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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9792
CAVALIER HOMES, INC.
(Exact name of Registrant as specified in Its Charter)
Delaware 63-0949734
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
Highway 41 N. and 32 Wilson Boulevard,
Addison, Alabama 35540
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (256) 747-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of
Each Exchange
Title of Each class on Which Registered
Common Stock, par value $.10 New York Stock Exchange
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 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on the New
York Stock Exchange as of March 20, 2000, was $39,930,897.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 20, 2000.
17,767,528
Common, $0.10 par value
Documents Incorporated by Reference
PartIII of this report incorporates by reference certain portions of the
Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held
May 16, 2000.
1
CAVALIER HOMES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
PART I
ITEM 1. BUSINESS
General
Cavalier Homes, Inc. (the "Company"), incorporated in 1984, is a Delaware
corporation with its executive offices located at Highway 41 North and 32 Wilson
Boulevard, Addison, Alabama 35540. Effective December 31, 1997, the Company
completed a merger (the "Merger") involving Belmont Homes, Inc. ("Belmont"),
pursuant to which the Company issued 7,555,121 shares of its common stock in
exchange for Belmont's common stock and Belmont became a wholly owned subsidiary
of the Company. The Merger was accounted for as a pooling of interests and,
accordingly, the Company's 1997 consolidated financial statements have been
restated to include the results of operations and cash flows of Belmont. The
information herein is presented on a combined basis. Unless otherwise indicated
by the context, references in this report to the "Company" or to "Cavalier"
include the Company, its subsidiaries, divisions of these subsidiaries and their
respective predecessors, if any.
Cavalier is engaged in the production, sale, financing and insuring of
manufactured homes. The Company has chosen to build its distribution system
around exclusive independent dealers, which the Company believes gives it many
of the same efficiencies and market presence that captive retail centers provide
to other companies. At December 31, 1999, Cavalier had a total of 290 dealer
locations participating in its Exclusive Dealer Program, including sixteen
Company-owned retail locations. In addition, the Company markets its homes
through approximately 800 non-exclusive independent dealer locations in 28
states.
The Company designs and manufactures a wide range of homes with a focus on
serving the low- to medium-priced manufactured housing market in the South
Central and South Atlantic regions of the United States. The Company's homes are
sold under 87 brand names, normally include appliances, may be furnished and are
comprised of one or more floor sections. At December 31, 1999, the Company
operated 19 home manufacturing facilities, one plant that manufactures laminated
wall board, and three material and supply distribution locations. Cavalier also
participates in joint ventures with other manufactured housing companies for
lumber distribution and the manufacture of roof trusses and cabinet doors.
Through its financial services segment, the Company purchases qualifying retail
installment sales contracts for manufactured homes sold through its exclusive
dealer network and sells various commissioned insurance products to exclusive
dealers and their retail customers. During 1998, the business focus of Cavalier
Acceptance Corporation ("CAC"), the Company's finance subsidiary, changed from
building, holding and servicing a portfolio of loans to purchasing loans from
its dealers that are subsequently resold to another financial institution,
without recourse (provided that the transferred loan was properly originated by
the dealer and purchased by CAC. CAC does not retain the servicing function and
does not earn interest income on those resold loans.
Revenue, operating profit, identifiable assets and other financial data of the
Company's industry segments for the three years ended December 31, 1999 are
contained in Note 12 of Notes to Consolidated Financial Statements in Part II.
2
Home Manufacturing Operations
At December 31, 1999, the Company, through six wholly owned subsidiaries, owned
or leased nineteen manufacturing facilities (excluding idled facilities) engaged
in the production of manufactured homes. Because of deteriorating market
conditions, Cavalier idled a total of five home manufacturing facilities,
including three subsequent to the end of 1999, that built primarily single
section homes to consolidate production into other plants. See "Item 2.
Properties". Immediately following the end of 1999, the Company reorganized
certain of its operating subsidiaries, and merged them into and combined them
with a new operating subsidiary, Cavalier Enterprises, Inc. ("CEI"), a Delaware
corporation, (formerly Belmont Homes, Inc. ("Belmont"), Spirit Homes, Inc. and
Delta Homes, Inc., both subsidiaries of Belmont). Cavalier Industries, Inc.
("CII"), a Delaware corporation, was reorganized to include the former Bellcrest
Homes, Inc. and Adrian Homes, a division of Bellcrest Homes, Inc. The former
operating subsidiaries will continue their operations as divisions or
subsidiaries of CEI and CII, and are known as Belmont Homes, a division of
Cavalier Enterprises, Inc., Delta Homes, Inc., a subsidiary of Cavalier
Enterprises, Inc., Spirit Homes, a division of Cavalier Enterprises, Inc.,
Bellcrest Homes, a division of Cavalier Industries, Inc., and Adrian Homes, a
division of Cavalier Industries, Inc. The management of each of the Company's
home manufacturing units typically consists of a president or general manager, a
production manager, a general sales manager, a controller, a service manager, a
purchasing manager and a quality control manager. These mid-level management
personnel manage the Company's home manufacturing operations, and typically
participate in an incentive compensation system based upon their respective
operation's profitability.
The Company has experienced significant growth in manufacturing capacity during
the past seven years, expanding from four manufactured housing production
facilities in 1992 to nineteen facilities (excluding idled facilities) at the
end of 1999. Because of deteriorating market conditions, Cavalier has idled a
total of five home manufacturing facilities, including three subsequent to the
end of 1999, that built primarily single section homes to consolidate production
into other plants. The Company's operating facilities normally function on a
single-shift, five-day week basis with the approximate annual capacity to
produce 40,000 floors.
The following table sets forth certain sales information for 1999, 1998, and
1997:
For the Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Number of homes sold:
Single-section homes 10,546 47% 12,430 51% 13,576 58%
Multi-section homes 11,831 53% 11,957 49% 10,026 42%
--------- ------- ---------- ------- ---------- -------
Total homes 22,377 100% 24,387 100% 23,602 100%
========= ======= ========== ======= ========== =======
Number of floors sold 34,294 36,517 33,646
========= ========== ==========
Construction of a home begins by welding steel frame members together. The frame
is then moved through the plant, stopping at a number of workstations where
various components and sub-assemblies are attached. Certain sub-assemblies, such
as plumbing, cabinets, ceilings and wall systems, are assembled at off-line
workstations. The completed home is usually sold furnished and is ready for
connection to customer-supplied utilities.
The principal raw materials purchased by the Company are steel, lumber, plywood,
sheetrock, aluminum siding, galvanized roofing materials, insulating materials,
electrical supplies and plastics. The Company purchases axles, wheels, tires,
kitchen appliances, laminated wallboard, roof trusses, plumbing fixtures,
furniture, carpet, vinyl floor covering, windows and decorator accessories.
Currently, the Company maintains approximately two to three weeks' inventory of
raw materials. The Company is not dependent on any single source of supply and
believes that the materials and parts necessary for the construction and
assembly of its homes are generally available from other sources. However,
during 1999, the Company experienced tightened supply from its traditional
vendors of certain types of raw materials, including sheetrock, lumber and
insulation, required for the production of its manufactured homes. The Company
obtained these and similar products from other vendors, which resulted in higher
than normal costs, some of which the Company was unable to recover through price
increases.
3
The Company's component manufacturing and distribution subsidiaries provide
laminated wallboards, cabinet doors and certain other supply products for some
of its home manufacturing facilities and other manufacturers. Additionally,
certain of the Company's home manufacturing facilities currently purchase roof
trusses and laminated wallboards from joint ventures in which the Company owns
an interest. The Company believes prices obtained by the Company for these
products from these joint ventures are competitive with the Company's other
sources of supply.
Because the cost of transporting a manufactured home is significant, there is a
limit to the distance between a manufacturing facility and the dealers it can
service. The Company believes that the location of its manufacturing facilities
in multiple states allows it to serve more dealers in more markets. The Company
generally arranges, at the dealer's expense, for the transportation of finished
homes to dealers using independent trucking companies. Dealers or other
independent installers are responsible for placing the home on site, combining
of multi-section homes, making utility connections and providing and installing
certain accessory items and appurtenances, such as decks, carports and
foundations.
Products
The Company's homes include both single-section and multi-section models, with
the substantial majority of such products being "HUD Code Homes" which are
manufactured homes that meet the specifications of the National Manufactured
Home Construction and Safety Act of 1974, as amended, and administered by the
U.S. Department of Housing and Urban Development ("HUD"). Single-section homes
are 14 to 16 feet wide, vary in length from 40 to 84 feet and contain between
656 and 1,280 square feet. The multi-section models consist of two or more floor
sections that are joined at the home site, vary in length from 36 to 82 feet and
contain between 792 and 3,016 square feet.
The Company currently produces over 800 different models of manufactured homes
with a variety of decors that are marketed under 87 brand names. The homes
typically include a living room, dining area, kitchen, one to four bedrooms and
one or more bathrooms. Each home contains a cooking range and oven,
refrigerator, water heater and central heating. Depending on the customer's
preferences, most homes are sold fully furnished. Customers may also choose many
available options including fireplaces, ceiling fans, dishwashers, garbage
disposals, microwave ovens, stereos, bay windows, composition shingle roofs,
vinyl siding and sliding glass patio doors.
Modular homes are homes designed to meet building codes administered by states
and local authorities, as opposed to the national HUD guidelines. Five of the
Company's manufacturing facilities currently manufactures a limited number of
modular homes meeting applicable regulatory standards.
The Company's product development and engineering personnel design homes in
consultation with operating management, sales representatives and dealers. They
also evaluate new materials and construction techniques and use computer-aided
and other design methods in a continuous program of product development, design
and enhancement. The Company's product development activities do not require
significant capital investments.
4
Independent Dealer Network, Sales and Marketing
As of December 31, 1999, the Company had, under its Exclusive Dealer Program,
290 participating dealer locations selling only the Company's homes, which
included sixteen Company-owned retail locations. In addition, the Company
markets its homes through approximately 800 independent non-exclusive dealer
locations in 28 states.
Since 1991, the Company has been developing its independent exclusive dealer
network. The Company's independent exclusive dealers market and sell only homes
manufactured by the Company, while the Company's independent non-exclusive
dealers typically will choose to offer the products of other manufacturers in
addition to those of the Company. The growth in the Company's number of
independent exclusive dealers and percentage of total Company sales represented
by them is summarized in the following table:
For the Year Ended December 31, 1999 1998 1997
- ------------------------------- ------- ------- ------
Number of independent exclusive dealer locations 274 232 132
Percentage of manufactured home sales 55% 40% 30%
Through its finance subsidiary, CAC, the Company purchases qualifying retail
installment sales contracts for manufactured homes sold through the Company's
exclusive dealer network and provides its exclusive dealers with other services
and support.
Approximately 88% of the Company's sales in 1999 were to dealers operating sales
centers in the Company's core states as follows: Texas - 17%, Alabama - 12%,
Georgia - 9%, North Carolina - 9%, South Carolina - 8%, Arkansas - 8%, Louisiana
- - 7%, Mississippi - 7%, Tennessee - 4%, Oklahoma - 4% and Missouri - 3%.
The Company has written agreements with most of its independent dealers. These
agreements generally may be terminated at any time by either party, with or
without cause, after a short notice period. The Company does not have any
control over the operations of, or financial interests in, any of its
independent dealers, including any of its independent exclusive dealers. The
Company is not dependent on any single dealer, and in 1999, the Company's
largest dealer accounted for approximately 1.9% of sales.
The Company believes that its independent dealer network enables the Company to
avoid the substantial investment in management, capital and overhead associated
with company owned sales centers. To enable dealers to maximize retail market
penetration and enhance customer service, typically only one dealer within a
given market area distributes a particular product line of the Company. The
Company believes its strategy of selling its homes through independent dealers
helps to ensure that the Company's homes are competitive with those of other
manufacturers in terms of consumer acceptability, product design, quality and
price. Accordingly, a component of the Company's business strategy is to
continually strengthen its dealer relations. The Company believes its relations
with its independent dealers, including its independent exclusive dealers, are
good. *
The industry has recently been experiencing a trend of increasing competition
for independent dealers, and many manufacturers, which had previously not owned
their own retail sales centers, have begun purchasing independent dealers and/or
establishing their own retail outlets. While the Company will continue to focus
on exclusive independent dealers, the Company has diversified its channels of
distribution with a few Company-owned retail locations. Cavalier purchased seven
retail locations in 1999, and opened four other sites during the year, ending
the year with a total of sixteen Company-owned stores. The Company may open or
acquire other locations in the future at a conservative pace and may close some
of its existing locations. *
Each of the Company's manufacturing units typically employs a general sales
manager and its own respective sales representatives who are compensated on a
commission basis. The plant-level sales representatives are charged with the
- --------
* See Safe Harbor Statement on page 31.
5
day-to-day servicing of the needs of the Company's independent dealers,
including its exclusive dealers. The Company markets its homes through product
promotions, participation in regional manufactured housing shows, advertisements
in local media and trade publications. As of December 31, 1999, the Company
maintained a sales force of 111 full-time salesmen and 11 full-time general
sales managers.
Retail Financing Activities
A significant factor affecting sales of manufactured homes is the availability
and terms of financing. CAC purchases qualifying retail installment sales
contracts for manufactured homes sold through the Company's exclusive dealer
network.
CAC seeks to provide competitive financing terms to customers of the Company's
exclusive dealers. CAC currently offers various conventional loan programs which
require a down-payment ranging from 0% to 20% of the purchase price, in cash,
trade-in value of a previously-owned manufactured home and/or appraised value of
equity in any real property pledged as collateral. Repayment terms generally
range from 84 to 360 months, depending upon the type of home and amount
financed, the amount of the down payment and the customer's creditworthiness.
CAC's loans are secured by a purchase money security interest in the
manufactured home and, in certain instances, a mortgage on real property pledged
as additional collateral. As of December 31, 1999, all of CAC's outstanding
loans were secured. Loans purchased by CAC normally provide a fixed rate of
interest with equal monthly payments and are non-recourse to the dealer. The
interest rates applicable to CAC's loan portfolio as of such date generally
ranged from 9% to 14%, and the approximate weighted average annual percentage
interest rate was 11.16%. Currently, CAC operates in most of the states in which
the Company has independent exclusive dealers.
For those retail customers who meet CAC's lending standards, CAC strives to
provide prompt credit approvals and funding of loans. CAC has established a
standardized credit scoring system to facilitate prompt decision-making on loan
applications. The most important criteria in the scoring system are the income,
employment stability and creditworthiness of the borrower. The system requires a
minimum score before CAC will consider funding the installment sale contract.
In the event an installment sale contract becomes delinquent, CAC normally
contacts the customer within 10 to 25 days thereafter in an effort to cure the
delinquency. CAC generally repossesses the home after payments have become 60 to
90 days delinquent. After repossession, CAC normally has the home delivered to a
dealer's sales center where CAC attempts to resell the home or contracts with an
independent party to resell the home. To a limited extent, CAC sells repossessed
homes at wholesale.
