8)% 8,060 Accounts payable 21,247 18,524 2,723 14.7 % 20,835 Accrued expenses 9,130 10,178 (1,048) (10.3)% 7,845 Accrued restructuring costs 3,745 4,855 (1,110) (22.9)% 4,054 Income taxes payable 3,561 1,179 2,382 202.0 % 2,488 --------------- -------------- -------------- ----------- -------------- Total current liabilities 45,422 42,862 2,560 6.0 % 43,282 Long-term debt, less current maturities 39,601 42,440 (2,839) (6.7)% 39,662 --------------- -------------- -------------- ----------- -------------- Total liabilities 85,023 85,302 (279) (0.3)% 82,944 Shareholders' equity 74,907 81,885 (6,978) (8.5)% 74,523 --------------- -------------- -------------- ----------- -------------- Total liabilities and shareholders' equity $ 159,930 167,187 (7,257) (4.3)% 157,467 =============== ============== ============== =========== ============== Shares outstanding 11,685 11,552 133 1.2 % 11,655 =============== ============== ============== =========== ============== * Derived from audited financial statements. See accompanying notes to consolidated financial statements. </TABLE> I-2
CULP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JULY 30, 2006 AND JULY 31, 2005 UNAUDITED (Amounts in Thousands) <TABLE> <CAPTION> THREE MONTHS ENDED ----------------------- Amounts ----------------------- July 30, July 31 2006 2005 ---------- ---------- Cash flows from operating activities: <S> <C> <C> Net income (loss) $ 132 (3,941) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation 1,702 6,172 Amortization of other assets 23 31 Stock-based compensation 132 53 Deferred income taxes (1,337) (2,182) Restructuring expense 70 853 Gain on sale of equipment (307) -- Changes in assets and liabilities: Accounts receivable 3,005 5,805 Inventories (6,362) (1,626) Other current assets (1,502) 1,031 Other assets (6) 166 Accounts payable 796 (4,413) Accrued expenses 1,285 622 Accrued restructuring (309) (995) Income taxes payable 1,073 (365) ------- ------- Net cash (used in) provided by operating activities (1,605) 1,211 ------- ------- Cash flows from investing activities: Capital expenditures (637) (3,840) Proceeds from the sale of buildings and equipment 1,600 2,850 ------- ------- Net cash provided by (used in) investing activities 963 (990) ------- ------- Cash flows from financing activities: Payments on vendor-financed capital expenditures (428) (108) Payments on long-term debt (382) -- Proceeds from the issuance of long-term debt -- 16 Proceeds from common stock issued 125 2 ------- ------- Net cash used in financing activities (685) (90) ------- ------- (Decrease) increase in cash and cash equivalents (1,327) 131 Cash and cash equivalents at beginning of period 9,714 5,107 ------- ------- Cash and cash equivalents at end of period $ 8,387 5,238 ======= ======= </TABLE> See accompanying notes to consolidated financial statements. I-3
CULP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY UNAUDITED (Dollars in thousands, except share data) <TABLE> <CAPTION> Capital Accumulated Common Stock Contributed Other Total ------------------------- in Excess Unearned Retained Comprehensive Shareholders' Shares Amount of Par Value Compensation Earnings Income Equity ------------ ----------- -------------- ------------ ----------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, May 1, 2005 11,550,759 $ 579 39,964 (139) 45,367 - $ 85,771 Net loss - - - - (11,796) - (11,796) Stock-based compensation - - - 139 - - 139 Gain on cash flow hedge, net of taxes - - - - - 18 18 Common stock issued in connection with stock option plans 104,200 5 386 - - - 391 ------------ ----------- -------------- ------------ ------------ --------- ------------- Balance, April 30, 2006 11,654,959 584 40,350 - 33,571 18 74,523 Net income - - - - 132 - 132 Stock-based compensation - - 132 - - - 132 Loss on cash flow hedge, net of taxes - - - - - (5) (5) Common stock issued in connection with stock option plans 30,000 2 123 - - - 125 ------------ ----------- -------------- ------------ ------------ --------- ------------- Balance, July 30, 2006 11,684,959 $ 586 40,605 - 33,703 13 $ 74,907 ============ =========== =============== ============= ============ ========= ============= </TABLE> See accompanying notes to consolidated financial statements. I-4
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the "company") include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All of these adjustments are of a normal recurring nature except as disclosed in note 10 to the consolidated financial statements. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on July 26, 2006 for the fiscal year ended April 30, 2006. The company's three months ended July 30, 2006 and July 31, 2005 represent 13 week periods. 2. Stock-Based Compensation Effective May 1, 2006, the company began recording compensation expense associated with its stock option plans in accordance with SFAS No. 123R, "Share-Based Payment" which requires the measurement of the cost of employee services received in exchange for an award of an equity instrument based on the grant date fair value of the award. The company adopted the modified prospective transition method provided for under SFAS No. 123R, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation expense associated with stock options recognized in the first quarter of fiscal 2007 now includes amortization related to the remaining unvested portion of all stock option awards granted prior to May 1, 2006 based on their grant date fair value estimated in accordance with the original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Prior to May 1, 2006, the company recognized compensation costs related to employee stock option plans utilizing the intrinsic value-based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The company had also adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure." SFAS No. 123 required disclosure of pro-forma net income, earnings per share, and other information as if the fair value method of accounting for stock options and other equity instruments described in SFAS No. 123 had been adopted. As a result of adopting SFAS No. 123R, the company recorded $132,000 of compensation expense for stock options within selling, general, and administrative expense for the three-month period ended July 30, 2006. In the prior year, the company recorded $53,000 of compensation expense for stock options that were required to be accounted for under the provisions of APB Opinion No. 25 for the three-month period July 31, 2005. Prior to the adoption of SFAS No. 123R, the benefit of tax deductions in excess of recognized compensation costs were reported as an operating cash flow. SFAS No. 123R requires such benefits be recorded as financing cash flow rather than as a reduction of taxes paid within operating cash flow. For the three-month period ended July 30, 2006, no tax benefits in excess of recognized compensation costs were realized from option exercises. I-5
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The remaining unrecognized compensation costs related to unvested awards at July 30, 2006 is $1.3 million which is expected to be recognized over a weighted average period of 3.1 years. The following table illustrates the effect on net loss and net loss per share if the company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the company's stock option plan for three-months ended July 31, 2005: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) July 31, 2005 - ----------------------------------------------------------------------------------------------------------- <S> <C> Net loss, as reported $ (3,941) Add: Total stock-based employee compensation expense included in net loss, net of tax 33 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax (107) - ----------------------------------------------------------------------------------------------------------- Pro forma net loss $ (4,015) - ----------------------------------------------------------------------------------------------------------- Net loss per share: Basic - as reported $ (0.34) Basic - pro forma (0.35) Diluted - as reported (0.34) Diluted - pro forma (0.35) - ----------------------------------------------------------------------------------------------------------- </TABLE> Under the company's stock option plans, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of grant. Options granted under these plans generally vest over four years and expire five to ten years after the date of grant. The fair value of each option award was estimated on the date of grant using a Black-Scholes option-pricing model. The fair value of stock options granted during the three-month period ended July 30, 2006 was $2.43 per share using the following assumptions: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- <S> <C> Risk-free interest rate 5.03% Dividend yield 0.00% Expected volatility 67.03% Expected term (in years) 1.6 - ----------------------------------------------------------------------------------------------------------- </TABLE> The assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. The risk-free interest rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield was calculated based on the company's annual dividend as of the option grant date. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on the company's common stock. The expected term of the options is the contractual term of the stock options and expected employee exercise and post-vesting employment termination trends. I-6
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The following table summarizes the stock options (vested and unvested) as of July 30, 2006 and option activity during the three-month period then ended: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Average Average Aggregate Exercise Contractual Intrinsic Shares Price Term Value - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Outstanding, April 30, 2006 993,875 $ 7.11 Granted 218,000 4.52 Expired (154,750) 5.85 Exercised (30,000) 4.10 $ 9,000 - ------------------------------------------------------------------------------------------------------------------------------- Outstanding, July 30, 2006 1,027,125 6.84 3.3 Years $ 712,485 - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> At July 30, 2006, there were 274,750 shares available for future grants under the company's incentive stock option plans and options to purchase 496,000 shares were exercisable which had a weighted average exercise price of $8.93 per share, an aggregate intrinsic value of $346,865 and a weighted average contractual term of 0.16 years. 3. Accounts Receivable A summary of accounts receivable follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ (dollars in thousands) July 30, 2006 April 30, 2006 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Customers $ 28,117 $ 30,924 Allowance for doubtful accounts (985) (1,049) Reserve for returns and allowances and discounts (1,088) (826) - ------------------------------------------------------------------------------------------------------------------ $ 26,044 $ 29,049 - ------------------------------------------------------------------------------------------------------------------ </TABLE> A summary of the activity in the allowance for doubtful accounts follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ Three months ended (dollars in thousands) July 30, 2006 July 31, 2005 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Beginning balance $ (1,049) $ (1,142) Recovery of bad debt expense 8 0 Net write-offs 56 22 - ------------------------------------------------------------------------------------------------------------------ Ending balance $ (985) $ (1,120) - ------------------------------------------------------------------------------------------------------------------ </TABLE> I-7
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) A summary of the activity in the allowance for returns and allowances and discounts accounts follows: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- Three months ended (dollars in thousands) July 30, 2006 July 31, 2005 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Beginning balance $ (826) $ (837) Provision for returns and allowances and discounts (701) (491) Discounts taken 439 487 - -------------------------------------------------------------------------------------------------------------------- Ending balance $ (1,088) $ (841) - -------------------------------------------------------------------------------------------------------------------- </TABLE> 4. Inventories Inventories are carried at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method. A summary of inventories follows: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands) July 30, 2006 April 30, 2006 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Raw materials $ 12,452 $ 13,561 Work-in-process 1,894 2,020 Finished goods 28,709 21,112 - -------------------------------------------------------------------------------------------------------------------- $ 43,055 $ 36,693 - -------------------------------------------------------------------------------------------------------------------- </TABLE> 5. Accounts Payable A summary of accounts payable follows: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands) July 30, 2006 April 30, 2006 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Accounts payable-trade $ 19,182 $ 18,386 Accounts payable-capital expenditures 2,065 2,449 - -------------------------------------------------------------------------------------------------------------------- $ 21,247 $ 20,835 - -------------------------------------------------------------------------------------------------------------------- </TABLE> 6. Accrued Expenses A summary of accrued expenses follows: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands) July 30, 2006 April 30, 2006 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Compensation, commissions and related benefits $ 4,252 $ 4,757 Interest 1,225 433 Accrued rebates 902 705 Other 2,751 1,950 - -------------------------------------------------------------------------------------------------------------------- $ 9,130 $ 7,845 - -------------------------------------------------------------------------------------------------------------------- </TABLE> I-8
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7. Long-Term Debt A summary of long-term debt follows: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------- (dollars in thousands) July 30, 2006 April 30, 2006 - ----------------------------------------------------------------------------------------------- <S> <C> <C> Unsecured term notes $ 42,440 $ 42,440 Real estate loan 4,193 4,242 Canadian government loans 707 1,040 - ----------------------------------------------------------------------------------------------- 47,340 47,722 Less current maturities (7,739) (8,060) - ----------------------------------------------------------------------------------------------- $ 39,601 $ 39,662 - ----------------------------------------------------------------------------------------------- </TABLE> Unsecured Term Notes The company's unsecured term notes have a fixed interest rate of 7.76% (payable semi-annually in March and September) and are payable over an average remaining term of three years beginning March 2007 through March 2010. The principal payments are required to be paid in annual installments over the next four years as follows: March 2007 - $7.5 million; March 2008 - $19.9 million; March 2009 - $7.5 million; and March 2010 - $7.5 million. Real Estate Loan The company's real estate loan is secured by a lien on the company's corporate headquarters office located in High Point, NC. This term loan bears interest at the one-month London Interbank Offered Rate plus an adjustable margin based on the company's debt/EBITDA ratio, as defined in the agreement and is payable in varying monthly installments through September 2010, with a final payment of $3.3 million in October 2010. Revolving Credit Agreement On July 20, 2006, the company entered into a Ninth Amendment to this credit agreement. This credit agreement provides for a revolving loan commitment of $8.0 million, including letters of credit up to $5.5 million. Borrowings under the credit facility bear interest at the one-month London Interbank Offered Rate plus an adjustable margin based on the company's debt/EBITDA ratio, as defined in the agreement. This agreement limits annual capital expenditures to $2.5 million for fiscal 2007, requires the company to maintain collected deposit balances of at least $2.0 million, and maintain certain other financial covenants as defined in the agreement. As of July 30, 2006, there were $4.0 million in outstanding letters of credit and no borrowings outstanding under the agreement. This agreement expires on August 31, 2007. I-9
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Canadian Government Loans In November 2005, the company entered into an agreement with the Canadian government to provide for a term loan in the amount of $680,000. The proceeds are to partially finance capital expenditures at the company's Rayonese facility located in Quebec, Canada. This loan is non-interest bearing and is payable in 48 equal monthly installments commencing December 1, 2009. In addition to the term loan entered into in November 2005, the company had an existing non-interest bearing term loan with the Canadian government which was paid in May 2006. Overall The company's loan agreements require that the company maintain compliance with certain financial ratios. At July 30, 2006, the company was in compliance with these financial covenants. The principal payment requirements of long-term debt during the next five years are: Year 1 - $7.7 million; Year 2 - $20.0 million; Year 3 - $7.8 million; Year 4 - $7.8 million; Year 5 - $3.5 million; and thereafter - $455,000. 8. Interest Rate Hedging In connection with the company's real estate loan, the company was required to have an agreement to hedge the interest rate risk exposure on the real estate loan. The company entered into a $2,170,000 notional principal interest rate swap, which represents 50% of the principal amount of the real estate loan, that effectively converted the floating rate LIBOR based payments to fixed payments at 4.99% plus the spread calculated under the real estate loan agreement. This agreement expires October 2010. The company accounts for the interest rate swap as a cash flow hedge whereby the fair value of this contract is reflected in other assets in the accompanying consolidated balance sheets with the offset recorded as accumulated other comprehensive income. The fair value of the interest rate swap at July 30, 2006 was $24,000, as determined by quoted market prices. 9. Cash Flow Information Payments for interest and income taxes follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------- Three months ended (dollars in thousands) July 30, 2006 July 31, 2005 - ------------------------------------------------------------------------------------------- <S> <C> <C> Interest $ 168 $ 5 Income tax payments 243 366 - ------------------------------------------------------------------------------------------- </TABLE> The company did not finance any of its capital expenditures for the three months ended July 30, 2006. The non-cash portion of capital expenditures representing vendor financing totaled $1,670,000 for the three months ended July 31, 2005. I-10