The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CAC to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. Amounts credited to the reserve were $2.2, $1.0 and $1.3 million in
1999, 1998, and 1997, respectively. Additionally, as a result of defaults, early
payoffs and repossessions the reserve was charged $1.3, $1.6 and $1.0 million in
1999, 1998, and1997, respectively. The reserve for credit losses at December 31,
1999 was $1.7 million as compared to $0.8 million at December 31, 1998, and $1.3
million at December 31, 1997.
In 1999, 1998 and 1997, CAC repossessed 62, 77 and 92 homes, respectively. The
Company's inventory of repossessed homes was 28 homes at December 31, 1999, as
compared to 30 homes at December 31, 1998, and 50 homes at December 31, 1997.
The Company's net losses resulting from repossessions on CAC purchased loans as
a percentage of the average principal amount of such loans outstanding for
fiscal 1999, 1998 and 1997 was 7.83%, 5.01% and 2.27%, respectively.
At December 31, 1999 and December 31, 1998, delinquencies expressed as a
percentage of the total number of installment sale contracts which CAC owned
were as follows:
6
Delinquency Percentage
----------------------------------------------------------
Total Number
December 31, of Contracts 30 Days 60 Days 90 Days Total
--------------- -------------- --------------- -------------- --------
1999 290 1.03% 0.00% 0.00% 1.03%
1998 986 1.62% 0.41% 0.10% 2.13%
At December 31, 1999 and December 31, 1998, delinquencies expressed as a
percentage of the total outstanding principal balance of installment sale
contracts which CAC owned were as follows:
Delinquency Percentage
----------------------------------------------------------
Total Value
December 31, of Contracts 30 Days 60 Days 90 Days Total
---------------- ------------- --------------- -------------- --------
1999 $9,450,000 0.90% 0.00% 0.00% 0.90%
1998 $26,117,000 1.89% 0.58% 0.19% 2.66%
There can be no assurance that the Company's future results with respect to
delinquencies and repossessions will be consistent with its past experience as
reflected above.
Certain operating data relating to CAC are set forth in the following table:
December 31,
-------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
Total loans receivable $ 9,450,000 $ 26,117,000 $ 49,146,000
Allowance for credit losses $ 1,656,000 $ 760,000 $ 1,272,000
Number of loans outstanding 290 986 1,712
Number of delinquencies 3 21 43
Net loss ratio on average
outstanding principal balance 7.83% 5.01% 2.27%
Weighted average annual
percentage rate 11.2% 10.9% 10.9%
During 1998, the business focus of CAC changed from building, holding and
servicing a portfolio of loans to purchasing loans from its dealers that are
subsequently resold to another financial institution without CAC retaining the
servicing function. Although the level of CAC's future activities cannot
presently be determined, the Company expects to utilize internally generated
working capital and amounts generated from sales of loans under the retail
finance agreement discussed in the following paragraph to fund the purchase of
retail installment sale contracts on homes sold by the Company's exclusive
dealers and may use borrowings under the Company's loan agreement with its
primary lender (described below under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources") to develop a portfolio of such installment sale contracts. *
The Company believes that its relationships with its exclusive dealers will
assist the development of this business strategy. *
Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds borrowed under its credit line with its primary lender. In
February 1998, CAC entered into an agreement with another lender providing for
the periodic resale of a portion of CAC's loans that meet established criteria
and without recourse (provided that the transferred loan was properly originated
by the dealer and purchased by CAC). In March 1998 and in June 1999, CAC sold,
under the retail finance agreement, a substantial portion of its existing
portfolio of loans on those dates. The effect of these transactions on net
income was to reduce the amount of financial services revenue from interest
income on these portions of the portfolio, offset by reduced interest expense on
debt retired in March 1998 and earnings on the remaining proceeds. The Company
may sell a substantial portion of its remaining installment loan portfolio in
fiscal year 2000, in addition to the periodic sale of installment contracts
- --------
* See Safe Harbor Statement on page 31. *
7
purchased by CAC in the future. * The Company believes the periodic sale of
installment contracts under the retail finance agreement will reduce
requirements for both working capital and borrowings, increase the Company's
liquidity, reduce the Company's exposure to interest rate fluctuations and
enhance the ability of CAC to increase its volume of loan purchases. * There can
be no assurance, however, that additional sales will be made under this
agreement, or that CAC and the Company will be able to realize the expected
benefits from such agreement. *
Retail Insurance Activities
Through its wholly owned insurance agencies, the Company sells commissioned
insurance products to retail purchasers of the Company's homes, including
physical damage and extended home warranties. The Company also sells commercial
lines of insurance products, including general liability and property insurance,
to the Company's exclusive dealers and others. Additionally, personal line
products are sold to others.
Wholesale Dealer Financing and Repurchase Obligations
In accordance with manufactured housing industry practice, substantially all of
the Company's dealers finance their purchases of manufactured homes through
wholesale "floor plan" financing arrangements. Under a typical floor plan
financing arrangement, a financial institution provides the dealer with a loan
for the purchase price of the home and maintains a security interest in the home
as collateral. The financial institution which provides financing to the dealer
customarily requires the Company to enter into a separate repurchase agreement
with the financial institution under which the Company is obligated, upon
default by the dealer, to repurchase the financed homes at a declining price
based upon the Company's original invoice price plus, in specific cases, certain
administrative expenses. A portion of purchases by dealers are pre-sold to
retail customers and are paid through retail financing commitments.
The risk of loss under such repurchase agreements is mitigated by the fact that
(i) sales of the Company's manufactured homes are spread over a relatively large
number of independent dealers, the largest of which accounted for approximately
1.9% of sales in 1999, (ii) the repurchase obligation expires on individual
homes after a reasonable period of time (generally 12 to 18 months from invoice
date) and also declines during such period based on predetermined amounts and
(iii) the Company is in many cases able to sell homes repurchased from credit
sources in the ordinary course of business without incurring significant losses.
As of December 31, 1999, the Company's contingent liability under these
repurchase and other similar recourse agreements was an amount estimated to be
approximately $273 million. The Company has provided an allowance for possible
repurchase losses of $3.5 million as of December 3l, 1999, based on prior
experience and current market conditions.
Quality Control, Warranties and Service
The Company believes the quality in materials and workmanship, continuous
refinement in design and production procedures as well as price and other market
factors, are important elements in the market acceptance of manufactured homes.
The Company maintains a quality control inspection program at all production
stages. The Company's manufacturing facilities and the plans and specifications
of its manufactured homes have been approved by a HUD-designated inspection
agency. An independent, HUD-approved third-party inspector regularly checks the
Company's manufactured homes for compliance during construction.
The Company provides the initial retail home buyer with a one-year limited
warranty against manufacturing defects in the home's construction. Warranty
services after sale are performed, at the expense of the Company, by plant
personnel, dealers or local independent contractors. Additionally, direct
warranties often are provided by the manufacturers of specific components and
appliances.
- --------
See Safe Harbor Statement on page 31.
8
The Company employs a full-time service manager at each of its home
manufacturing units and 197 full-time service personnel to provide
administrative and on-site service and to correct production deficiencies that
are attributable to the manufacturing process. Warranty service constitutes a
significant cost to the Company, and management of the Company has placed
emphasis on diagnosing potential problem areas to help minimize costly field
repairs. The Company also has focused on reducing response time to customer
service requests. At December 31, 1999, the Company had established a reserve
for future warranty claims of $13 million relating to homes sold, based upon
management's assessment of historical experience factors and current industry
trends.
Competition
The manufactured housing industry is highly competitive, characterized by low
barriers to entry and severe price competition. Competition is based on price,
repair service, product features and quality, reputation for service quality,
depth of field inventory, delivery capabilities, warranty repair service, dealer
promotions, merchandising and terms of dealer and retail consumer financing. The
Company also competes with other manufacturers, some of which maintain their own
retail sales centers, for quality independent dealers. In addition, the
Company's manufactured homes compete with other forms of low-cost housing,
including site-built, prefabricated, modular homes, apartments, townhouses and
condominiums. The selection by retail buyers of a manufactured home rather than
an apartment or other alternative forms of housing is significantly affected by
their ability to obtain satisfactory financing. The Company faces direct
competition from numerous manufacturers, many of which possess greater
financial, manufacturing, distribution and marketing resources.
The Company's business strategy currently includes the continued operation of
financial services provided through CAC. The Company believes that operations of
CAC will have a positive impact on the Company's efforts to sell its products
and enhance its competitive ability within the industry. *However, due to strong
competition in the retail finance segment of the industry from companies much
larger than CAC, there can be no assurance that CAC will be able to expand its
operations or that it will have a positive impact on the Company's ability to
compete.
Regulation
The Company's businesses are subject to a number of federal, state and local
laws, regulations and codes. Construction of manufactured housing is governed by
the National Manufactured Home Construction and Safety Standards Act of 1974, as
amended, and regulations issued thereunder by HUD, which have established
comprehensive national construction standards. The HUD regulations cover all
aspects of manufactured home construction, including structural integrity, fire
safety, wind loads, thermal protection and ventilation. Such regulations preempt
state and local regulations on such matters. The Company cannot presently
determine what, if any, legislation may be adopted by Congress or state or local
governing bodies, or the effect any such legislation may have on the Company or
the manufactured housing industry as a whole.
The Company's manufacturing facilities and the plans and specifications of its
manufactured homes have been approved by a HUD-designated inspection agency.
Furthermore, an independent, HUD-approved third-party inspector regularly checks
the Company's manufactured homes for compliance during construction. Failure to
comply with the HUD regulations could expose the Company to a wide variety of
sanctions, including closing the Company's manufacturing facilities. The Company
believes its manufactured homes meet or surpass all present HUD requirements. *
HUD has promulgated regulations with respect to structural design, wind loads
and energy conservation. The Company's operations were not materially affected
by the regulations; however, HUD and other state and local governing bodies have
these and other regulatory matters under continuous review, and the Company
cannot predict what effect (if any) additional regulations promulgated by HUD or
other state or local regulatory bodies would have on the Company or the
manufactured industry as a whole.
- --------
* See Safe Harbor Statement on page 31. *
9
Certain components of manufactured and modular homes are subject to regulation
by the U.S. Consumer Product Safety Commission ("CPSC"), which is empowered to
ban the use of component materials believed to be hazardous to health and to
require the repair of defective components. The CPSC, the Environmental
Protection Agency and other governmental agencies are evaluating the effects of
formaldehyde. Regulations of the Federal Trade Commission also require
disclosure of a manufactured home's insulation specifications. Manufactured,
modular and site-built homes may be built with compressed board, wood paneling
and other products that contain formaldehyde resins. Since February 1985, HUD
has regulated the allowable concentration of formaldehyde in certain products
used in manufactured homes and required manufacturers to warn purchasers
concerning formaldehyde associated risks. The Company currently uses materials
in its manufactured homes that it believes meet HUD standards for formaldehyde
emissions and otherwise comply with HUD regulations in this regard. *
The transportation of manufactured homes on highways is subject to regulation by
various federal, state and local authorities. Such regulation may prescribe size
and road use limitations and impose lower than normal speed limits and various
other requirements.
The Company's manufactured homes are subject to local zoning and housing
regulations. A number of states require manufactured home producers to post
bonds to ensure the satisfaction of consumer warranty claims. A number of states
have adopted procedures governing the installation of manufactured homes.
Utility connections are subject to state and local regulation.
The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission
Improvement Act, which regulates the descriptions of warranties on products. The
description and substance of the Company's warranties are also subject to a
variety of state laws and regulations.
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. The Company
currently does not believe it will be required under existing environmental laws
and enforcement policies to expend amounts which will have a material adverse
effect on its results of operations or financial condition. * However, the
requirements of such laws and enforcement policies have generally become
stricter in recent years. Accordingly, the Company is unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.
A variety of federal laws affect the financing of manufactured homes, including
the financing activities conducted by CAC. The Consumer Credit Protection Act
(Truth-in-Lending) and Regulation Z promulgated thereunder require substantial
disclosures to be made in writing to a consumer with regard to various aspects
of the particular transaction, including the amount financed, the annual
percentage rate, the total finance charge, itemization of the amount financed
and other matters. The Equal Credit Opportunity Act and Regulation B promulgated
thereunder prohibit discrimination against any credit applicant based on certain
prohibited bases, and also require that certain specified notices be sent to
credit applicants whose applications are denied. The Federal Trade Commission
has adopted or proposed various trade regulation rules to specify and prohibit
certain unfair credit and collection practices and also to preserve consumers'
claims and defenses. The Government National Mortgage Association ("GNMA")
specifies certain credit underwriting requirements in order for installment
manufactured home sale contracts to be eligible for inclusion in a GNMA program.
HUD also has promulgated substantial disclosure and substantive regulations and
requirements in order for a manufactured home installment sale contract to
qualify for insurance under the Federal Housing Authority ("FHA") program, and
the failure to comply with such requirements and procedures can result in loss
of the FHA guaranty protection. In addition, the financing activities of CAC may
- ---------
See Safe Harbor Statement on page 31. *
10
also become subject to the reporting and disclosure requirements of the Home
Mortgage Disclosure Act. In addition to the extensive federal regulation of
consumer credit matters, many states have also adopted consumer credit
protection requirements that may impose significant requirements for consumer
credit lenders. For example, many states require that a consumer credit finance
company such as CAC obtain certain regulatory licenses or permits in order to
engage in such business in that state, and many states also set forth a number
of substantive contractual limitations regarding provisions that permissibly may
be included in a consumer contract, as well as limitations upon the permissible
interest rates, fees and other charges that may be imposed upon a consumer.
Failure by the Company or CAC to comply with the requirements of federal or
state law pertaining to consumer credit could result in the invalidity of the
particular contract for the affected consumer, civil liability to the affected
customers, criminal liability and other adverse results. The sale of insurance
products by the Company is subject to various state insurance laws and
regulations which govern allowable charges and other insurance practices.
Employees
As of December 31, 1999, the Company had 4,890 employees, of whom 4,029 were
engaged in home manufacturing and supply distribution, 122 in sales, 228 in
warranty and service, 373 in general administration, 4 in delivery, 48 in retail
finance and insurance services and 86 in retail locations. At year-end, only one
home manufacturing operation's employees (106 employees) were covered by a
collective bargaining agreement. Management considers its relations with its
employees to be good.
Risk Factors
If you are interested in making an investment in Cavalier, you should carefully
consider the following risk factors concerning Cavalier and its business, in
addition to the other information contained in this Report on Form 10-K:
Cyclical and Seasonal Nature of the Manufactured Housing Industry
The manufactured housing industry is highly cyclical and seasonal and has
experienced wide fluctuations in aggregate sales in the past, resulting in the
failure of many manufacturing concerns. Many of the same national and regional
economic and demographic factors that affect the broader housing industry also
affect the market for manufactured homes. Historically, most sectors of the home
building industry, including the manufactured housing industry, have been
affected by the following, among other things:
o changes in general economic conditions;
o inflation;
o levels of consumer confidence;
o employment and income levels;
o housing supply and demand;
o availability of alternative forms of housing;
o availability of financing; and
o the level and stability of interest rates.