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. Restructuring and Asset Impairment Charges A summary of accrued restructuring follows: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------- (dollars in thousands) July 30, 2006 April 30, 2006 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> September 2005 Upholstery Fabrics $ 352 $ 439 August 2005 Upholstery Fabrics 228 134 April 2005 Upholstery Fabrics 946 1,000 October 2004 Upholstery Fabrics 46 64 Fiscal 2003 Culp Decorative Fabrics 2,173 2,412 Fiscal 2001 Culp Decorative Fabrics - 5 - ---------------------------------------------------------------------------------------------------- $ 3,745 $ 4,054 - ---------------------------------------------------------------------------------------------------- </TABLE> September 2005 Upholstery Fabrics During the first quarter of fiscal 2007, total restructuring and related charges incurred were $310,000 of which $340,000 related to operating costs associated with the closing of a plant facility, $169,000 related to asset movement costs, $26,000 related to employee termination benefits, $9,000 related to lease termination costs, and a credit of $234,000 for sale proceeds received on equipment with no carrying value. Of the total charge, $204,000 was recorded in restructuring expense, $340,000 was recorded in cost of sales, and a credit of $234,000 was recorded in other income in the 2007 Consolidated Statement of Net Income. The following summarizes the fiscal 2007 activity in the restructuring accrual (dollars in thousands): <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- Employee Lease Termination Termination and Benefits Other Exit Costs Total - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance, April 30, 2006 $ 439 - 439 Adjustments in fiscal 2007 26 - 26 Additions in fiscal 2007 - 9 9 Paid in fiscal 2007 (122) - (122) - ---------------------------------------------------------------------------------------------------------- Balance, July 30, 2006 $ 343 9 352 - ---------------------------------------------------------------------------------------------------------- </TABLE> As of July 30, 2006 and April 30, 2006, assets classified as held for sale consisted of a building with a carrying value of $641,000. August 2005 Upholstery Fabrics During the first quarter of fiscal 2007, total restructuring and related charges incurred were $157,000 of which $128,000 related to employee termination benefits primarily from headcount reductions within the upholstery fabrics segment, $46,000 related to asset movement costs, $27,000 related to operating costs associated with the closing of a plant facility, and a credit of $44,000 for sale proceeds received on equipment with no carrying value. Of the total charge, $174,000 was recorded in restructuring expense, $27,000 was recorded in cost of sales, and a credit of $44,000 was recorded in other income in the 2007 Consolidated Statement of Net Income. I-11
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The following summarizes the fiscal 2007 activity in the restructuring accrual (dollars in thousands): <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------- Employee Lease Termination Termination and Benefits Other Exit Costs Total - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance, April 30, 2006 $ 127 7 134 Adjustments in fiscal 2007 128 - 128 Paid in fiscal 2007 (33) (1) (34) - ----------------------------------------------------------------------------------------------- Balance, July 30, 2006 $ 222 6 228 - ----------------------------------------------------------------------------------------------- </TABLE> As of July 30, 2006 and April 30, 2006, assets classified as held for sale consisted of equipment with a carrying value of $700,000. As of April 30, 2006, assets classified as held for sale also included a building with a carrying value of $475,000, which was sold in May 2006. April 2005 Upholstery Fabrics During the first quarter of fiscal 2007, the total restructuring and related charges incurred were $701,000, of which approximately $238,000 related to inventory markdowns, $169,000 related to asset movement costs, $116,000 for write-downs of equipment, $102,000 related to operating costs associated with the closing of a plant facility, $94,000 related to employee termination benefits primarily from headcount reductions, $8,000 for lease termination costs, and a credit of $26,000 for sale proceeds received on equipment with no carrying value. Of this total charge, $387,000 was recorded in restructuring expense, $340,000 was recorded in cost of sales, and a credit of $26,000 was recorded in other income in the 2007 Consolidated Statement of Net Income. The following summarizes the fiscal 2007 activity in the restructuring accrual (dollars in thousands): <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------ Employee Lease Termination Termination and Benefits Other Exit Costs Total - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Balance, April 30, 2006 $ 799 201 1,000 Adjustments in fiscal 2007 94 8 102 Paid in fiscal 2007 (99) (57) (156) - ------------------------------------------------------------------------------------------------ Balance, July 30, 2006 $ 794 152 946 - ------------------------------------------------------------------------------------------------ </TABLE> As of July 30, 2006 and April 30, 2006, assets classified as held for sale consisted of equipment with a carrying value of approximately $1.2 million and $1.3 million, respectively. I-12
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) October 2004 Upholstery Fabrics During the first quarter of fiscal 2007, as a result of management's continual evaluation of the restructuring accrual, the reserve was decreased by $8,000 to reflect current estimates of future health care claims. This $8,000 decrease in the reserve was recorded in restructuring expense in the 2007 Consolidated Statement of Net Income. The following summarizes the fiscal 2007 activity in the restructuring accrual (dollars in thousands): <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------- Employee Lease Termination Termination and Benefits Other Exit Costs Total - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance, April 30, 2006 $ 64 - 64 Adjustments in fiscal 2007 (8) - (8) Paid in fiscal 2007 (10) - (10) - --------------------------------------------------------------------------------------------- Balance, July 30, 2006 $ 46 - 46 - --------------------------------------------------------------------------------------------- </TABLE> As of July 30, 2006 and April 30, 2006, there were no assets classified as held for sale. Fiscal 2003 Culp Decorative Fabrics Restructuring During the first quarter of fiscal 2007, as a result of management's continual evaluation of the restructuring accrual, the reserve was decreased by approximately $22,000 to reflect current estimates of sub-lease income and other exit costs. This $22,000 decrease in the reserve was recorded in restructuring expense in the 2007 Consolidated Statement of Net Income. Additionally, the company recorded a restructuring related charge of $12,000 for other operating costs associated with a closed plant facility. This $12,000 restructuring related charge was recorded in cost of sales in the 2007 Consolidated Statement of Net Income. The following summarizes the fiscal 2007 activity in the restructuring accrual (dollars in thousands): <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------- Employee Lease Termination Termination and Benefits Other Exit Costs Total - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance, April 30, 2006 $ 88 2,324 2,412 Adjustments in fiscal 2007 - (22) (22) Paid in fiscal 2007 (11) (206) (217) - ---------------------------------------------------------------------------------------------------- Balance, July 30, 2006 $ 77 2,096 2,173 - ---------------------------------------------------------------------------------------------------- </TABLE> As of July 30, 2006 and April 30, 2006, there were no assets classified as held for sale. I-13
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Fiscal 2001 Culp Decorative Fabrics Restructuring During the first quarter of fiscal 2007, as a result of management's continual evaluation of the restructuring accrual, the reserve was decreased by approximately $5,000 to reflect current estimates of future health care claims. This $5,000 decrease in the reserve was recorded in restructuring expense in the 2007 Consolidated Statement of Net Income. Additionally, the company recorded a restructuring related charge of $26,000 for other operating costs associated with a closed plant facility. This $26,000 restructuring related charge was recorded in cost of sales in the 2007 Consolidated Statement of Net Income. The following summarizes the fiscal 2007 activity in the restructuring accrual (dollars in thousands): <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------- Employee Lease Termination Termination and Benefits Other Exit Costs Total - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance, April 30, 2006 $ 5 - 5 Adjustments in fiscal 2007 (5) - (5) Paid in fiscal 2007 - - - - ----------------------------------------------------------------------------------------------- Balance, July 30, 2006 $ - - - - ----------------------------------------------------------------------------------------------- </TABLE> As of July 30, 2006 and April 30, 2006, there were no assets classified as held for sale. 11. Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income (loss) per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock options calculated using the treasury stock method. Weighted average shares used in the computation of basic and diluted net income (loss) per share follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Three months ended (amounts in thousands) July 30, 2006 July 31, 2005 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Weighted average common shares outstanding, basic 11,672 11,551 Effect of dilutive stock options 98 - - ------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding, diluted 11,770 11,551 - ------------------------------------------------------------------------------------------------------------------- </TABLE> Options to purchase 466,125 and 515,375 shares of common stock were not included in the computation of diluted net income (loss) per share for the three months ended July 30, 2006 and July 31, 2005, respectively, because the exercise price of the options was greater than the average market price of the common shares. Options to purchase 36,138 shares of common stock were not included in the computation of diluted net loss per share for the three months ended July 31, 2005, because the company incurred a net loss for the period. I-14
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 12. Segment Information The company's operations are classified into two segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics to bedding manufacturers. The upholstery fabrics segment manufactures, sources, and sells fabrics primarily to residential and commercial (contract) furniture manufacturers. Financial information for the company's operating segments as follows: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------- Three months ended (dollars in thousands) July 30, 2006 July 31, 2005 - ---------------------------------------------------------------------------------------------------------------------- Net sales: <S> <C> <C> Mattress Fabrics $ 21,845 $ 22,915 Upholstery Fabrics 40,740 39,425 - ---------------------------------------------------------------------------------------------------------------------- $ 62,585 $ 62,340 - ---------------------------------------------------------------------------------------------------------------------- Gross profit: Mattress Fabrics $ 3,521 $ 3,095 Upholstery Fabrics 5,285 3,955 - ---------------------------------------------------------------------------------------------------------------------- Total segment gross profit 8,806 7,050 Restructuring related charges (746) (1) (495) (3) - ---------------------------------------------------------------------------------------------------------------------- $ 8,060 $ 6,555 - ---------------------------------------------------------------------------------------------------------------------- Selling, general, and administrative expenses: Mattress Fabrics $ 1,663 $ 1,737 Upholstery Fabrics 3,710 4,335 - ---------------------------------------------------------------------------------------------------------------------- Total segment selling, general, and administrative expenses 5,373 6,072 Unallocated corporate expenses 1,202 762 Restructuring related charges - 3,022 (4) - ---------------------------------------------------------------------------------------------------------------------- $ 6,575 $ 9,856 - ---------------------------------------------------------------------------------------------------------------------- Income (loss) from operations: Mattress Fabrics $ 1,858 $ 1,358 Upholstery Fabrics 1,575 (380) - ---------------------------------------------------------------------------------------------------------------------- Total segment income from operations 3,433 978 Unallocated corporate expenses (1,202) (762) Restructuring and related charges (1,476) (2) (5,343) (5) - ---------------------------------------------------------------------------------------------------------------------- $ 755 $ (5,127) - ---------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The $746,000 represents restructuring related charges of $507,000 for other operating costs associated with the closing of or closed plant facilities and $239,000 for inventory markdowns related to the reduction of SKUs. These charges relate to the Upholstery Fabrics segment. I-15
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (2) The $1.5 million represents restructuring and related charges of $507,000 for other operating costs associated with the closing of or closed plant facilities, $385,000 for asset movement costs, $239,000 for inventory markdowns related to the reduction of SKUs, $235,000 for termination benefits, $116,000 for write-downs of equipment, and a credit of $6,000 for lease termination costs. Of this total charge, $746,000 and $730,000 are included in cost of sales and restructuring expense, respectively. These charges relate to the Upholstery Fabrics segment. (3) The $495,000 represents restructuring related charges for accelerated depreciation. These charges primarily relate to the Upholstery Fabrics segment. (4) The $3.0 million represents restructuring related charges for accelerated depreciation. These charges primarily relate to the Upholstery Fabrics segment. (5) The $5.3 million represents $3.5 million for accelerated depreciation, $1.2 million for asset movement costs, $754,000 for write-downs of equipment, $47,000 for lease termination costs, and a restructuring credit of $142,000 for the reversal of accrued termination and benefit expenses. Of the total charge, $495,000, $3.0 million, and $1.8 million are included in the cost of sales, selling, general, and administrative expenses, and restructuring expense, respectively. These charges primarily related to the Upholstery Fabrics segment. Balance sheet information for the company's operating segments follow: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) July 30, 2006 April 30, 2006 - -------------------------------------------------------------------------------------------------------------- Segment assets: Mattress Fabrics <S> <C> <C> Current assets (8) $ 21,061 $ 21,179 Property, plant and equipment (6) 24,319 25,357 - -------------------------------------------------------------------------------------------------------------- Total mattress fabrics assets 45,380 46,536 - -------------------------------------------------------------------------------------------------------------- Upholstery Fabrics Current assets (8) 48,038 44,563 Assets held for sale 2,531 3,111 Property, plant and equipment (7) 18,468 19,229 - -------------------------------------------------------------------------------------------------------------- Total upholstery fabrics assets 69,037 66,903 - -------------------------------------------------------------------------------------------------------------- Total segment assets 114,417 113,439 Non-segment assets: Cash and cash equivalents 8,387 9,714 Deferred income taxes 28,633 27,296 Other current assets 2,789 1,287 Property, plant & equipment 48 53 Goodwill 4,114 4,114 Other assets 1,542 1,564 - -------------------------------------------------------------------------------------------------------------- Total assets $ 159,930 $ 157,467 - -------------------------------------------------------------------------------------------------------------- </TABLE> I-16
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Three months ended (dollars in thousands) July 30, 2006 July 31, 2005 - ------------------------------------------------------------------------------------------------------------------- Capital expenditures: <S> <C> <C> Mattress Fabrics $ 26 $ 2,870 Upholstery Fabrics 654 1,174 - ------------------------------------------------------------------------------------------------------------------- $ 680 $ 4,044 - ------------------------------------------------------------------------------------------------------------------- Depreciation expense: Mattress Fabrics $ 942 $ 857 Upholstery Fabrics 760 1,798 - ------------------------------------------------------------------------------------------------------------------- Total segment depreciation expense 1,702 2,655 Accelerated depreciation - 3,517 - ------------------------------------------------------------------------------------------------------------------- $ 1,702 $ 6,172 - ------------------------------------------------------------------------------------------------------------------- </TABLE> (6) Included in property, plant, and equipment are assets located in the U.S. totaling $12.6 million and $12.9 million at July 30, 2006 and April 30, 2006, respectively. (7) Included in property, plant, and equipment are assets located in the U.S. totaling $12.5 million and $13.8 million at July 30, 2006 and April 30, 2006, respectively. Included in this U.S. property, plant, and equipment are various other corporate allocations totaling $4.0 million and $4.1 million at July 30, 2006 and April 30, 2006, respectively. (8) Current assets represent accounts receivable and inventory for the respective segment. I-17