The Manufactured Housing Institute ("MHI") reported that from 1983 to 1991,
aggregate domestic shipments of manufactured homes declined 42%. According to
industry statistics, after a ten-year low in floor shipments in 1991, the
industry recovered significantly. Between 1992 and 1998, floor shipments
increased each year, as set forth in the table below, although the growth rate
gradually slowed.
Percentage Increase in Floor Shipments Through 1998
o 1992............................21%
o 1993............................22%
o 1994............................23%
o 1995............................12%
o 1996............................10%
o 1997.............................1%
o 1998.............................8%
11
Over the past several years, the manufactured housing industry has also
experienced increases in both the number of retail dealers and manufacturing
capacity, which we believe is currently resulting in slower retail turnover,
higher dealer inventories and increased price competition. * These conditions
significantly affected the industry in 1999. According to MHI, floor shipments
declined 4.3% in 1999 from 1998, and the decline accelerated in the second half
of the year and has continued through January 2000 (the latest information
available). In addition, a number of retail dealers have failed and
repossessions of manufactured homes have increased. Some manufactured housing
wholesale and retail lenders have also stopped doing business in the industry,
and some of the remaining lenders have raised their interest rates and tightened
their credit standards. We think more dealers may fail, repossessions may
continue to increase and more lenders may exit the market in the future. *
Sales in the manufactured housing industry are also seasonal in nature, with
sales of homes traditionally being stronger in April through October and weaker
during the first and last part of the calendar year. While seasonality did not
significantly impact Cavalier's business from 1992 through 1996, when industry
shipments were steadily increasing, the recent tightening of competitive
conditions seems to signal a return to the industry's traditional seasonal
patterns.
We cannot predict how long the tightening of competitive and industry conditions
will last, or what the extent of their impact will be on the future results of
operations and financial condition of Cavalier. Furthermore, because of the
cyclical and seasonal nature of the manufactured housing industry and the recent
increase in competitive conditions, Cavalier cannot assure its investors that
the manufactured housing industry is not in a down cycle, which could have a
material adverse effect on Cavalier's results of operations or financial
condition.
Limitations on Ability to Pursue Business Strategy Cavalier's current business
strategies are to:
o develop our exclusive and independent dealer network;
o develop the production and distribution of component parts for
manufactured housing;
o pursue implementation of an enterprise-wide management information
system;
o pursue the financing, insurance and other activities of CAC and the
financial services segment; and
o operate a limited number of Cavalier-owned retail locations.
Downturns in shipments in the manufactured housing industry and a decline in the
demand for Cavalier's homes could have a material adverse effect on us. Our
ability to execute our business strategy depends on a number of factors,
including the following:
o general economic and industry conditions;
o competition from other companies in the same business as us;
o our ability to attract, retain or sell to additional independent
dealers, especially, exclusive dealers;
o the availability of semi-skilled workers in the
areas in which our manufacturing facilities are located;
o the ability of CAC and the Company's insurance and component parts
operations to be competitive;
o the availability of capital and financing;
o the ability of our independent dealers and retail locations to compete
under current industry conditions; and
o the availability and terms of wholesale and retail financing from
lenders in the manufactured housing industry.
- --------
See Safe Harbor Statement on page 31. *
12
There are other factors in addition to those listed above, many of which are
beyond our control. Cavalier cannot assure investors that our business strategy
will be successful. If our strategy is unsuccessful, this may have a material
adverse effect upon Cavalier's results of operations or financial condition. *
Limitations on Availability of Consumer and Dealer Financing
Third-party lenders generally provide consumer financing for manufactured home
purchases. Our sales depend in large part on the availability and cost of
financing for manufactured home purchasers and dealers as well as our own retail
locations. The availability and cost of such financing is further dependent on
the number of financial institutions participating in the industry, the
financial institutions' lending practices, the strength of the credit markets
generally, governmental policies and other conditions, all of which are beyond
our control. In addition, most states classify manufactured homes for both legal
and tax purposes as personal property rather than real estate. As a result,
financing for the purchase of manufactured homes is characterized by shorter
loan maturities and higher interest rates, and in certain periods such financing
is more difficult to obtain than conventional home mortgages. Unfavorable
changes in these factors and the current adverse trend in the availability and
terms of financing in the industry may have a material adverse effect on
Cavalier's results of operations or financial condition.
Dependence on Independent Dealers
Cavalier depends on independent dealers for substantially all retail sales of
our manufactured homes. Typically only one dealer within a given market area
distributes a particular product line of ours. Our relationships with our
dealers are cancelable on short notice by either party. The manufactured housing
industry has recently experienced a trend of increasing competition for quality
independent dealers. In addition, a number of dealers in the industry are
experiencing difficulty in the current market conditions. While we believe that
our relations with our independent dealers are generally good, we cannot assure
our investors that we will be able to maintain these relations, that these
dealers will continue to sell our homes, that these dealers will be successful,
or that we will be able to attract and retain quality independent dealers. *
Intense Competition
The production and sale of manufactured homes is a highly competitive industry,
characterized by low barriers to entry and severe price competition. Competition
is based primarily on the following factors:
o price;
o repair service;
o product features and quality;
o reputation for service and quality;
o depth of field inventory;
o delivery capabilities;
o warranty repair service;
o dealer promotions;
o merchandising; and
o terms of dealer and retail consumer financing.
In addition, Cavalier competes with other manufacturers, some of which maintain
their own retail sales centers, for independent dealers. Manufactured homes also
compete with other forms of low-cost housing, including site-built,
prefabricated and modular homes, apartments, townhouses and condominiums. We
face direct competition from numerous manufacturers, many of which possess
greater financial, manufacturing, distribution and marketing resources. As a
result of these competitive conditions, Cavalier may not be able to sustain past
levels of sales or profitability.
- --------
See Safe Harbor Statement on page 31. *
13
Contingent Repurchase and Guaranty Obligations
Manufactured housing companies customarily enter into repurchase and other
recourse agreements with lending institutions which have provided wholesale
floor plan financing to dealers. Substantially all of Cavalier's sales are made
to dealers located primarily in the South Central and South Atlantic regions of
the United States pursuant to repurchase agreements with lending institutions.
These agreements generally provide that Cavalier will repurchase our products
from the lending institutions for the balance due them in the event such product
is repossessed upon a dealer's default. The risk of loss under repurchase
agreements is lessened by the fact that (1) sales of our manufactured homes are
spread over a relatively large number of independent dealers; (2) the price that
Cavalier is obligated to pay under such repurchase agreements generally declines
over the period of the agreement and also declines during such period based on
predetermined amounts; and (3) in many cases, Cavalier has been able to resell
homes repurchased from lenders in the ordinary course of business without
incurring significant losses. While we have established a reserve for possible
repurchase losses, we cannot assure investors that we will not incur material
losses in excess of these reserves in the future. *
Uncertainties Regarding Retail Financing Activities
Cavalier purchases retail installment finance loans that have been originated by
our independent exclusive dealers. We maintain a reserve for estimated credit
losses on installment sale contracts owned by CAC to provide for future losses
based on our historical loss experience, current economic conditions and
portfolio performance. It is difficult to predict with any certainty the
appropriate reserves to establish, and we cannot assure investors that CAC will
not experience losses that exceed Cavalier's loss reserves and have a material
adverse effect on Cavalier's results of operations and financial condition. *
Volatility or a significant change in interest rates might also materially
affect CAC's and Cavalier's business, results of operations or financial
condition.
Our strategy currently includes the continued operation of the financial
services segment of our business. Accordingly, we may incur additional debt, or
other forms of financing, in order to continue to fund such growth. We may also
engage in other transactions, such as selling or securitizing portions of our
installment loan portfolio, that are designed to facilitate the ability of CAC
to purchase and/or originate an increased volume of loans and to reduce our
exposure to interest rate fluctuations and installment loan losses. * Cavalier
has entered into such a transaction pursuant to the Retail Finance Agreement
discussed above under "Retail Finance Activities". Additionally, CAC has
periodically sold installment loan contracts throughout 1999 to another
financial institution under this agreement. The Company may sell a substantial
portion of its existing loan portfolio in 2000, in addition to the periodic sale
of loans purchased by CAC in the future, under the Retail Finance Agreement.
Cavalier believes the periodic sale of installment contracts under the Retail
Finance Agreement will reduce requirements for both working capital and
borrowings, increase Cavalier's liquidity, reduce Cavalier's exposure to
interest rate fluctuations and enhance the ability of CAC to increase its volume
of loan purchases. * However, we cannot assure investors that this agreement
will remain in effect, that additional sales will be made under this agreement
or that CAC or Cavalier will be able to realize the expected benefits from such
agreement. We also cannot offer any assurance that possible additional
financing, or the aforementioned transactions involving our installment loan
portfolio, will be available on terms acceptable to Cavalier. If not, we may
be forced to curtail our financial services business and to alter our other
strategies.
Uncertainties in Integrating Business Operations and Achieving Benefits of the
Belmont Merger
- --------
See Safe Harbor Statement on page 31. *
See Safe Harbor Statement on page 31. *
14
On December 31, 1997, a wholly owned subsidiary of Cavalier
merged with and into Belmont, which is also a producer of manufactured housing.
For a more detailed description of Belmont and this transaction, you should
review Cavalier's Current Reports on Form 8-K dated August 20, 1997, December
11, 1997 and January 15, 1998 (as amended by Form 8-K/A dated March 16, 1998 and
Form 8-K/A dated March 17, 1998), and Cavalier's Registration Statement on Form
S-4 filed with the Commission on December 2, 1997 (Reg. No. 333-41319). The
acquisition of Belmont required the consolidation of functions and the
integration of departments, systems and procedures, which present significant
management challenges and are to some degree still ongoing. Although our primary
purpose in taking such actions was to realize direct cost savings and other
operating efficiencies, synergies and benefits, Cavalier cannot assure
stockholders of the extent to which or whether such cost savings, efficiencies,
synergies or benefits will be achieved.
Potential Unavailability and Increases in Prices of Raw Materials
The availability and pricing of certain raw materials, particularly lumber,
sheetrock, particle board and insulation may significantly affect Cavalier's
operating costs. Sudden increases in demand for these construction materials
caused by natural disasters or other market forces can greatly increase the
costs of materials or limit the availability of such materials. Increases in
costs cannot always be reflected immediately in prices, especially in
competitive times, and, consequently, may adversely impact Cavalier's
profitability. Further, a reduction in the availability of raw materials also
may affect our ability to meet or maintain production requirements.
Operations May Be Limited by the Availability of Manufactured Housing Sites
Any limitation on the growth of the number of sites for placement of
manufactured homes or on the operation of manufactured housing communities could
adversely affect the manufactured housing business. Manufactured housing
communities and individual home placements are subject to local zoning
ordinances and other local regulations relating to utility service and
construction of roadways. In the past, property owners often have resisted the
adoption of zoning ordinances permitting the location of manufactured homes in
residential areas, which Cavalier believes has adversely affected the growth of
the industry. We cannot insure investors that manufactured homes will receive
widespread acceptance or that localities will adopt zoning ordinances permitting
the location of manufactured home areas. The inability of the manufactured home
industry to gain such acceptance and zoning ordinances could have a material
adverse effect on our financial condition or results of operations.
Reliance on Executive Officers
Cavalier's success depends highly upon the personal efforts and abilities of its
current executive officers. Specifically, Cavalier relies on the efforts of its
Chairman of the Board, Barry B. Donnell, its President and Chief Executive
Officer, David A. Roberson, and its Vice President, Chief Financial Officer and
Secretary-Treasurer, Michael R. Murphy. The loss of the services of one or more
of these individuals could have a material adverse effect upon our business. We
do not have employment or non-competition agreements with any of our executive
officers. Our continued growth, including the expansion of CAC's business, will
depend upon our ability to attract and retain additional experienced management
personnel.
Potential Adverse Effects of Regulation
Cavalier is subject to a variety of federal, state and local laws and
regulations affecting the production, sale, financing and insuring of
manufactured housing. We suggest you read the section above under the heading
"Regulation" for a description of many of these laws and regulations. Cavalier's
failure to comply with such laws and regulations could expose us to a wide
variety of sanctions, including closing one or more manufacturing facilities.
Governmental bodies have regulatory matters affecting our operations under
continuous review and we cannot predict what effect (if any) additional laws and
regulations promulgated by HUD would have on us or the manufactured housing
industry as a whole. Failure to comply with laws or regulations applicable to or
affecting Cavalier, or the passage in the future of new and more stringent laws
affecting Cavalier, may adversely affect us.
15
Compliance with Environmental Laws
Federal, state and local laws and regulations relating to the generation,
storage, handling, emission, transportation and discharge of materials into the
environment govern Cavalier's operations. In addition, third parties and
governmental agencies in some cases have the power under such laws and
regulations to require remediation of environmental conditions and, in the case
of governmental agencies and entities, to impose fines and penalties. The
requirements of such laws and enforcement policies have generally become
stricter in recent years. Accordingly, we cannot assure investors that we will
not be required to incur response costs, remediation expenses, fines, penalties
or other similar damages, expenses or liabilities, or to incur operational
shut-downs, business interruptions or similar losses, associated with compliance
with environmental laws and enforcement policies that either individually or in
the aggregate would have a material adverse effect on our results of operations
or financial condition.
Warranty Claims
Cavalier is subject to warranty claims in the ordinary course of its business.
Although we maintain reserves for such claims, which to date have been adequate,
there can be no assurance that warranty expense levels will remain at current
levels or that such reserves will continue to be adequate. A large number of
warranty claims exceeding our current warranty expense levels could have a
material adverse effect on Cavalier's results of operations.
Litigation
We suggest that you read Item 3., Legal Proceedings, below, for description of
certain risk factors associated with litigation.
Volatility of Stock Price
The Company's common stock is traded on the NYSE. The market price of the
Company's common stock may be subject to significant fluctuations in response to
variations in the Company's operating results and other factors affecting the
Company specifically, the manufactured housing industry generally, and the stock
market generally.
16
ITEM 2. PROPERTIES
The following table sets forth the location and approximate square footage for
each principal facility of the Company, separated by segment, as of December 31,
1999:
Location Use (Number of Facilities) Approximate Owned/
Manufacturing & Distribution Square Footage Leased (a)
Adrian Homes
Adrian, Georgia Manufacturing facility (1) 90,000 Owned
Astro Homes
Shippenville, Pennsylvania Manufacturing facility (1) 120,000 Owned
Bellcrest Homes, Inc.
Millen, Georgia Manufacturing facilities (2) 164,000 Owned
Belmont Homes, Inc.
Belmont Mississippi Manufacturing facilities (3) 498,000 Owned
Clarksdale, Mississippi Manufacturing facility (1) 91,000 Owned
BRC Components, Inc.