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION This report and the exhibits attached hereto contain statements that may be deemed "forward-looking statements" within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties. Further, forward looking statements are intended to speak only as of the date on which they are made. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as "expect," "believe," "estimate," "plan" and "project" and their derivatives, and include but are not limited to statements about expectations for the company's future operations or success, sales, gross profit margins, operating income, SG&A or other expenses, and earnings, as well as any statements regarding future economic or industry trends or future developments. Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on the company's business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect the company adversely. In addition, changes in consumer preferences for various categories of furniture coverings, as well as changes in costs to produce such products (including import duties and quotas or other import costs) can have significant effect on demand for the company's products. Also, changes in the value of the U.S. dollar versus other currencies can affect the company's financial results because a significant portion of the company's operations are located outside the United States. Further, economic and political instability in international areas could affect the company's operations or sources of goods in those areas, as well as demand for the company's products in international markets. Finally, unanticipated delays or costs in executing restructuring actions could cause the cumulative effect of restructuring actions to fail to meet the objectives set forth by management. Further information about these factors, as well as other factors that could affect the company's future operations or financial results and the matters discussed in forward-looking statements are included in Item 1A "Risk Factors" section in the company's Form 10-K filed with the Securities and Exchange Commission on July 26, 2006 for the fiscal year ended April 30, 2006. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes and other exhibits included elsewhere in this report. OVERVIEW Culp, Inc. (or the "company") has two operating segments - mattress fabrics and upholstery fabrics. The company manufactures, sources and markets fabrics that are used primarily in the production of bedding products and residential and commercial upholstered furniture, including mattresses, box springs, mattress sets, sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and office seating. The company primarily markets fabrics that have broad appeal in the "good" and "better" priced categories of furniture and bedding. Management believes that Culp is the largest producer of mattress fabrics in North America, as measured by total sales, and one of the three largest marketers of upholstery fabrics for furniture in North America, again measured by total sales. I-18
The company's executive offices are located in High Point, North Carolina. The company was organized as a North Carolina corporation in 1972 and made its initial public offering in 1983. Since 1997, the company has been listed on the New York Stock Exchange and traded under the symbol "CFI." The company's fiscal year is the 52 or 53 week period ending on the Sunday closet to April 30. The first quarter of fiscal 2007 and 2006 included 13 weeks. The following tables set forth the company's net sales, gross profit, selling, general and administrative expenses and operating income (loss) by segment for the three months ended July 30, 2006 and July 31, 2005. I-19
CULP, INC. SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT FOR THE THREE MONTHS ENDED JULY 30, 2006 AND JULY 31, 2005 (Amounts in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED (UNAUDITED) ---------------------------------------------------------------------------- Amounts Percent of Total Sales ------------------------------ ------------------------------ July 30, July 31, % Over July 30, July 31, Net Sales by Segment 2006 2005 (Under) 2006 2005 - ------------------------------------------------- ------------- -------------- ----------- -------------- ------------- <S> <C> <C> <C> <C> <C> Mattress Fabrics $ 21,845 22,915 (4.7)% 34.9 % 36.8 % Upholstery Fabrics 40,740 39,425 3.3 % 65.1 % 63.2 % ------------- -------------- ------------------------------------------- Net Sales $ 62,585 62,340 0.4 % 100.0 % 100.0 % ============= ============== =========================================== Gross Profit by Segment Gross Profit Margin - ------------------------------------------------- ------------------------------ Mattress Fabrics $ 3,521 3,095 13.8 % 16.1 % 13.5 % Upholstery Fabrics 5,285 3,955 33.6 % 13.0 % 10.0 % ------------- -------------- ------------------------------------------- Subtotal 8,806 7,050 24.9 % 14.1 % 11.3 % Restructuring related charges (746)(1) (495)(3) 50.7 % (1.2)% (0.8)% ------------- -------------- ------------------------------------------- Gross Profit $ 8,060 6,555 23.0 % 12.9 % 10.5 % ============= ============== =========================================== Sales, General and Administrative expenses by Segment Percent of Sales - -------------------------------------------------- ------------------------------ Mattress Fabrics $ 1,663 1,737 (4.3)% 7.6 % 7.6 % Upholstery Fabrics 3,710 4,335 (14.4)% 9.1 % 11.0 % Unallocated Corporate expenses 1,202 762 57.7 % 1.9 % 1.2 % ------------- -------------- ------------------------------------------- Subtotal 6,575 6,834 (3.8)% 10.5 % 11.0 % Restructuring related charges - 3,022 (4) (100.0)% 0.0 % 4.8 % ------------- -------------- ------------------------------------------- Selling, General and Administrative expenses $ 6,575 9,856 (33.3)% 10.5 % 15.8 % ============= ============== =========================================== Operating income (loss) by Segment Operating Income (Loss) Margin - -------------------------------------------------- ------------------------------ Mattress Fabrics $ 1,858 1,358 36.8 % 8.5 % 5.9 % Upholstery Fabrics 1,575 (380) 514.5 % 3.9 % (1.0)% Unallocated corporate expenses (1,202) (762) (57.7)% (1.9)% (1.2)% ------------- -------------- ------------------------------------------- Subtotal 2,231 216 932.9 % 3.6 % 0.3 % Restructuring expense and restructuring related charges (1,476)(2) (5,343)(5) (72.4)% (2.4)% (8.6)% ------------- -------------- ------------------------------------------- Operating income (loss) $ 755 (5,127) 114.7 % 1.2 % (8.2)% ============= ============== =========== ============= ============= Depreciation by Segment - ------------------------------------------------- Mattress Fabrics $ 942 857 9.9 % Upholstery Fabrics 760 1,798 (57.7)% ------------- -------------- ------------ Subtotal 1,702 2,655 (35.9)% Accelerated depreciation - 3,517 (100.0)% ------------- -------------- ------------ Total Depreciation $ 1,702 6,172 (72.4)% ============= ============== ============= </TABLE> (1) The $746,000 represents restructuring related charges of $507,000 for other operating costs associated with the closing of or closed plant facilities and $239,000 for inventory markdowns. (2) The $1.5 million represents $507,000 for other operating costs associated with the closing of or closed plant facilities, $385,000 for asset movement costs, $239,000 for inventory markdowns, $235,000 for termination benefits, $116,000 for write-downs of equipment, and a credit of $6,000 for lease termination costs. Of this total charge, $746,000 and $730,000 are included in cost of sales and restructuring expense, respectively. (3) The $495,000 represents restructuring related charges for accelerated depreciation. (4) The $3.0 million represents restructuring related charges for accelerated depreciation. (5) The $5.3 million represents $3.5 million for accelerated depreciation, $1.2 million for asset movement costs, $754,000 for write-downs of equipment, $47,000 for lease termination costs, and a restructuring credit of $142,000 for the reversal of accrued termination benefits. Of this total charge, $495,000, $3.0 million, and $1.8 million are included in cost of sales, selling, general, and administrative expenses, and restructuring expense, respectively. I-20