Phil Campbell, Alabama Distribution facility (1) 50,000 Leased
Salisbury, North Carolina Distribution facility (1) 60,000 Leased
Hillsboro, Texas Distribution facility (1) 42,500 Owned
Brigadier Homes of North Carolina
Nashville, North Carolina Manufacturing facility (1) 170,000 Owned
Buccaneer Homes
Hamiliton, Alabama Manufacturing facility (1) 195,000 Owned
Winfield, Alabama Manufacturing facilities (2) 205,000 Leased
Cavalier Homes of Alabama
Addison, Alabama Manufacturing facilities (4) 545,000 Owned (b)
Homestead Homes
Cordele, Georgia Manufacturing facility (1) 110,000 Owned
Mansion Homes
Robbins, North Carolina Manufacturing facility (1) 99,000 Leased
Quality Housing Supply, LLC
Hamiliton, Alabama Manufacturing facility (1) 50,000 Leased
Winfield, Alabama Distribution facility (1) 48,000 Leased
Riverchase Homes
Haleyville, Alabama Manufacturing facility (1) 78,000 Owned
Spirit Homes, Inc.
Conway, Arkansas Manufacturing facilities (2) 220,000 Owned
Bigelow, Arkansas Manufacturing facility (1) 80,000 Owned
Town & Country Homes
Fort Worth, Texas Manufacturing facility (1) 101,000 Owned
Mineral Wells, Texas Manufacturing facility (1) 81,000 Leased
Graham, Texas Manufacturing facility (1) 103,000 Leased
Financial Services
Hamilton, Alabama Administrative Office 7,000 Owned
Haleyville, Alabama Administrative Office 1,000 Leased
Greensboro, North Carolina Administrative Office 2,000 Leased
General Corporate & Other
Addison, Alabama Administrative Office 8,000 Owned
Wichita Falls, Texas Administrative Office 1,000 Leased
Decatur, Alabama Administrative Office 5,000 Leased
Haleyville, Alabama Administrative Office 4,000 Leased
(a) Certain of the facilities listed as owned are financed under industrial
development bond issues, including the Adrian, Buccaneer, Cavalier Homes of
Alabama (2), and Riverchase facilities. Not included in this table is the
Georgia facility for which construction is not complete.
(b) During 1999, the Company purchased two of these manufacturing facilities
that were previously leased.
In general, the manufacturing facilities are in good condition and are operated
at capacities which range from approximately 28% to 93%, excluding six idled
facilities in Addison and Winfield, Alabama, Bigelow, Arkansas, Belmont and
Clarksdale, Mississippi, and Mineral Wells, Texas, and the facility in Adrian,
Georgia, which began production in March 1999.
17
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are engaged in various legal proceedings that
are incidental to and arise in the course of its business. Certain of the cases
filed against the Company and its subsidiaries and companies engaged in
businesses similar to it allege, among other things, breach of contract and
warranty, product liability, personal injury and fraudulent, deceptive or
collusive practices in connection with their businesses. These kinds of suits
are typical of suits that have been filed in recent years, and they sometimes
seek certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. The outcome of many of the
cases in which the Company is involved or may in the future become involved
cannot be predicted with any degree of reliability, and the potential exists for
unanticipated material adverse judgments against the Company and its respective
subsidiaries.
In addition, Belmont has been sued by three former shareholders (the
"Plaintiffs") of Belmont Homes, Inc., an Alabama corporation which originally
owned the initial Belmont manufacturing facility ("BHIA"), in the Circuit Court
of Madison County, Alabama (Case Number CV 97-2297). The defendants are BHIA,
Belmont (as a successor in interest of BHIA), BHI, Inc., as a successor to
Belmont Homes, Inc., a Mississippi corporation ("BHI"), the Estate of Jerold
Kennedy (the former President and Chief Executive Officer of Belmont), J. M.
Page, and certain other unnamed and unidentified individual officers, employees,
agents and directors of BHIA, Belmont and BHI, alleging breach of fiduciary
duties, misrepresentation, deceit, suppression and civil conspiracy. The
Plaintiffs state that they owned a majority of the stock in BHIA and sold such
stock in February of 1989. In addition to certain other allegations, the
Plaintiffs claim that Mr. Kennedy, along with others who allegedly conspired
with him, misrepresented and omitted certain facts to them regarding his
attempts to hire a production manager, that Belmont later hired the production
manager, and that the Plaintiffs would not have sold their stock in BHIA in the
absence of these alleged misrepresentations and omissions. Additionally, the
Plaintiffs claim that the defendants intentionally depreciated the market value
of the stock of BHIA. In their complaint, the Plaintiffs request an unspecified
amount of compensatory and punitive damages and/or equitable relief, including a
constructive trust. The Company is aware that these same plaintiffs have also
filed a separate claim against the Estate of Mr. Kennedy in the probate court of
Franklin County, Alabama (Case Number 97-051), alleging essentially the same
facts and seeking substantial compensatory damages and punitive damages and a
constructive trust over the stock in the various Belmont entities owned by Mr.
Kennedy`s estate. The Circuit Court of Madison County, Alabama, has transferred
the Madison County action to the Circuit Court of Franklin County, Alabama. The
Circuit Court of Franklin County has granted summary judgment in favor of the
defendants on all counts asserted in the plaintiff's complaint. The plaintiffs
have appealed this decision, and the appeal is currently pending before the
Alabama Court of Civil Appeals. The outcome of this litigation and its effect on
the Company cannot presently be determined, and the possibility exists for an
adverse resolution of the litigation which could have a material adverse effect
on the results of operations and financial condition of the Company in the
quarter and year in which any such adverse resolution occurs. *
In September 1998, the Company and certain of its subsidiaries, along with a
number of other manufactured housing producers, the Manufacturing Housing
Institute, and the Manufactured Housing Association for Regulatory Reform, were
named as defendants in a lawsuit purporting to be brought on behalf of all
Kentucky residents who own manufactured homes produced by the defendants. The
complaint was filed in the Commonwealth of Kentucky Pendleton Circuit Court,
Case No. 98-CI-00143, and alleges that the defendants engaged in wrongful
conduct and fraudulent misrepresentation and concealment, and that manufactured
housing units are unsafe and/or dangerous for residential use because their
design allegedly makes them more susceptible to fire. The plaintiffs seek
compensatory and punitive damages, a requirement to retrofit manufacturing
housing units with sprinkler systems, and other equitable and legal relief. The
Commonwealth of Kentucky Pendleton Circuit Court granted defendants' motion to
dismiss during the second quarter of 1999. The plaintiffs have appealed the
dismissal, and the appeal is currently pending before the Kentucky Court of
- --------
See Safe Harbor Statement on page 31. *
18
Appeals. The outcome of this litigation and its effect on the Company cannot
presently be determined, however, and the possibility exists for an adverse
resolution of the litigation, which could have a material adverse effect on the
results of operations and financial condition of the Company. *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders during the last
quarter of the fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCK-HOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CAV". The following table sets forth, for each of the periods
indicated, the reported high and low closing sale prices per share on the NYSE
for the Company's common stock and the cash dividends paid per share in such
periods. All adjusted prices of the Company's common stock have been rounded to
the nearest one-eighth of one dollar.
Closing Sales Price
-----------------------------------
High Low Dividends
----------------- ---------------- -------------
Year ended December 31, 1999
Fourth Quarter $ 5 1/8 $ 3 11/16 $ 0.040
Third Quarter $ 6 7/8 $ 3 11/16 0.040
Second Quarter $10 $ 6 13/16 0.040
First Quarter $11 3/8 $ 8 3/4 0.040
Year ended December 31, 1998
Fourth Quarter $11 3/8 $ 7 7/8 $ 0.040
Third Quarter $13 $ 9 1/16 0.030
Second Quarter $12 11/16 $10 7/8 0.030
First Quarter $11 13/16 $ 9 5/8 0.030
As of March 17, 2000, the Company had approximately 400 shareholders of record
and 5,200 beneficial holders of its common stock, based upon information in
securities position listings by registered clearing agencies upon request of the
Company's transfer agent.
Cavalier has paid regular quarterly dividends since 1989. The amount of the
quarterly dividend was last increased to $0.04 per share in October 1998. The
payment of dividends on the Company's common stock will be determined by the
Board of Directors of the Company in light of conditions then existing,
including the earnings of the Company and its subsidiaries, their funding
requirements and financial conditions, certain loan restrictions and applicable
laws and governmental regulations. The Company's present loan agreement contains
restrictive covenants which, among other things, limit the aggregate dividend
payments and purchases of treasury stock to 50% of the Company's consolidated
net income for the two most recent fiscal years. Given current industry
conditions, the Company cannot give assurances that it will pay dividends in the
future in the same manner as it has in the past.
- --------
See Safe Harbor Statement on page 31. *
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data regarding
the Company for the periods indicated. The statement of income data, the balance
sheet data, and other data of the Company for each of the five years ended
December 31, 1999, have been derived from the consolidated financial statements
of the Company. The Company's audited financial statements as of December 31,
1999 and 1998, and for each of the years in the three-year period ended December
31, 1999, including the notes thereto and the related report of Deloitte &
Touche LLP, independent auditors, are included elsewhere in this report. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements (including the Notes thereto) and the other
financial information contained elsewhere in this report, and with the Company's
consolidated financial statements and the notes thereto appearing in the
Company's previously filed Annual Reports on Form 10-K.
Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Statement of Income Data
Revenue:
Home manufacturing net sales $ 555,756 $ 598,116 $ 553,730 $ 572,997 $ 420,519
Financial services 6,107 6,088 5,346 3,333 1,764
Retail 20,914 7,167 - - -
Supply 5,023 2,699 2,112 841 271
---------- ----------- ----------- ----------- -----------
Total revenue 587,800 614,070 561,188 577,171 422,554
Cost of sales 477,527 496,708 464,222 482,204 354,811
Selling, general and administrative 102,754 87,611 72,526 54,120 39,035
Impairment Special charge for idled
facilities 4,002 - - - -
Non-recurring merger and related - 7,359 -
costs - - - - -
---------- ----------- ----------- ----------- -----------
Operating profit 3,517 29,751 17,081 40,847 28,708
Life insurance proceeds - - 1,500 1,750 -
Other income (expense) - net 36 1,531 (242) 1,589 90
---------- ----------- ----------- ----------- -----------
Income before taxes $ 3,553 $ 31,282 18,339 $ 44,186 $ 28,798
========== =========== =========== =========== ===========
Net income $ 2,150 $ 18,655 $ 10,247 $ 27,479 $ 17,630
========== =========== =========== =========== ===========
Basic net income per share1 $ .12 $ .94 $ .52 $ 1.42 $ 1.06
========== =========== =========== =========== ===========
Diluted net income per share1 $ .12 $ .93 $ .51 $ 1.39 $ 1.03
========== =========== =========== =========== ===========
Cash dividend per share1 $ .16 $ .13 $ .07 $ .06 $ .04
========== =========== =========== =========== ===========
Weighted average number of shares
outstanding1 18,126 19,905 19,835 19,363 16,630
========== =========== =========== =========== ===========
Weighted average number of shares
outstanding, assuming dilution1 18,204 20,144 20,028 19,799 17,057
========== =========== =========== =========== ===========
Other Data
Capital expenditures $ 24,546 $ 14,655 $ 10,186 $ 16,106 $ 13,482
========== =========== =========== =========== ===========
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- -----------
Balance Sheet Data
Working capital $ 32,652 $ 41,707 $ 28,484 $ 24,746 $ 22,157
Total assets $ 229,574 $ 235,952 $ 211,554 $ 196,387 $ 132,694
Long-term debt $ 10,218 $ 3,650 $ 15,808 $ 6,227 $ 11,233
Stockholders' equity $ 129,391 $ 144,911 $ 133,551 $ 122,652 $ 75,119
1 All per share data has been adjusted for all stock splits.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Industry and Company Outlook
Cavalier Homes, Inc. and its subsidiaries are engaged in the production, sale,
financing, and insuring of manufactured housing. The manufactured housing
industry is cyclical and seasonal and is influenced by many of the same economic
and demographic factors that affect the housing market as a whole. During most
of the 1990s, the manufactured housing industry experienced significant growth,
which the Company attributes in part to a reduction in alternative housing,
increased availability of retail financing, increased consumer confidence and
continuing strength in the national economy during much of that time. As a
result, the number of retail dealerships, manufacturing capacity and wholesale
shipments expanded significantly, which consequently created slower retail
turnover, higher retail inventory levels and increased price competition.
Inventory oversupply at the retail level had a significant impact on wholesale
shipments during 1999. The Manufactured Housing Institute ("MHI") reported that
floor shipments declined 4.3% for 1999 as compared to 1998. The rate of decline
in floor shipments accelerated throughout the year, as MHI reported 12.2% fewer
shipments in the last six months of 1999 versus the same period in 1998 and
18.2% lower floor shipments in December 1999 compared to December 1998. The
industry has also been impacted by the loss of some lenders from the
manufactured housing retail and wholesale financing markets and tightening of
credit standards by those remaining. In response to deteriorating market
conditions, manufacturers have closed or idled some of their manufacturing
facilities and retail dealers have closed some locations.
Industry conditions significantly impacted Cavalier's financial results during
1999. The Company is uncertain at this time as to the extent and duration of
these developments and as to what effect these factors will have on the
Company's future sales and earnings. * The Company currently believes these
conditions will continue to adversely affect the Company's financial performance
at least through the first half of 2000. * The Company is experiencing a
significant decline in sales in the first quarter of 2000 as compared to the
first quarter of 1999 and expects to incur a substantial loss for the quarter. *
The Company also believes that, due to these industry conditions, the
possibility exists for some additional retail dealer failures and additional
loss of wholesale and retail lenders, which could adversely affect the Company.
* Because of deteriorating market conditions, Cavalier has idled a total of five
home manufacturing facilities, including three subsequent to the end of 1999,
that built primarily single section homes to consolidate production into other
plants. In 1999, the Company recorded a pre-tax impairment charge of $4.0
million ($2.5 million after tax, or $.14 per diluted share) to write-down the
value of assets of the idled plants. The Company expects to continue to monitor
the need for further plant consolidations, idlings and/or closings and to
evaluate other potential cost savings options identified through a company-wide
analysis designed to mitigate the impact of current market conditions. * The
Company can give no assurance as to which one or more of these options, if any,
it may ultimately adopt.