THREE MONTHS ENDED JULY 30, 2006 COMPARED WITH THREE MONTHS ENDED JULY 31, 2005 For the three months ended July 30, 2006, net sales were $62.6 million compared to $62.3 million for the first quarter of fiscal 2006. The company reported net income of $132,000, or $0.01 per diluted share for the first quarter of fiscal 2007, which included restructuring and related pre-tax charges of $1.2 million. The company reported a net loss of $3.9 million, or $0.34 per share diluted, in the first quarter of fiscal 2006, which included restructuring and related pre-tax charges of $5.3 million. RESTRUCTURING AND RELATED CHARGES During the first quarter of fiscal 2007, total restructuring and related charges incurred were $1.2 million, of which $507,000 related to other operating costs associated with the closing of or closed plant facilities, $385,000 for asset movement costs, $239,000 for inventory markdowns, $235,000 for termination benefits, $116,000 for write-downs of equipment and a building, a credit of $6,000 for lease termination costs, and a credit of $307,000 for sale proceeds received on equipment with no carrying value. Of this total charge, $730,000 was recorded in restructuring expense, $746,000 was recorded in cost of sales, and a credit of $307,000 was recorded in other income in the 2007 Consolidated Statement of Net Income. MATTRESS FABRICS SEGMENT NET SALES -- Mattress fabric (known as mattress ticking) net sales for the first quarter of fiscal 2007 were $21.8 million compared to $22.9 million for the first quarter of fiscal 2006, a 4.7% decline. On a unit volume basis, total yards sold decreased by 5.6% compared with the first quarter of fiscal 2006. This trend reflects a decline in demand for printed ticking, a less popular category, and an increase in demand for knitted ticking, reflecting changing customer demand. Although prices on the key product lines have trended lower, the average selling price of $2.30 per yard for mattress ticking for the first quarter of fiscal 2007 was slightly higher than the $2.28 average selling price of the first quarter of fiscal 2006, due to the shift in product mix to increased sales of substantially higher priced knitted ticking. OPERATING INCOME -- For the first quarter of fiscal 2007, the mattress fabrics segment reported operating income of $1.9 million, or 8.5% of net sales, compared to $1.4 million, or 5.9% of net sales, for the first quarter of fiscal 2006. Operating margins improved in the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006 due to productivity gains from the $10.0 million capital project implemented over the past 18 months. We also continue to see higher sales and profits in knitted ticking, and we expect this product line to represent a higher percentage of our mattress ticking business in fiscal 2007. We are experiencing a growing trend with our customers to use more knits on the top of the mattress and woven jacquards on the sides. SEGMENT ASSETS -- Segment assets consist of accounts receivable, inventory, and property, plant, and equipment. As of July 30, 2006, accounts receivable and inventory totaled $21.1 million compared to $21.2 million at April 30, 2006. Also as of July 30, 2006, property, plant and equipment totaled $24.3 million compared to $25.4 million at April 30, 2006. Included in property, plant, and equipment are assets located in the U.S. totaling $12.6 million and $12.9 million at July 30, 2006 and April 30, 2006, respectively. UPHOLSTERY FABRICS SEGMENT NET SALES -- Upholstery fabric net sales for the first quarter of fiscal 2007 were $40.7 million, a 3.3% improvement compared with $39.4 million in the first quarter of fiscal 2006. Total yards sold increased by 6.3%, while average selling prices were 3.9% lower compared to the first quarter of fiscal 2006. Sales of upholstery fabrics reflect significantly higher sales of non-U.S. produced fabrics, but continued very soft demand industry wide for U.S. produced fabrics, driven by consumer preference for leather and suede furniture and other imported fabrics, including an increasing amount of cut and sewn kits. Sales of non-U.S. produced fabrics were $23.5 million in the first quarter of fiscal 2007, a 102.5% increase in comparison to the first quarter of fiscal 2006. Sales of U.S. produced fabrics were $17.2 million, a decrease of 38.1% from the first quarter of fiscal 2006. I-21
OPERATING INCOME (LOSS) - Operating income for the first quarter of fiscal 2007 was $1.6 million, or 3.9% of net sales, compared with an operating loss of $380,000 for the first quarter of fiscal 2006. These improved results were driven by the sales of non-U.S. produced fabrics, including the company's China platform. In addition, the improved operating margins reflect significantly lower U.S. manufacturing fixed costs (down 59% year over year) and variances, and lower selling, general, and administrative expenses (down 14% year over year) as a result of the company's aggressive steps to reduce manufacturing complexities and improve the cost structure of its U.S. upholstery fabric operations. NON-U.S. PRODUCED SALES - Net sales of upholstery fabrics produced outside the company's U.S. manufacturing operations accounted for 58% of upholstery fabric sales for the first quarter of 2007, as compared to 30% of upholstery fabric sales for the first quarter of fiscal 2006. Sales of non-U.S. produced upholstery fabrics surpassed sales of U.S. produced upholstery fabrics for the first time. As the company's U.S. customers have continued to move an increasing amount of their fabric purchases to Asia, the company has moved with them and responded with an operation designed to meet their needs. A key component of this platform is the fabric finishing and inspection facility located near Shanghai. A key element of the company's strategy is to control the value-added finishing and inspection process, thereby assuring customers that the company's fabrics will meet or exceed U.S. quality standards. U.S .PRODUCED SALES - As previously discussed, management has continued to take aggressive actions over the past year to reduce manufacturing complexities and improve the cost structure of its U.S. upholstery fabric operations. As a result of these activities, the company now has three U.S. manufacturing facilities operating in the upholstery fabrics segment - one for velvet fabrics, one for decorative fabrics, and one for specialty yarns. As of July 30, 2006, the carrying value of the company's U.S. based upholstery fabrics fixed assets is $8.5 million (excludes various corporate allocations) compared with approximately $32 million at the end of fiscal 2005. As of July 30, 2006, the company had assets held for sale with a carrying value of $2.5 million compared to $3.1 million as of April 30, 2006. The company received sale proceeds of approximately $1.3 million on assets held for sale in the first quarter of fiscal 2007. The company expects the majority of assets held for sale as of July 30, 2006 to be sold in the next twelve months. While management believes it is important to produce some level of upholstery fabric in the U.S. to support its customers' domestic fabric requirements, management remains committed to taking additional steps if necessary to address the profitability of the company's U.S. upholstery fabric operations. The company could experience additional write-downs of its property, plant, and equipment in this business if sales continue to decline and further restructuring actions become necessary. SEGMENT ASSETS -- Segment assets consist of accounts receivable, inventory, assets held for sale, and property, plant, and equipment. As of July 30, 2006, accounts receivable and inventory totaled $48.0 million compared to $44.6 million at April 30, 2006. As of July 30, 2006, assets held for sale totaled $2.5 million compared to $3.1 million as of April 30, 2006. As of July 30, 2006, property, plant, and equipment totaled $18.5 million compared to $19.2 million at April 30, 2006. Included in property, plant, and equipment are assets located in the U.S. totaling $12.5 million and $13.8 million at July 30, 2006, and April 30, 2006, respectively. Included in this U.S. property, plant, and equipment are various other corporate allocations totaling $4.0 million and $4.1 million at July 30, 2006, and April 30, 2006, respectively. I-22
OTHER (INCOME) EXPENSE CATEGORIES SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general, and administrative expenses of $6.6 million for the first quarter of fiscal 2007 decreased approximately $3.3 million, from $9.9 million in the first quarter of fiscal 2006. Included in the $9.9 million for the first quarter of fiscal 2006 was $3.0 million in accelerated depreciation associated with the company's design and distribution centers sold in June 2005. The company adopted SFAS No. 123R as of the beginning of the current year, which requires all share-based payments to be recognized as expense over the requisite service period based upon their values as of the grant dates. Under the provisions of SFAS No. 123R, total stock-based compensation expense was $132,000. The company recorded $53,000 of stock-based compensation expense for stock options accounted for under the provisions of APB Opinion No. 25, for the three-month period July 31, 2005. INTEREST EXPENSE (INCOME) -- Interest expense for the first quarter of fiscal 2007 was $950,000 compared to $948,000 for the first quarter of fiscal 2006. Interest income was $46,000 compared to $16,000 for the first quarter of fiscal 2006, reflecting higher invested balances. OTHER (INCOME) EXPENSE - Other income for the first quarter of fiscal 2007 was $278,000 compared to other expense of $133,000 for the first quarter of fiscal 2006. The change primarily reflects sale proceeds of $307,000 received on equipment with no carrying value. INCOME TAXES -- The effective tax rate (taxes as a percentage of income (loss) before income taxes) for the first quarter of fiscal 2007 was an income tax benefit of 2.3% compared with 36.4% for the first quarter of fiscal 2006. The change in the effective income tax rate reflects losses from the company's U.S. operations combined with lower income tax rates on income from foreign sources. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY -- The company's sources of liquidity include cash and cash equivalents, cash flow from operations and amounts available under its revolving credit line. These sources have been adequate for day-to-day operations and capital expenditures. Cash and cash equivalents as of July 30, 2006 decreased to $8.4 million from $9.7 million as of April 30, 2006, primarily reflecting net cash used in operations of $1.6 million, capital expenditures of $637,000 primarily related to our China operations, $428,000 for payments on vendor-financed capital expenditures, $382,000 for payments on long-term debt, offset somewhat by proceeds from common stock of $125,000 in connection with stock option exercises and sales proceeds of $1.6 million from the sale of a building and equipment resulting from the company's restructuring activities. WORKING CAPITAL -- Accounts receivable as of July 30, 2006 increased 13.1% in comparison to July 31, 2005. Days sales outstanding totaled 35 days at July 30, 2006 compared with 31 days at July 31, 2005. Inventories at the close of the first quarter decreased 17.4% in comparison to July 31, 2005. However, inventories increased by 17.3% in comparison to April 30, 2006 due primarily to the growth in demand for non-US produced fabric. Inventory turns for the first quarter were 5.5 versus 4.3 for the year-earlier period. Operating working capital (comprised of accounts receivable and inventories, less trade accounts payable) was $47.9 million at July 30, 2006, down from $56.6 million at July 31, 2005. I-23
FINANCING ARRANGEMENTS UNSECURED TERM NOTES The company's unsecured term notes have a fixed interest rate of 7.76% (payable semi-annually in March and September) and are payable over an average remaining term of three years beginning March 2007 through March 2010. The principal payments are required to be paid in annual installments over the next four years as follows: March 2007 - $7.5 million; March 2008 - $19.9 million; March 2009 - $7.5 million; and March 2010 - $7.5 million. REAL ESTATE LOAN The company's real estate loan is secured by a lien on the company's corporate headquarters office located in High Point, NC. This term loan bears interest at the one-month London Interbank Offered Rate plus an adjustable margin based on the company's debt/EBITDA ratio, as defined in the agreement, and is payable in varying monthly installments through September 2010, with a final payment of $3.3 million in October 2010. REVOLVING CREDIT AGREEMENT On July 20, 2006, the company entered into a Ninth Amendment to this credit agreement. This credit agreement provides for a revolving loan commitment of $8.0 million, including letters of credit up to $5.5 million. Borrowings under the credit facility bear interest at the one-month London Interbank Offered Rate plus an adjustable margin based on the company's debt/EBITDA ratio, as defined in the agreement. This agreement limits annual capital expenditures to $2.5 million for fiscal 2007, requires the company to maintain collected deposit balances of at least $2.0 million, and maintain certain other financial covenants as defined in the agreement. As of July 30, 2006, there were $4.0 million in outstanding letters of credit and no borrowings outstanding under the agreement. This agreement expires on August 31, 2007. CANADIAN GOVERNMENT LOANS In November 2005, the company entered into an agreement with the Canadian government to provide for a term loan in the amount of $680,000. The proceeds are to partially finance capital expenditures at the company's Rayonese facility located in Quebec, Canada. This loan is non-interest bearing and is payable in 48 equal monthly installments commencing December 1, 2009. In addition to the term loan entered into in November 2005, the company had an existing non-interest bearing term loan with the Canadian government which was paid in May 2006. OVERALL The company's loan agreements require that the company maintain compliance with certain financial ratios. At July 30, 2006, the company was in compliance with these financial covenants. The principal payment requirements of long-term debt during the next five years are: Year 1 - $7.7 million; Year 2 - $20.0 million; Year 3 - $7.8 million; Year 4 - $7.8 million; Year 5 - $3.5 million; and thereafter - $455,000. I-24
CAPITAL EXPENDITURES - Cash expenditures for capital spending in the first quarter of fiscal 2007 were $637,000, primarily for our China operations. The company's capital budget for fiscal 2007 is $2.0 million. Depreciation for the first quarter of fiscal 2007 was $1.7 million and is estimated to be $7.0 million for fiscal 2007. The company expects that the availability of funds under the revolving credit line and cash flow from operations will be sufficient to fund its planned capital needs. LIQUIDITY REQUIREMENTS -- As indicated earlier, the company's sources of liquidity include cash and cash equivalents, cash flow from operations and amounts available under its revolving credit line. The company believes its sources of liquidity continue to be adequate to meet its current operating needs. In addition, the company is taking further steps to support its liquidity, including ongoing efforts to reduce inventories and operating expenses. However, the company's cash position may be adversely affected by factors beyond its control, such as weakening industry demand, delays in receipt of payment on accounts receivable and the availability of trade credit. CRITICAL ACCOUNTING POLICIES AND RECENT ACCOUNTING DEVELOPMENTS U.S. generally accepted accounting principles require the company to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Some of these estimates require difficult, subjective and/or complex judgments about matters that are inherently uncertain, and as a result actual results could differ significantly from those estimates. Due to the estimation processes involved, management considers the following summarized accounting policies and their application to be critical to understanding the company's business operations, financial condition and results of operations. ACCOUNTS RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS. Substantially all of the company's accounts receivable are due from residential and commercial furniture and bedding manufacturers. Ownership of these manufacturers is increasingly concentrated and certain bedding manufacturers have a high degree of leverage. As of July 30, 2006, accounts receivable related to the upholstery fabrics segment totaled approximately $18.0 million, and approximately $8.0 million related to the mattress fabrics segment. Additionally, as of July 30, 2006, the aggregate accounts receivable balance of the company's ten largest customers was $10.2 million, or 39% of trade accounts receivable. The company continuously performs credit evaluations of its customers, considering numerous inputs including customers' financial position, past payment history, cash flows and management capability; historical loss experience; and economic conditions and prospects. Once evaluated, each customer is assigned a credit grade. Credit grades are adjusted as warranted. Significant management judgment and estimates must be used in connection with establishing the reserve for allowance for doubtful accounts. While management believes that adequate allowances for doubtful accounts have been provided in the consolidated financial statements, it is possible that the company could experience additional unexpected credit losses. INVENTORY VALUATION. The company operates as a "make-to-order" and "make-to-stock" business. Although management closely monitors demand in each product area to decide which patterns and styles to hold in inventory, the increasing availability of low cost imports and the gradual shifts in consumer preferences expose the company to write-downs of inventory. Management continually examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value. Experience has shown that the most significant indicator of the need for inventory write-downs is the age of the inventory. As a result, the company provides inventory valuation write-downs based upon set percentages for inventory aging categories, generally using six, nine, twelve and fifteen month categories. While management believes that adequate write-downs for excess and obsolete inventory have been made in the consolidated financial statements, significant unanticipated changes in demand or changes in consumer tastes and preferences could result in additional excess and obsolete inventory in the future. LONG-LIVED ASSETS. The company follows the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes an impairment accounting model for long-lived assets to be held and used, disposed of by sale, or disposed of by abandonment or other means. Management reviews long-lived assets, which consists of property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered. During the first quarter of fiscal 2007, no events or changes in circumstances occurred that would require the company to test for impairment. Unforeseen events and changes in circumstances and market conditions could negatively affect the value of assets and result in an impairment charge. I-25