- --------
See Safe Harbor Statement on page 31. *
21
Results of Operations
The following table (dollars in thousands) summarizes certain financial and
operating data including, as applicable, the percentage of total revenue:
For the Year Ended December 31,
------------------------------------------------------------------------
INCOME STATEMENT DATA 1999 1998 1997
---------------------- ---------------------- -----------------------
Revenue:
Home manufacturing net sales $ 555,756 $ 598,116 $ 553,730
Financial services 6,107 6,088 5,346
Retail 20,914 7,167 -
Other 5,023 2,699 2,112
----------- --------- ----------
Total revenue $ 587,800 100.0% $ 614,070 100.0% $ 561,188 100.0%
Cost of sales 477,527 81.2% 496,708 80.9% 464,222 82.7%
----------- -------- --------- ----------- ---------- ---------
Gross profit $ 110,273 18.8% $ 117,362 19.1% $ 96,966 17.3%
=========== ======== ========= =========== ========== =========
Selling, general and administrative $ 102,754 17.5% $ 87,611 14.3% $ 72,526 12.9%
Impairment charge for idled facilities $ 4,002 0.7% $ - 0.0% $ - 0.0%
Non-recurring merger and related costs $ - 0.0% $ - 0.0% $ 7,359 1.3%
Operating profit $ 3,517 0.6% $ 29,751 4.8% $ 17,081 3.0%
Other income (expense), net $ 36 0.0% $ 1,531 0.2% $ 1,258 0.2%
Net income $ 2,150 0.4% $ 18,655 3.0% $ 10,247 1.8%
OPERATING DATA
Home manufacturing sales:
Floor shipments 34,294 36,517 33,646
Home shipments
Single section 10,546 47.1% 12,430 51.0% 13,576 57.5%
Multi section 11,831 52.9% 11,957 49.0% 10,026 42.5%
----------- -------- --------- ----------- ---------- ---------
Total shipments 22,377 100.0% 24,387 100.0% 23,602 100.0%
Shipments to company owned stores (645) (2.9%) (164) (0.7%) - 0.0%
----------- -------- --------- ----------- ---------- ---------
Shipments to independent dealers 21,732 97.1% 24,223 99.3% 23,602 100.0%
=========== ======== ========= =========== ========== =========
Retail sales:
Single section 375 58.3% 70 37.2% - 0.0%
Multi section 268 41.7% 118 62.8% - 0.0%
----------- -------- --------- ----------- ---------- ---------
Total sales 643 100.0% 188 100.0% - 0.0%
=========== ======== ========= =========== ========== =========
Cavalier produced homes sold 490 76.2% 121 64.4% - 0.0%
=========== ======== ========= =========== ========== =========
Used homes sold 115 17.9% 26 13.8% - 0.0%
=========== ======== ========= =========== ========== =========
Installment loan purchases $ 47,063 $ 27,438 $ 18,013
Capital expenditures $ 24,546 $ 14,655 $ 10,186
Home manufacturing facilities-operating 19 23 22
Independent exclusive dealer locations 274 232 132
Company-owned retail locations 16 5 -
1999 compared to 1998
Revenue
Total revenue for 1999 was $587,800 compared to $614,070 for 1998.
Home manufacturing net sales for 1999 compared to 1998 decreased 7%, or $42
million, to $556 million, net of intercompany eliminations of $17 million. Home
shipments decreased 8.2%, with floor shipments decreasing by 6.1%. During 1999,
53% of the Company's homes sold were multi-section homes compared to 49% for the
previous year. The expansion of the Company's multi-section product base is in
response to increasing consumer demand for multi-section homes as compared to
single section homes. Actual shipments of homes for 1999 were 22,377 versus
24,387 in 1998. The Company attributes the decrease in sales and shipments to
the increasingly competitive conditions in the industry described above.
Approximately 88% of Cavalier's shipments were to its core market of 11 states,
where the Company's floor shipments for 1999 declined 6.5% as compared to 1998.
For 1999, MHI reported an 8.7% decline in floor shipments in these 11 states.
Additionally, the Company's inventory at all retail locations increased, based
22
on twelve month trailing sales, from 151 days a year ago to 165 days at year
end. The average price of homes sold rose to $25,600 in 1999 from $24,700 in
1998. The increase in the average selling price was primarily due to price
increases instituted by the Company associated with rising prices in raw
materials and an increase in the shipment of multi-section homes. The Company's
exclusive dealer program expanded by 53 locations since December 31,1998,
bringing the total to 290 at December 31, 1999, including 16 company-owned
stores. Sales to exclusive dealers represented 55% of total sales in 1999 versus
40% in 1998.
Revenue in 1999 from the financial services segment approximated 1998 revenue.
During 1999, Cavalier Acceptance Corporation ("CAC") purchased installment loan
contracts of $47 million and sold $61 million of installment contracts. In 1998,
CAC purchased contracts of $27 million and sold installment contracts totaling
$46 million. During 1998, the focus of CAC's business changed from building,
holding and servicing a portfolio of loans to purchasing loans from its dealers,
which are then resold to another financial institution, without recourse
(provided that the transferred loan was properly originated by the dealer and
purchased by CAC). CAC does not retain the servicing function and does not earn
the interest income on these resold loans.
Revenue from the retail segment was $21 million for 1999, of which 76% of the
units sold were Cavalier product. In 1998, retail revenue was $7 million, of
which 64% of the units sold were Cavalier product. At December 31, 1999, the
Company operated 16 retail locations as compared to 5 at December 31, 1998.
Other revenue consists mainly of revenue from the Company's wholesale supply and
component manufacturing businesses, which sell primarily to the Company's home
manufacturing segment. Revenue from external customers increased 86%, or $2
million, for 1999 compared to 1998. This increase is due primarily to the
addition of a supply company.
Gross Profit
Gross profit is derived by deducting cost of sales from total revenue. Gross
profit was $110 million, or 18.8% of total revenue, in 1999 versus $117 million,
or 19.1% of total revenue, in 1998. During 1999, the Company experienced
tightened supply from its traditional vendors of certain types of raw materials,
including sheetrock, insulation and lumber, required for production of its
homes. The Company obtained these products from other vendors and purchased
substitute products, which resulted in higher than normal costs. Due to the
competitive industry conditions, some of these costs were not recoverable
through price increases.
Selling, General and Administrative
Selling, general and administrative expenses during 1999 were $103 million or
17.5% of total revenue, versus $88 million or 14.3% in 1998, an increase of $15
million. Of this increase, $1.9 million is related to expanded sales and
marketing efforts, including PowerHouse promotions, and recruiting, set-up and
maintenance of the exclusive dealer network. Additionally, selling, general and
administrative expenses increased $2.0 million due to higher costs for employee
benefits, $0.8 million for increased warranty service activities and $3.1
million for the start-up costs associated with implementing an enterprise-wide
management information system. Other factors contributing to the increase in
selling, general and administrative expenses are (1) costs of $3.4 million
associated with operating new retail locations and the continued development of
a retail infrastructure, (2) costs associated with the expansion of the supply
distribution business of $1.6 million, (3) $2.8 million of costs associated with
repurchased inventory, (4) $0.9 million increase in loan loss reserve, and (5)
$0.3 million in costs of opening an additional home manufacturing facility.
These costs were partially offset by a reduction in incentive compensation of
$4.1 million.
Impairment charge for idled facilities
Because of deteriorating market conditions, Cavalier has idled a total of five
home manufacturing facilities, including three subsequent to the end of 1999,
that built primarily single section homes to consolidate production into other
plants. In 1999, the Company recorded a pre-tax impairment charge of $4.0
million ($2.5 million after tax, or $.14 per diluted share) to write-down the
value of assets of the idled plants.
23
Operating Profit
Operating profit is derived by deducting cost of sales and selling, general and
administrative expenses from total revenue. Operating profit declined $26
million to $4 million in 1999 from $30 million in 1998.
Home manufacturing operating profit declined $18 million, before intercompany
eliminations, due primarily to lower sales, increased raw material prices,
increased selling, general and administrative expenses and the impairment charge
for idled facilities. Financial services operating profit decreased $2 million
due principally to increased selling, general and administrative expenses,
consisting primarily of prepayment and repossession costs and payroll costs due
to the addition of area sales personnel. The retail segment's operating loss
increased $1.5 million due to the operation of start-up retail locations, the
continued development of a retail infrastructure and the competitive conditions
currently prevailing in the industry. Other operating profit declined $1.8
million, before intercompany eliminations, due mainly to the costs associated
with the start-up of a new supply company.
Other Income (Expense)
Interest expense increased to $2 million in 1999 from $1 million in 1998 due to
the increase in notes payable under retail floor plan agreements and amounts
outstanding under Industrial Development Revenue Bond Issues.
Other, net, is primarily comprised of interest income (unrelated to financial
services), gains or losses on sales of assets, equity earnings in investments
accounted for on the equity basis of accounting and applicable allocation of
minority interest. The decrease of $0.7 million in 1999 to $1.7 million from
$2.4 million in 1998 was primarily due to decreased interest income earned due
to lower average cash balances during 1999 as compared to 1998.
Net Income
Net income declined $17 million to $2 million in 1999 from $19 million in 1998
which the Company attributes to lower sales, increased raw materials prices and
selling, general and administrative expenses, the impairment charge and the
other industry factors discussed above. Diluted net income per share was $0.12
in 1999, compared to $0.93 per share in 1998.
1998 compared to 1997
Revenue
Home manufacturing net sales for 1998 as compared to 1997 increased by 8%, or
$44 million, net of intercompany elimination of $5 million, with home shipments
increasing by 3.3%. During 1998, 49% of the Company's homes sold were
multi-section homes compared to 42% for the previous year. As the sale of
multi-section homes continued to increase, the number of floors sold in 1998
increased 8.5% from 1997. The expansion of the Company's multi-section product
base is in response to increasing consumer demand for multi-section homes. At
year end, the exclusive dealer distribution system had grown to 237 exclusive
dealer locations, including five Company-owned retail locations. Sales to
exclusive dealers represented 40% of total 1998 sales compared to 30% in 1997.
The Company attributes the strong growth in its Exclusive Dealer Program to
dealer acceptance of the program's benefits and the introduction of the program
to the Belmont group of dealers. Actual shipments of homes during 1998 were
24,387 versus 23,602 in 1997. The average price of homes sold rose to $24,700 in
1998 from $23,500 in 1997. The increase in the average selling price was
primarily due to price increases instituted by the Company associated with
rising prices in raw materials and an increase in the shipment of multi-section
homes.
24
Revenue from the financial services segment increased $0.7 million in 1998 as
compared to 1997 primarily due to a gain on the sale of a significant portion of
CAC's loan portfolio in 1998 and the subsequent periodic resale of loans. In
1998, the effect of the portfolio sale on financial services revenue was a
reduction in interest income earned of $1.4 million, offset by the gain on sale
of loans of $2 million. During 1998, the business focus of CAC changed from
building, holding and servicing a portfolio of loans to purchasing loans from
its dealers that are subsequently resold to another financial institution,
without recourse (provided that the transferred loan was properly originated by
the dealer and purchased by CAC). CAC does not retain the servicing function and
does not earn interest income on these resold loans. During 1998, CAC purchased
contracts totaling $27 million as compared to $18 million in 1997.
Revenue from the retail segment was $7 million for 1998, of which 64% of the
units sold were Cavalier product. The Company did not own any retail sales
centers in 1997. At December 31, 1998, the Company operated 5 retail locations.
Other revenue consists mainly of revenue from the Company's wholesale supply and
component manufacturing businesses, which sell primarily to the Company's home
manufacturing segment. Revenue from external customers increased 28%, or $0.6
million, for 1998 compared to 1997. This increase is due primarily to the
addition of a supply company.
Gross Profit
Gross profit is derived by deducting cost of sales from total revenue. Gross
profit was $117 million, or 19.1% of total revenue, in 1998 versus $97 million,
or 17.3% of total revenue, in 1997. The Company believes an increase in total
revenue and cost savings due to increased purchasing and other efficiencies
after the Belmont merger are responsible for a significant portion of this
increase.
Selling, General and Administrative
Selling, general and administrative expenses during 1998 were $88 million, or
14.3% of total revenue, compared to $73 million, or 12.9% of total revenue, in
1997, an increase of $15 million as compared to 1997. Of this increase, $4.5
million is related to broadened sales and marketing efforts, including
recruiting, set-up and maintenance of the exclusive dealer network, and the
continued development of a retail infrastructure. Additionally, selling, general
and administrative expenses increased $1.4 million due to higher costs for
employee benefits, primarily health insurance, $1 million for increased warranty
service activities and $0.7 million for the start-up costs associated with
implementing an enterprise-wide management information system. Other factors
contributing to the increase in selling, general and administrative expenses are
the costs associated with retail acquisitions, opening an additional home
manufacturing facility and the expansion of the supply distribution business.
Operating Profit
Operating profit is derived by deducting cost of sales and selling, general and
administrative expenses from total revenue. Operating profit improved $13
million to $30 million in 1998 from $17 million in 1997. Home manufacturing
operating profit improved $2.5 million due to an increase in sales and cost
savings associated with increased purchasing and other efficiencies after the
Belmont merger. Financial services operating profit improved $0.2 million due to
a gain on the sale of a significant portion of CAC's loan portfolio, offset by
reduced interest income on the portion of the portfolio sold. Additionally,
operating profit improved due to the absence of a $7.4 million non-recurring
merger charge in 1997.
Other Income (Expense)
Interest expense decreased in 1998 from 1997 due to the March 1998 retirement of
the financial services debt which was paid with the proceeds from the sale of a
portion of CAC's loan portfolio, as well as the payoff in September 1997 of debt
that had been used to support the 1996 Bellcrest acquisition, offset by floor
plan interest in 1998 incurred in connection with the Company-owned retail sales
locations.
25
Other, net, is primarily comprised of interest income (unrelated to financial
services), gains or losses on sales of assets, equity earnings in investments
accounted for on the equity basis of accounting and applicable allocation of
minority interest. The increase of $1.1 million in 1998 as compared to 1997 was
primarily due to increased interest income on earnings from the cash proceeds
from the sale of a portion of CAC's loan portfolio.
Net Income
Net income improved $8.5 million to $18.7 million in 1998 from $10.2 million in
1997 due primarily to an increase in total revenue, the cost savings associated
with increased purchasing and other efficiencies after the Belmont merger and
the absence of the non-recurring merger charge of $6.5 million net of taxes.
Liquidity and Capital Resources
Balances as of December 31,
----------------------------------
(Dollars in thousands) 1999 1998 1997
----------- -------- ---------
Cash and cash equivalents $ 39,635 $ 64,243 $ 37,276
Certificates of deposit, maturing within one year $ - $ - $ 4,000
Working capital $ 32,652 $ 41,707 $ 28,484
Current ratio 1.4 to 1 1.5 to 1 1.5 to 1
Long-term debt $ 10,218 $ 3,650 $ 15,808
Ratio of long-term debt to equity 1 to 13 1 to 40 1 to 8
Installment loan portfolio $ 9,450 $ 26,117 $ 49,146
Operating activities during 1999 used net cash of $6.5 million. Inventory at
December 31, 1999, increased $11.3 million from 1998 due primarily to the
expansion of the retail segment from five company-owned stores at the end of
1998 to 16 at the end of 1999.
Net cash totaling $4.4 million was paid during the first half of 1999 in
connection with acquisitions of seven retail locations, an insurance agency, a
premium finance company and a supply company.
The Company's 1999 capital expenditures were $24.5 million, as compared to $14.7
million in 1998. Capital expenditures during 1999 included normal property,
plant and equipment additions and replacements and the continued expansion and
modernization of certain of the Company's manufacturing facilities.
Additionally, during January 1999, the Company purchased, for a total of $3.4
million, two Alabama manufacturing facilities that were previously leased, and
renovated a Georgia manufacturing facility at a cost of $1.7 million that was
placed in operation at the end of the first quarter. Approximately $3.5 million
of the cost of implementing a new enterprise-wide management information system
has been capitalized in 1999. Due to current market conditions, construction of
an additional manufacturing facility in Georgia, for which the Company
capitalized $2.4 million in early 1999, has been temporarily slowed. In addition
to the periodic resale of loans, the Company's finance subsidiary, CAC, sold $16
million of its existing installment contracts portfolio to another financial
institution.
The 1999 increase in long-term debt of $6.6 million is primarily due to the
assumption of an industrial development revenue bond in the amount of $0.8
million related to the Alabama facilities acquired and proceeds from two other
industrial development bonds of $7.0 million for the Georgia facilities. Notes
payable increased $11.4 million due to the increase in retail floor plan
financing as a result of the acquisition or opening of additional retail
locations.
The Company purchased 1,779,000 shares of treasury stock during 1999 for $15.7
million. The Company has authorization to acquire up to 1.4 million additional
shares under the program.
As of December 31, 1998, the Company had working capital of $42 million compared
to $28 million at the end of 1997, an increase of $14 million. The 1998 increase
in working capital and the decreases in long-term debt and the debt to equity
ratio were due to the sale of a portion of CAC's installment loan portfolio, of
which a portion of the proceeds were used to retire approximately $14 million in
debt and approximately $13 million was invested in short-term assets. Operating
26
activities provided cash of $37 million in 1998. The Company's capital
expenditures were approximately $15 million in 1998. Capital expenditures during
1998 included normal property, plant and equipment additions and replacements,
the continued expansion and modernization of certain of the Company's
manufacturing facilities, as well as the purchase of a Texas manufacturing
facility that was previously leased, land adjacent to a North Carolina and a
Georgia manufacturing facility, and an additional manufacturing facility in
Georgia placed in operation in the first quarter of 1999. The Company initiated
a stock repurchase program during the latter part of 1998 of which 852,600
shares were purchased during 1998 for approximately $8 million.
The Company entered into a credit agreement with its primary lender in February
1994 and later amended it in March 1996 and June 1998. The credit facility
presently consists of a $35 million revolving, warehouse and term-loan
agreement. The credit facility contains a revolving line of credit which
provides for borrowings (including letters of credit) of up to 80% and 50% of
the Company's eligible (as defined) accounts receivable and inventories,
respectively, up to a maximum of $10 million. Interest is payable under the
revolving line of credit at the bank's prime rate, or, if elected by the
Company, the 90-day LIBOR Rate plus 2.5%. The warehouse and term-loan agreements
contained in the credit facility provide for borrowings of up to 80% of the
Company's eligible (as defined) installment sales contracts, up to a maximum of
$25 million. Interest on the term notes is fixed for a period of five years from
issuance at a rate based on the weekly average yield on five-year treasury
securities averaged over the preceding 13 weeks, plus 1.95%, with a floating
rate for the remaining two years (subject to certain limits) equal to the bank's
prime rate plus 0.75%. The warehouse component of the credit facility provides
for borrowings of up to $25 million with interest payable at the bank's prime
rate, or, if elected by the Company, the 90-day LIBOR Rate plus 2.5%. However,
in no event may the aggregate outstanding borrowings under the warehouse and
term-loan agreement exceed $25 million. Under the credit facility, no amounts
were outstanding at December 31, 1999 and December 31, 1998.
The credit facility contains certain restrictive covenants which limit, among
other things, the Company's ability to (i) make dividend payments and purchases
of treasury stock in an aggregate amount which exceeds 50% of consolidated net
income for the two most recent years, (ii) mortgage or pledge assets which
exceed, in the aggregate, $1 million, (iii) incur additional indebtedness,
including lease obligations, which exceed in the aggregate $10 million and (iv)
make capital expenditures in excess of $14 million. In addition, the credit
facility contains certain financial covenants requiring the Company to maintain
on a consolidated basis certain defined levels of net working capital (at least
$3.5 million), tangible net worth (which must increase at least $2 million per
year, subject to a carryover for increases in excess of $2 million in the prior
year), debt to equity ratio (not to exceed 2 to 1) and cash flow to debt service
ratio (not less than 1.5 to 1). The credit facility also requires CAC to comply
with certain specified restrictions and financial covenants. The Company has
obtained appropriate waiver letters to the extent it was in violation of certain
covenants at December 31, 1999.
On February 29, 2000, the Company received a commitment from its primary bank to
extend its Credit Facility through April 2002. The renewal increases the amount
available under the revolving line of credit to $35 million (an increase from
$10 million), provided that the aggregate amounts outstanding under the
revolving note and term loans do not exceed $35 million, eliminates the
warehouse feature of the Credit Facility and provides for the ability to convert
the amount advanced under the revolving line to a term loan. Interest is payable
under the terms of the renewal at the bank's prime rate less 0.5%, or, if
elected by the Company, the 90-day LIBOR Rate plus 2.0%. The principal
modifications to the financial covenants under the commitment letter are as
follows: (i) the net working capital requirement increased from at least $3.5
million to at least $15 million, (ii) a minimum current ratio requirement of
1.17 to 1was added, (iii) the sum of consolidated tangible net worth plus
treasury stock purchases must be at least $90 million and (iv) the ratio of
consolidated cash flow to debt service of not less than 1.5 to 1was amended to
not less than 1.75 to 1. Other terms and restrictive covenants are substantially
similar to the expiring agreement.
27
Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds borrowed under its credit line with its primary lender. In
February 1998, CAC entered into an agreement with another lender providing for
the periodic resale of a portion of CAC's loans that meet established criteria
and without recourse (provided that the transferred loan was properly originated
by the dealer and purchased by CAC). In March 1998 and in June 1999, CAC sold,
under the retail finance agreement, a substantial portion of its existing
portfolio of loans on those dates. The effect of these transactions on net
income was to reduce the amount of financial services revenue from interest
income on these portions of the portfolio, offset by reduced interest expense on
debt retired in March 1998 and earnings on the remaining proceeds. The Company
may sell a substantial portion of its remaining installment loan portfolio in
fiscal year 2000, in addition to the periodic sale of installment contracts
purchased by CAC in the future. * The Company believes the periodic sale of
installment contracts under the retail finance agreement will reduce
requirements for both working capital and borrowings, increase the Company's
liquidity, reduce the Company's exposure to interest rate fluctuations and
enhance the ability of CAC to increase its volume of loan purchases. * There can
be no assurance, however, that additional sales will be made under this
agreement, or that CAC and the Company will be able to realize the expected
benefits from such agreement. *
The Company currently believes existing cash and funds available under the
credit facility, together with cash provided by operations, will be adequate to
fund the Company's operations and plans for the next twelve months. In order to
provide additional funds for continued pursuit of the Company's business plans
and for operations, the Company may incur, from time to time, additional short
and long-term bank indebtedness or other forms of financing and may issue, in
public or private transactions, its equity and debt securities, the availability
and terms of which will depend upon market and other conditions. * The Company
may engage in other transactions, such as selling or securitizing all or
portions of its installment loan portfolio, that are designed to facilitate the
ability of the Company to originate an increased volume of loans and to reduce
the Company's exposure to interest rate fluctuations and has entered into such a
transaction pursuant to the retail finance agreement, as further described
above. * There can be no assurance that such possible additional financing, or
the aforementioned potential transactions involving the Company's installment
loan portfolio, will be available on terms acceptable to the Company. It is
possible that a future lack of financing or a prolonged downturn in industry
conditions could cause the Company to curtail or otherwise alter its current
business plans and operating strategies. *
Impact of Inflation
The Company generally has been able to increase its selling prices to offset
increased costs, including the costs of raw materials. Sudden increases in costs
as well as price competition, however, can affect the ability of the Company to
increase its selling prices. As discussed above, in 1999, the Company
experienced tightened supply of certain types of raw materials, which resulted
in some higher costs that were not recoverable through price increases. For a
further discussion of this matter, see "1999 Compared to 1998 - Gross Profit."
The Company believes that the relatively moderate rate of inflation over the
past several years has not had a significant impact on its sales or
profitability, but can give no assurance that this trend will continue in the
future. *
Impact of Accounting Statements
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133,as amended, is required to be adopted for years
beginning after June 15, 2000. The Company is currently evaluating SFAS 133 and
has not yet determined its impact on the Company's consolidated financial
statements.
Year 2000 Compliance
By October 1999, the Company implemented what it considered to be critical
modifications to its computer systems and software products, identified through
its assessment of Year 2000 issues. Cost incurred to complete the assessment and
- --------
See Safe Harbor Statement on page 31.
28
implementation of Year 2000 issues was $0.9 million, which was within the
reported estimated range of $0.8 million and $1.2 million as an expense, in
addition to approximately $0.2 million of capital expenditures. No critical
problems associated with the Year 2000 issue have been encountered and minor
issues have been corrected as discovered without significant disruption to the
Company's processes and without implementation of the Company's contingency
plan.
The Company's Year 2000 program included testing each computer system and
microprocessor in use, identifying significant third parties' Year 2000
compliance, converting Company systems to Year 2000 compliant versions of
software products and equipment and developing a contingency plan.
Market Risk
Market risk is the risk of loss arising from adverse changes in market prices
and interest rates. The Company is exposed to interest rate risk inherent in its
financial instruments. The Company is not currently subject to foreign currency
or commodity price risk. The Company manages its exposure to these market risks
through its regular operating and financing activities.
The Company is exposed to market risk related to investments held in a
non-qualified trust used to fund benefits under its deferred compensation plan.
These investments totaled $3.1 million at December 31, 1999. Due to the
long-term nature of the benefit liabilities that these assets fund, the Company
currently considers its exposure to market risk to be low. The Company does not
believe that a decline in market value of these investments would result in a
material near term funding of the trust or exposure to the benefit liabilities
funded.
The Company purchases retail installment contracts from its exclusive dealers,
at fixed interest rates, in the ordinary course of business, and periodically
resells certain of these loans to a financial institution under the terms of the
retail finance agreement discussed above. The periodic resale of installment
contracts reduces the Company's exposure to interest rate fluctuations, as the
majority of contracts are held for a short period of time. Additionally, the
Company has installment loans receivable in its portfolio of $9.5 million, which
may be sold during 2000. The Company's portfolio consists of fixed rate
contracts with interest rates generally ranging from 9.0% to 14.0% and an
average original term of 269 months at December 31, 1999. The Company estimated
the fair value of its installment contracts receivable using discounted cash
flows and interest rates offered by CAC on similar contracts at December 31,
1999.
The Company has notes payable under retail floor plan agreements and an
Industrial Development Revenue Bond issue that are exposed to changes in
interest rates. Since these borrowings are floating rate debt, an increase in
short-term interest rates would adversely affect interest expense. The Company
may retire this debt if interest rates were to increase significantly.
Additionally, the Company has five Industrial Development Revenue Bond issues at
fixed interest rates. The estimated fair value of outstanding borrowings
approximated carrying value at December 31, 1999. The Company estimated the fair
value of its debt instruments using rates at which the Company believes it could
have obtained similar borrowings at that time. The Company also has the ability
to incur debt under its credit facility which provides for interest at the
bank's prime rate for the revolving and warehouse line of credit and at fixed
rates for a certain period of time for the term notes. The table below provides
information about the Company's financial instruments that are sensitive to
changes in interest rates at December 31, 1999.
29
Assumed Annual Principal Cash Flows
-----------------------------------------------------------------------------
(dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total Fair value
Installment loan portfolio $ 143 $ 160 $ 178 $ 199 $ 223 $ 8,547 $ 9,450 $ 8,402
(weighted average interest rate - 11.16%)
Expected Principal Maturity Dates
-----------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair value
Notes payable and long-term debt $ 16,681 a $ 1,167 $ 1,215 $ 1,254 $ 1,461 $ 5,121 $ 26,899 $ 26,899
(weighted average interest rate - 7.08%)
a Amount payable in 2000 includes $1,119 of current portion of long-term debt and $15,562 of notes payable under retail
floor plan agreements.
30
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:
Our disclosure and analysis in this Annual Report on Form 10-K contain some
forward-looking statements. Forward looking statements give our current
expectations or forecasts of future events, including statements regarding
trends in the industry and the business, financing and other strategies of
Cavalier. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They generally are designated with an
asterisk (*) and use words such as "estimates," "projects," "intends,"
"believes," "anticipates," "expects," "plans," and other words and terms of
similar meaning in connection with any discussion of future operating or
financial performance. From time to time, we may also provide oral or written
forward-looking statements in other materials we release to the public. These
forward-looking statements include statements involving known and unknown
assumptions, risks, uncertainties and other factors which may cause our actual
results, performance or achievements to differ from any future results,
performance, or achievements expressed or implied by such forward-looking
statements or words. In particular, such assumptions, risks, uncertainties and
factors include those associated with the following:
o the cyclical and seasonal nature of the manufactured housing industry
and the economy generally;
o limitations in Cavalier's ability to pursue its business strategy;
o changes in demographic trends, consumer preferences and Cavalier's
business strategy;
o changes and volatility in interest rates and the availability of
capital and consumer and dealer financing;
o the ability to attract and retain quality independent dealers,
executive officers and other personnel;
o competition;
o contingent repurchase and guaranty obligations;
o uncertainties regarding Cavalier's retail financing activities;
o integrating the business operations and achieving the benefits
of the Belmont merger and other acquisitions;
o the potential unavailability and price increases for raw materials;
o the potential unavailability of manufactured housing sites;
o regulatory constraints;
o the potential for additional warranty claims;
o litigation; and
o potential volatility in our stock price.
Any or all of our forward-looking statements in this report, in the 1999 Annual
Report to Stockholders and in any other public statements we make may turn out
to be wrong. These statements may be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors listed above
will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our future filings with the Securities and Exchange Commission or in any of
our press releases. Also note that, under the heading Risk Factors, we have
provided a discussion of factors that we think could cause our actual results to
differ materially from expected and historical results. Other factors besides
those listed could also adversely affect Cavalier. This discussion is provided
as permitted by the Private Securities Litigation Reform Act of 1995.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Selected Quarterly Financial Data (Unaudited)
The table below sets forth certain unaudited quarterly financial data for the
two years ended December 31, 1999 and 1998. The Company believes that the
following quarterly financial data includes all adjustments necessary for a fair
presentation, in accordance with generally accepted accounting principles. The
following quarterly financial data should be read in conjunction with the other
financial information contained elsewhere in this report. The operating results
for any interim period are not necessarily indicative of results for a complete
year or for any future period.