The determination of future operating cash flows involves considerable estimation and judgment about future market conditions, future sales and profitability, and future asset utilization. Although the company believes it bases its impairment testing as required by SFAS No. 144 on reasonable estimates and assumptions, the use of different estimates and assumptions, or a decision to dispose of substantial portions of these assets, could result in materially different results. GOODWILL. As of July 30, 2006, the company's remaining $4.1 million of goodwill relates to the mattress fabrics segment. The determination of fair value involves considerable estimation and judgment. In particular, determining the fair value of a business unit involves, among other things, developing forecasts of future cash flows and appropriate discount rates. During the first quarter of fiscal 2007, no events or changes in circumstances occurred that would require the company to test for impairment. RESTRUCTURING CHARGES. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS 146, a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for certain employee termination benefits that qualify under SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The U.S. upholstery fabric industry continues to be under significant pressure from a variety of external forces, such as the current consumer preference for leather and suede furniture and the growing competition from imported fabrics and cut and sewn kits, primarily from China. In an effort to reduce operating expenses and scale U.S. productive capacity in line with demand, the company has undertaken restructuring initiatives during the past several years. These restructuring initiatives have resulted in restructuring charges related to the remaining lease costs of the closed facilities, the write-down of property, plant and equipment, workforce reduction and elimination of facilities. Severance and related charges are accrued at the date the restructuring was approved by the board of directors based on an estimate of amounts that will be paid to affected employees, in accordance with SFAS No. 112. Under SFAS No. 144, asset impairment charges related to the consolidation or closure of manufacturing facilities are based on an estimate of expected sales prices for the real estate and equipment. Other exit costs, which principally consist of charges for lease termination and losses from termination of existing contracts, equipment relocation costs and inventory markdowns that are related to the restructuring are accounted for in accordance with SFAS No. 146. I-26
The company reassesses the individual accrual requirements at the end of each reporting period. If circumstances change, causing current estimates to differ from original estimates, adjustments are recorded in the period of change. Restructuring charges, and adjustments of those charges, are summarized in note 10 to the consolidated financial statements. INCOME TAXES. The company is required to estimate its actual current income tax expense and to assess temporary differences resulting from differing treatment of items for tax and accounting purposes. At April 30, 2006, the company had deferred tax assets of $31.4 million (all of which relate to U.S. operations) and U.S. deferred tax liabilities of $2.2 million (all of which reverse in the carryforward period), resulting in net U.S. deferred tax assets of $29.2 million. Total deferred tax liabilities at April 30, 2006 were $4.1 million, resulting in total net deferred tax assets of $27.3 million. As of July 30, 2006, the company's net deferred tax assets total $28.6 million, an increase of $1.3 million from the end of fiscal 2006, primarily reflecting the federal and state tax benefits recorded for the loss from U.S. operations during the first quarter of fiscal 2007. A valuation allowance has not been recorded to reduce the company's deferred tax assets. Management has concluded that it is more likely than not that the company will be able to realize the benefit of the deferred tax assets. In making the judgment about the realization of the deferred tax assets, management has considered both negative and positive evidence, and concluded that sufficient positive evidence exists to overcome the cumulative losses experienced in recent years. Specifically, management considered the following, among other factors: nature of the company's products; history of positive earnings in the mattress fabrics segment; capital projects that have been completed to further enhance the company's globally competitive cost structure in the mattress fabrics segment; recent significant restructuring actions in the domestic upholstery fabrics business to adjust the domestic cost structure and bring U.S. manufacturing capacity in line with demand; and development of offshore manufacturing and sourcing programs to meet changing demands of upholstery fabric customers in the U.S. Management's analysis of taxable income also included the following considerations: none of the company's net operating loss carryforwards has previously expired unused; the U.S. federal carryforward period is 20 years; and the company's current losses principally expire in 16-20 years, fiscal 2022 through 2026. Considerable judgment is involved in this process as ultimate realization of benefits is dependent on the generation of income from future U.S. operations. INFLATION The cost of certain of the company's raw materials, principally fibers from petroleum derivatives, and utility/energy costs, increased during the first quarter of fiscal 2007 as oil and energy prices increased and had an impact on the company's financial results. These increases, however, are often not directly related to general economic inflation, which has not been a material factor in the company's recent financial results. Any significant increase in the company's raw material costs, utility/energy costs and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited the company's ability to pass significant operating cost increases on to its customers. I-27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risk from changes in interest rates on debt and foreign currency exchange rates. The company's market risk sensitive instruments are not entered into for trading purposes. The company's exposure to interest rate risk consists of floating rate debt based on the London Interbank Offered Rate plus an adjustable margin under the company's revolving credit agreement and real estate term loan. As of July 30, 2006, there were $4.2 million in borrowings outstanding under the real estate term loan and no borrowings under the company's revolving credit agreement. In connection with the real estate term loan, the company entered into a $2,170,000 notional principal interest rate swap agreement, which represents 50% of the principal amount on the real estate loan, and effectively converts the floating rate LIBOR based payments to fixed payments at 4.99% plus the spread calculated under the real estate term loan agreement. The company's unsecured term notes have a fixed interest rate of 7.76% and the Canadian government loan is non-interest bearing. Additionally, approximately 95% of the company's long-term debt is at a fixed rate or is non-interest bearing. Thus, any foreseeable change in interest rates would have a minimal material effect on the company's interest expense. The company's exposure to fluctuations in foreign currency exchange rates are due to foreign subsidiaries domiciled in China and Canada. These subsidiaries use the United States dollar as their functional currency. The company generally does not use financial derivative instruments to hedge foreign currency exchange rate risks associated with its foreign subsidiaries. A 10% change in either exchange rate at July 30, 2006 would not have a significant impact on the company's results of operations or financial position. ITEM 4. CONTROLS AND PROCEDURES The company conducted a review and evaluation of its disclosure controls and procedures, under the supervision and with the participation of the company's principal executive officer and principal financial officer as of July 30, 2006, and the principal executive officer and principal financial officer have concluded that the company's disclosure controls and procedures are adequate and effective. In addition, no change in the company's internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. I-28
PART II - OTHER INFORMATION ITEM 1A. RISK FACTORS There have been no material changes to our risk factors during the first quarter of fiscal 2007. Our risk factors are disclosed in our Form 10-K for the year ended April 30, 2006. ITEM 6. EXHIBITS THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT. 3(i) Articles of Incorporation of the company, as amended, were filed as Exhibit 3(i) to the company's Form 10-Q for the quarter ended July 28, 2002, filed September 11, 2002, and are incorporated herein by reference. 3(ii) Restated and Amended Bylaws of the company, as amended June 12, 2001, were filed as Exhibit 3(ii) to the company's Form 10-Q for the quarter ended July 29, 2001, filed September 12, 2001, and are incorporated herein by reference. 10(a) Ninth Amendment to Amended and Restated Credit Agreement among Culp, Inc. and Wachovia Bank, National Association, as Agent and as Bank. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. II-1
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CULP, INC. (REGISTRANT) Date: September 8, 2006 By: /S/ FRANKLIN N. SAXON -------------------------- Franklin N. Saxon President (Authorized to sign on behalf of the registrant and also signing as principal financial officer) By: /S/ KENNETH R. BOWLING ---------------------------- Kenneth R. Bowling Vice President-Finance, Treasurer (Authorized to sign on behalf of the registrant and also signing as principal accounting officer) II-2