Fourth Third Second First
Quarter Quarter Quarter Quarter Total
----------------------------------------------------------
1999
Revenue:
Home manufacturing $ 113,104 $ 126,083 $ 158,086 $ 158,483 $ 555,756
Financial services 1,156 1,470 2,026 1,455 6,107
Retail 5,684 6,748 6,004 2,478 20,914
Other 1,246 1,534 1,243 1,000 5,023
---------- ----------- ----------- ----------- -----------
Total revenue 121,190 135,835 167,359 163,416 587,800
Gross profit 21,686 24,748 31,235 32,604 110,273
Net income (3,550) (1,621) 2,820 4,501 2,150
Basic net income per share a (0.20) (0.09) .16 .24 .12
Diluted net income per share a (0.20) (0.09) .16 .24 .12
1998
Revenue:
Home manufacturing $ 158,457 $ 152,542 $ 164,274 $ 122,843 $ 598,116
Financial services 1,526 1,121 1,015 2,426 6,088
Retail b 2,552 2,761 1,854 - 7,167
Other b 845 1,074 470 310 2,699
---------- ----------- ----------- ----------- -----------
Total revenue 163,380 157,498 167,613 125,579 614,070
Gross profit 32,444 30,634 31,460 22,824 117,362
Net income 5,324 5,220 5,069 3,042 18,655
Basic net income per share a .27 .26 .25 .15 .94
Diluted net income per share a .27 .26 .25 .15 .93
a The sum of quarterly amounts may not equal the annual amounts due to rounding.
b Certain amounts from the prior periods have been reclassified to conform to the 1999 presentation.
32
CAVALIER HOMES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Consolidated Financial Statements and Schedule
Independent Auditor's Report 4
Consolidated Balance Sheets 5
Consolidated Statements of Income 7
Consolidated Statements of Stockholders' Equity 8
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
Schedule -
II - Valuation and Qualifying Accounts 55
Schedules I, III, IV and V have been omitted because they are either not
required or are inapplicable.
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Cavalier Homes, Inc.:
We have audited the accompanying consolidated balance sheets of Cavalier Homes,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial schedule listed in the index of Item 8. The financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
The 1997 consolidated financial statements give retroactive effect to the merger
of the Company and Belmont Homes, Inc., which has been accounted for as a
pooling of interests as described in Note 2 to the consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cavalier Homes, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
- --------------------------
Birmingham, Alabama
February 29, 2000
34
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,635 $ 64,243
Accounts receivable, less allowance for losses of
$3,464 (1999) and $1,201 (1998) 6,692 7,678
Notes and installment contracts receivable - current 939 1,577
Inventories 50,120 38,803
Deferred income taxes 15,166 9,413
Other current assets 3,109 4,077
---------- ----------
Total current assets 115,661 125,791
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 5,999 5,414
Buildings and improvements 52,182 41,991
Machinery and equipment 49,118 38,707
---------- ----------
107,299 86,112
Less accumulated depreciation and amortization 32,804 24,690
---------- ----------
Total property, plant and equipment, net 74,495 61,422
---------- ----------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $1,656 (1999) and
$760 (1998) 7,651 24,512
---------- ----------
GOODWILL, less accumulated amortization
of $5,432 (1999) and $4,154 (1998) 22,684 19,945
---------- ----------
OTHER ASSETS 9,083 4,282
---------- ----------
TOTAL $ 229,574 $ 235,952
========== ==========
35
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,119 $ 405
Notes payable under retail floor plan agreements 15,562 4,163
Accounts payable 12,303 17,776
Amounts payable under dealer incentive programs 25,442 25,559
Accrued compensation and related withholdings 5,312 7,154
Estimated warranties 13,000 12,400
Other accrued expenses 10,271 16,627
---------- ----------
Total current liabilities 83,009 84,084
---------- ----------
DEFERRED INCOME TAXES 1,459 390
---------- ----------
LONG-TERM DEBT 10,218 3,650
---------- ----------
OTHER LONG-TERM LIABILITIES 5,497 2,917
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Series A Junior Participating Preferred Stock, $.01 par value;
200,000 shares authorized, none issued
Preferred stock, $.01 par value; 300,000 shares authorized,
none issued
Common stock, $.10 par value; 50,000,000 shares authorized,
18,271,433 (1999) and 20,282,782 (1998) shares issued 1,827 2,028
Additional paid-in capital 55,181 60,760
Retained earnings 75,593 90,400
Treasury stock, at cost; 480,100 (1999) and 852,600 (1998) shares (3,210) (8,277)
----------- ----------
Total stockholders' equity 129,391 144,911
----------- ----------
TOTAL $ 229,574 $ 235,952
=========== ===========
See notes to consolidated financial statements.
36
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1999 1998 1997
REVENUE $ 587,800 $ 614,070 $ 561,188
----------- ----------- -----------
COST OF SALES 477,527 496,708 464,222
SELLING, GENERAL AND ADMINISTRATIVE 102,754 87,611 72,526
IMPAIRMENT CHARGE FOR IDLED FACILITIES 4,002
MERGER AND RELATED COSTS - - 7,359
----------- ----------- -----------
584,283 584,319 544,107
----------- ----------- -----------
OPERATING PROFIT 3,517 29,751 17,081
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (1,643) (820) (1,511)
Life insurance proceeds 1,500
Other, net 1,679 2,351 1,269
----------- ----------- -----------
36 1,531 1,258
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,553 31,282 18,339
INCOME TAXES 1,403 12,627 8,092
----------- ----------- -----------
NET INCOME $ 2,150 $ 18,655 $ 10,247
=========== =========== ===========
BASIC NET INCOME PER SHARE $ 0.12 $ 0.94 $ 0.52
=========== =========== ===========
DILUTED NET INCOME PER SHARE $ 0.12 $ 0.93 $ 0.51
=========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 18,125,763 19,904,746 19,834,942
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING,
ASSUMING DILUTION 18,204,030 20,143,795 20,028,181
=========== =========== ===========
See notes to consolidated financial statements.
37
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
BALANCE, JANUARY 1, 1997 $ 1,974 $ 55,126 $ 65,552 - $ 122,652
Stock options exercised 7 7
Sale of common stock under Employee Stock
Purchase Plan 5 425 430
Sale of common stock under Dividend
Reinvestment Plan 17 1,653 1,670
Accrued compensation 172 172
Cash dividends paid ($.07 per share) (1,470) (1,470)
Retirement of common stock (2) (155) (157)
Net income - - 10,247 10,247
-------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 1,994 57,228 74,329 133,551
Stock options exercised 4 153 157
Income tax benefit attributable to exercise of
stock options 90 90
Sale of common stock under Employee Stock
Purchase Plan 5 504 509
Sale of common stock under Dividend
Reinvestment Plan 25 2,579 2,604
Accrued compensation 206 206
Cash dividends paid ($.13 per share) (2,584) (2,584)
Purchase of treasury stock (852,600 shares) (8,277) (8,277)
Net income - - 18,655 - 18,655
-------- ---------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 2,028 60,760 90,400 (8,277) 144,911
Stock options exercised 4 280 284
Income tax benefit attributable to exercise of
stock options 28 28
Sale of common stock under Employee Stock
Purchase Plan 10 481 491
Sale of common stock under Dividend
Reinvestment Plan 14 14
Accrued compensation 114 114
Cash dividends paid ($.16 per share) (2,926) (2,926)
Purchase of treasury stock (1,779,000 shares) (15,675) (15,675)
Retirement of treasury stock (2,151,500 shares) (215) (6,496) (14,031) 20,742 -
Net income - - 2,150 - 2,150
-------- --------- --------- --------- ----------
BALANCE, DECEMBER 31, 1999 $ 1,827 $ 55,181 $ 75,593 $ (3,210) $ 129,391
======== ========= ========= ========= ==========
See notes to consolidated financial statements.
38
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
OPERATING ACTIVITIES:
Net income $ 2,150 $ 18,655 $ 10,247
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,250 8,365 7,492
Provision (recovery) for credit losses and repurchase commitments 3,159 (486) 669
Gain on sale of installment contracts (2,257) (2,048)
Loss on sale of property, plant and equipment 85 49 340
Impairment charge for idled facilities 4,002
Other, net 2 267 211
Changes in assets and liabilities provided (used) cash,
net of effects of acquisitions:
Accounts receivable (1,277) 787 2,574
Inventories (5,376) (6,248) (488)
Accounts payable (6,929) 6,313 (3,310)
Other assets and liabilities (10,329) 11,704 5,513
---------- ---------- -----------
Net cash provided by (used in) operating activities (6,520) 37,358 23,248
---------- ---------- -----------
INVESTING ACTIVITIES:
Net cash paid in connection with acquisitions (4,439) (2,358) (871)
Proceeds from sale of property, plant and equipment 437 282 122
Capital expenditures (24,546) (14,655) (10,186)
Purchases of certificates of deposit (6,044) (8,000)
Maturities of certificates of deposit 10,044 12,243
Proceeds from sale or maturity of marketable securities 1,097
Net change in notes and installment contracts (44,943) (23,119) (13,547)
Proceeds from sale of installment contracts 62,815 47,852
Other investing activities (1,686) (1,085) 133
---------- --------- -----------
Net cash provided by (used in) investing activities (12,362) 10,917 (19,009)
---------- --------- ----------
FINANCING ACTIVITIES:
Net borrowings on notes payable 4,824 1,307
Proceeds from long-term borrowings 7,807 25,263
Payments on long-term debt (545) (15,024) (22,457)
Net proceeds from sales of common stock 505 3,113 2,100
Proceeds from exercise of stock options 284 157 7
Cash dividends paid (2,926) (2,584) (1,470)
Purchase of treasury stock (15,675) (8,277)
Other financing activities - - (157)
---------- --------- ----------
Net cash provided by (used in) financing activities (5,726) (21,308) 3,286
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (24,608) 26,967 7,525
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 64,243 37,276 29,751
---------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 39,635 $ 64,243 $ 37,276
========== ========= ==========
See notes to consolidated financial statements.
39
CAVALIER HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Cavalier Homes, Inc. and its wholly-owned and
majority-owned subsidiaries (collectively, the "Company"). The Company's
minority ownership interests in various joint ventures are accounted for
using the equity method and are included in other assets in the
accompanying consolidated balance sheets. Intercompany transactions have
been eliminated in consolidation. See Note 12 for information related to
the Company's business segments.
Nature of Operations - The Company designs and produces manufactured homes
which are sold to a network of dealers located primarily in the South
Central and South Atlantic regions of the United States. In addition,
through its financial services segment, the Company offers retail
installment sale financing and related insurance products for manufactured
homes sold through the Company's exclusive dealer locations and
company-owned retail locations. The Company's retail segment operates
retail sales locations which offer the Company's homes, financing and
insurance products to retail customers.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and notes. Actual results could
differ from those estimates.
Fair Value of Financial Instruments - The carrying value of the Company's
cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short-term maturity of
those instruments. Additional information concerning the fair value of
other financial instruments is disclosed in Notes 4 and 6.
Cash Equivalents - The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost and depreciated primarily over the estimated useful lives of the
related assets using the straight-line method. Maintenance and repairs are
expensed as incurred. The Company paid $337, $388 and $270 in 1999, 1998
and 1997, respectively, for construction of plant facilities, and paid
$3.4 million in 1999 to exercise purchase options on two previously leased
facilities, to companies among whose owners are certain officers,
directors or stockholders of the Company.
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired and is being amortized over the
expected periods to be benefited, 15 to 25 years, using the straight-line
method.
40
Impairment of Long-Lived Assets - The Company evaluates the recoverability
of long-lived assets primarily using forecasted undiscounted cash flows,
supplemented if necessary by an independent appraisal of fair value.
Revenue Recognition - Sales of manufactured homes to independent dealers
are recorded as of the date the home is shipped to the dealer. All sales
are final and without recourse except for the contingency described in
Note 11. For Company-owned retail locations, revenue is recorded upon
transfer of title to the retail home buyer. Interest income on installment
contracts receivable is recognized using the interest method.
Product Warranties - The Company provides the retail home buyer a one-year
limited warranty covering defects in material or workmanship in home
structure, plumbing and electrical systems. A liability is provided for
estimated future warranty costs relating to homes sold, based upon
management's assessment of historical experience factors and current
industry trends.
Allowance for Losses on Installment Contracts - The Company has provided
an allowance for estimated future losses resulting from retail financing
activities of Cavalier Acceptance Corporation ("CAC"), a wholly-owned
subsidiary, primarily based upon management's assessment of historical
experience and current economic conditions.
Insurance - The Company's workmen's compensation (prior to February 1,
1999), product liability and general liability insurance coverages (with
the exception of two subsidiaries, whose insurance is provided under fully
insured policies) are provided under incurred loss, retrospectively rated
premium plans. Under these plans, the Company incurs insurance expense
based upon various rates applied to current payroll costs and sales.
Annually, such insurance expense is adjusted by the carrier for loss
experience factors subject to minimum and maximum premium calculations.
Refunds or additional premiums are estimated and recorded when
sufficiently reliable data is available. During 1999, the Company's
workmen's compensation coverage was converted to a fully insured policy.
Net Income Per Share - The Company reports two separate net income per
share numbers, basic and diluted. Both are computed by dividing net income
by the weighted average shares outstanding (basic) or weighted average
shares outstanding assuming dilution (diluted) as detailed below (in
thousands of shares):
1999 1998 1997
Weighted average shares outstanding 18,126 19,905 19,835
Dilutive effect of stock options and warrants 78 239 193
-------- -------- --------
Weighted average shares outstanding,
assuming dilution 18,204 20,144 20,028
======== ======== ========
Options and warrants that could potentially dilute basic net income per
share in the future were not included in the computation of diluted net
income per share because to do so would have been antidilutive.
Antidilutive options and warrants (in thousands of shares) were 2,602,
642, and 1,399 for 1999, 1998, and 1997, respectively.
Recent Accounting Pronouncement - In June 1998, Statement of Financial
Accounting Standards ("SFAS") 133, Accounting for Derivative Instruments
and Hedging Activities was issued. As amended, SFAS 133 is required to be
adopted for years beginning after June 15, 2000. The Company is currently
evaluating SFAS 133 and has not yet determined its impact on the Company's
consolidated financial statements.
41
Reclassifications - Certain amounts from the prior periods have been
reclassified to conform to the 1999 presentation.
2. BUSINESS COMBINATION AND ACQUISITIONS
The Company acquired various retail lots during 1999 and 1998. These
acquisitions were accounted for as purchases with the excess purchase
price over net assets acquired recorded as goodwill. Collectively, these
acquisitions were not material to the consolidated financial statements.
On December 31, 1997, Belmont Homes, Inc. ("Belmont") was merged with and
into a subsidiary of Cavalier Homes, Inc. ("Cavalier"), and 7,555,121
shares of Cavalier's common stock were issued in exchange for all of the
outstanding common stock of Belmont. The merger was accounted for as a
pooling of interests, and, accordingly, the accompanying 1997 financial
statements were restated to include the results of operations and cash
flows of Belmont.
Revenues and net income for the separate companies and the combined
amounts presented in the 1997 consolidated financial statements are as
follows (excluding non-recurring merger and related costs):
1997
Revenues:
Cavalier $ 336,343
Belmont 224,845
---------
Combined $ 561,188
=========
Net income:
Cavalier $ 10,428
Belmont 5,688
---------
Combined $ 16,116
=========
Certain amounts from Belmont's prior financial statements were
reclassified to conform to Cavalier's presentation.
In connection with the merger, Cavalier recorded charges of $7.4 million
in the quarter ended December 31, 1997. These charges are non-recurring
and include $2.5 million from the earn-out provision contained in the
Stock Purchase Agreement between Belmont and the shareholders of
Bellcrest, $0.9 million for severance costs associated with the
consolidation of certain administrative functions, $3.1 million for
printing, investment banking, legal, accounting and other fees, and $0.9
million for other costs associated with combining and realigning the
operations of the two companies.
3. IMPAIRMENT CHARGE FOR IDLED FACILITIES
During 1999, because of deteriorating market conditions, the Company
recorded a noncash impairment charge of $4.0 million in connection with
the idling of five home manufacturing plants to consolidate manufacturing
into other plants. The write-down to estimated fair value was based
primarily on independent appraisals of fair value.
42
4. INSTALLMENT CONTRACTS RECEIVABLE
CAC finances retail sales through the purchase of installment contracts
from a portion of the Company's exclusive dealers, at fixed interest
rates, in the ordinary course of business, and periodically resells
certain of the loans to a financial institution under the terms of a
retail finance agreement. Standard loan programs require minimum down
payments, ranging from 0% to 20% of the purchase price of the home, on all
installment contracts based on the creditworthiness of the borrower. In
addition, CAC requires the borrower to maintain adequate insurance on the
home throughout the life of the contract. Contracts are secured by the
home which is subject to repossession by CAC upon default by the borrower.
CAC's portfolio consists of fixed rate contracts with interest rates
generally ranging from 9% to 14% and from 8.0% to 13.0% at December 31,
1999 and 1998, respectively. The average original term of the portfolio
was approximately 269 and 216 months at December 31, 1999 and 1998,
respectively. During 1998, CAC entered into an agreement to sell, without
recourse (provided that the transferred loan was properly originated by
the dealer and purchased by CAC), contracts in its portfolio that meet
specified credit criteria. Under this agreement, CAC sold $60,558 and
$45,804 contracts receivable and realized a gain of $2,257 and $2,048 for
the years ended December 31, 1999 and 1998, respectively.
At December 31, 1999, estimated principal payments under installment
contracts receivable are as follows:
Year Ending
December 31,
2000 $ 143
2001 160
2002 178
2003 199
2004 223
Thereafter 8,547
-------
Total $ 9,450
=======
Activity in the allowance for losses on installment contracts was as
follows:
1999 1998 1997
Balance, beginning of year $ 760 $ 1,272 $ 941
Provision for losses 2,192 1,042 1,329
Charge-offs, net (1,296) (1,554) (998)
-------- -------- --------
Balance, end of year $ 1,656 $ 760 $ 1,272
======== ======== ========
At December 31, 1999 and 1998, the estimated fair value of installment
contracts receivable was $8,402 and $26,211, respectively. These fair
values were estimated using discounted cash flows and interest rates
offered by CAC on similar contracts at that time.
5. INVENTORIES
Inventories consisted of the following:
43
1999 1998
Raw materials $ 27,363 $ 26,224
Work-in-process 3,513 3,697
Finished goods 19,244 8,882
--------- ---------
Total $ 50,120 $ 38,803
========= =========
During 1999, 1998, and 1997, the Company purchased raw materials of
approximately $20,166, $12,413 and $10,592, respectively, from joint
ventures in which the Company owns a minority interest and from a company
in which a stockholder and director of the Company is also a stockholder.
6. CREDIT ARRANGEMENTS
The Company has a $35,000 revolving, warehouse and term-loan agreement
(the "Credit Facility") with its primary bank, whose president is a
director of the Company. The Credit Facility contains a revolving line of
credit which provides for borrowings (including letters of credit) of up
to 80% and 50% of the Company's eligible accounts receivable and
inventories, respectively, up to a maximum of $10,000. Interest is payable
under the revolving line of credit at the bank's prime rate (8.50% and
7.75% at December 31, 1999 and 1998, respectively) or, if elected by the
Company, the 90-day LIBOR rate plus 2.5% (8.50% and 7.57% at December 31,
1999 and 1998, respectively). No amounts were outstanding under the
revolving line of credit at December 31, 1999 and 1998.
The warehouse and term-loan agreement contained in the Credit Facility
provide for borrowings of up to 80% of the Company's eligible installment
sale contracts, up to a maximum of $25,000. Interest on term notes is
fixed for a period of five years from issuance at a rate based on the
weekly average yield on five-year treasury securities averaged over the
preceding 13 weeks, plus 1.95%, and floats for the remaining two years at
a rate (subject to certain limits) equal to the bank's prime rate plus
.75%. The warehouse component of the Credit Facility provides for
borrowings of up to $25,000 with interest payable at the bank's prime rate
or, if elected by the Company, the 90-day LIBOR rate plus 2.5%. However,
in no event may the aggregate outstanding borrowings under the warehouse
and term-loan agreement exceed $25,000. No amounts were outstanding under
the warehouse and term-loan portion of the Credit Facility at December 31,
1999 and 1998.
The Credit Facility contains certain restrictive and financial covenants,
which, among other things, limit the aggregate of dividend payments and
purchases of treasury stock to 50% of consolidated net income for the two
most recent years, restrict the Company's ability to pledge assets, incur
additional indebtedness and make capital expenditures, and require the
Company to maintain certain defined financial ratios. At December 31,
1999, the Company was in violation of certain covenants; however,
appropriate waiver letters have been obtained from the lender. Amounts
outstanding under the Credit Facility are secured by the accounts
receivable and inventories of the Company, loans purchased and originated
by CAC, and the capital stock of certain of the Company's consolidated
subsidiaries.
On February 29, 2000, the Company received a commitment from its primary
bank to extend its Credit Facility through April 2002. The renewal
increases the amount available under the revolving line of credit to
$35,000 (an increase from $10,000), provided that aggregate amounts
outstanding under the revolving note and term loans do not exceed $35,000,
eliminates the warehouse feature of the Credit Facility, provides for more
favorable interest rates, and modifies certain financial covenants to be
more restrictive.
The Company has $15,562 and $4,163 of notes payable under retail floor
plan agreements at December 31, 1999 and 1998, respectively. The notes are
collateralized by certain inventories and bear interest at the prime rate.
44
The Company has amounts outstanding under six Industrial Development
Revenue Bond issues ("Bonds") of $11,337 and $4,052 at December 31, 1999
and 1998, respectively. Four of the bond issues bear interest at variable
rates ranging from 4.0% to 5.4% and mature at various dates through April
2009. One of the bond issues is payable in equal monthly installments and
bears interest at 75% of the prime rate and matures in 2005. One of the
bond issues is payable in equal quarterly principal payments with interest
payable at 6.75% and matures in 2004. The bonds are collateralized by
certain plant facilities. At December 31, 1999, restricted bond proceeds
of $1,725 were not disbursed and are reflected as a non-current asset in
the consolidated balance sheets.
45
At December 31, 1999, principal repayment requirements on long-term debt
are as follows:
Year Ending
December 31,
2000 $ 1,119
2001 1,167
2002 1,215
2003 1,254
2004 1,461
Thereafter 5,121
---------
Total 11,337
Less current portion 1,119
---------
Long-term debt $ 10,218
=========
The estimated fair value of outstanding borrowings approximated carrying
value at December 31, 1999 and 1998. These estimates were determined using
rates at which the Company believes it could have obtained similar
borrowings at that time.
Cash paid for interest during the years ended December 31, 1999, 1998 and
1997 was $1,480, $776 and $1,445, respectively.
7. STOCKHOLDERS' EQUITY
The Company has adopted a Stockholder Rights Plan with the terms and
conditions of the plan set forth in a Rights Agreement dated October 23,
1996 between the Company and its Rights Agent. Pursuant to the plan, the
Board of Directors of the Company declared a dividend of one Right (as
defined in the Rights Agreement) for each share of the Company's
outstanding common stock to stockholders of record on November 6, 1996.
One Right is also associated with each share of the Company's outstanding
common stock issued after November 6, 1996, until the Rights become
exercisable, are redeemed or expire. The Rights, when exercisable, entitle
the holder to purchase a unit of 0.80 one-hundredth share of Series A
Junior Participating Preferred Stock, par value $.01, at a purchase price
of $80 per unit. Upon certain events relating to the acquisition of, or
right to acquire, beneficial ownership of 20% or more of the Company's
outstanding common stock by a third party, or a change in control of the
Company, the Rights entitle the holder to acquire, after the Rights are no
longer redeemable by the Company, shares of common stock of the Company
(or, in certain cases, securities of an acquiring person) for each Right
held at a significant discount. The Rights will expire on November 6,
2006, unless redeemed earlier by the Company at $.01 per Right under
certain circumstances.
Pursuant to a common stock repurchase program approved by the Company's
Board of Directors, a total of 2.6 million shares has been purchased at a
cost of approximately $24 million. At December 31, 1999, the Company may
acquire up to 1.4 million additional shares under the program.
8. INCENTIVE PLANS
Dealership Stock Option Plan -
o Effective December 31, 1999, the Company cancelled its
Dealership Stock Option Plan (the "Dealer Plan") to
eligible independent dealerships. The Dealer Plan allowed
46
for 562,500 options to be issued at a price equal to the
fair market value on the date of grant, and these options
were earned based on the amount of contracts funded through
CAC during the year. Options granted under the Plan are
immediately exercisable and expire three years from the
grant date. Since these options have been granted to
persons other than employees, the Company adopted the
recognition and measurement provisions of SFAS 123,
Accounting for Stock-Based Compensation.
Employee and Director Plans:
o The Company has a Key Employee Stock Incentive Plan (the
"1996 Plan") which provides for the granting of both
incentive and non-qualified stock options. Additionally,
the 1996 Plan provides for stock appreciation rights and
awards of both restricted stock and performance shares.
Options are granted at prices and terms determined by the
compensation committee of the Board of Directors. The 1996
Plan also provides for an additional number of common
shares to be reserved for issuance each January 1, through
January 1, 2001, equal to 1.5% of the number of the common
shares outstanding on that date. Options granted under the
1996 Plan are generally exercisable six months after the
grant date and expire ten years from the date of grant.
o The Company also has a Non-employee Director Plan under
which 625,000 shares of the Company's common stock were
reserved for grant to non-employee directors at fair market
value on the date of such grant. Options are granted upon
the director's initial election and automatically on an
annual basis thereafter. Options granted under the plan
are generally exercisable six months after the grant date
and expire ten years from the date of grant.
o The Company has an Employee Stock Purchase Plan under which
625,000 shares of the Company's common stock may be issued
to eligible employees at a price equal to the lesser of 85%
of the market price of the stock as of the first or last
day of the payment periods (as defined). Employees may
elect to have a portion of their compensation withheld,
subject to certain limits, to purchase the Company's common
stock.
o The Company has a Deferred Compensation and Flexible Option
Plan (the "Deferred Plan") which provides for deferral of a
portion of certain key employees' earnings plus a Company
match. Upon the occurrence of a distributable event, the
employee will receive the greater of cash at a fixed annual
return or shares of the Company's common stock credited to
his account valued at fair market value. The Company funds
benefits under the Deferred Plan through cash contributions
and through the issuance of a stock option to a trust at an
exercise price equal to fair market value on the date of
the grant. Under the Deferred Plan, there are 500,000
shares of Company common stock available for issuance. At
December 31, 1999, the Company had recorded plan
investments of $3,133 and a deferred compensation liability
of $3,557.
Compensation expense recorded in connection with these plans for the years
ended December 31, 1999 and 1998 was not material.
On January 17, 1997, substantially all employee stock options then
exerciseable at a price of $12.00 or higher were repriced to an exercise
price of $10.625. In addition, on January 17, 1997, an option issued under
the 1993 Non-employee Director's Plan to purchase 25,000 shares at $15.40
per share was canceled and reissued for 17,250 shares at $10.625 per
share.
During 1998, the Company revised the Dividend Reinvestment Plan to
increase the shares available under the Plan to 500,000 and to eliminate
the optional cash payment feature of the Plan. Participants in the Plan
may purchase additional shares of the Company's common stock by
reinvesting the cash dividends on all, or part, of their shares. The
purchase price of the stock will be the higher of 95% of the average daily
47
high and low sale prices of the Company's common stock on the four trading
days including and preceding the Investment Date (as defined) or 95% of
the average high and low sales prices on the Investment Date.
The Company applied Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for
its employee and director plans. Accordingly, no compensation expense has
been recognized for these plans except where the exercise price was less
than the fair value on the date of grant. Had compensation cost been
determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS 123, the
Company's net income and net income per share would approximate the pro
forma amounts below:
1999 1998 1997
Net income:
As reported $ 2,150 $ 18,655 $10,247
Pro forma $ 1,029 $ 16,506 $ 8,661
Basic net income per share:
As reported $ 0.12 $ 0.94 $ 0.52
Pro forma $ 0.06 $ 0.83 $ 0.44
Diluted net income per share:
As reported $ 0.12 $ 0.93 $ 0.51
Pro forma $ 0.06 $ 0.82 $ 0.43
The fair value of options granted were estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
1999 1998 1997
Dividend yield 1.90% 1.56 % 1.13 %
Expected volatility 40.10% 40.49 % 43.94 %
Risk free interest rate 5.27% 5.52 % 6.12 %
Expected lives 9.0 years 5.0 years 3.0 years
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts, and additional awards in future years are
anticipated.
With respect to options exercised, the income tax benefits resulting from
compensation expense allowable under federal income tax regulations in
excess of the expense reflected in the Company's financial statements have
been credited to additional paid-in-capital. These benefits, which totaled
$28 (1999), $90 (1998), and $-0- (1997), represent a noncash financing
transaction for purposes of the consolidated statements of cash flows.
48
Information regarding all of the Company's stock option plans is
summarized below:
Weighted
Weighted Average
Average Fair Value
Shares Exercise Price At Grant Date
Outstanding at December 31, 1996 1,461,609 $ 11.76
Granted at fair value 858,425 10.61 $ 3.52
Exercised (1,000) 4.27
Cancelled (564,420) 13.75
----------
Outstanding at December 31, 1997 1,754,614 $ 10.56
Granted at fair value 890,393 10.26 $ 3.50
Exercised (35,267) 4.45
Cancelled (49,746) 11.39
----------
Outstanding at December 31, 1998 2,559,994 $ 10.52
Granted at fair value 448,266 8.96 $ 3.48
Exercised (38,500) 7.37
Cancelled (174,357) 12.34
----------
Outstanding at December 31, 1999 2,795,403 $ 10.20
========== =======
Options exercisable at December 31, 1999 2,762,803 $ 10.17
========== =======
Options exercisable at December 31, 1998 2,438,434 $ 10.42
========== =======
Options exercisable at December 31, 1997 1,536,986 $ 10.37
========== =======
Stock options available for future grants at December 31, 1999 were
704,565 under all of the Company's various stock option plans.
The following table summarizes information concerning stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$0.55 - $5.50 273,477 7.71 $ 4.17 273,477 $ 4.17
$6.00 - $9.66 367,586 17.67 8.73 367,586 8.73
$9.75 - $10.88 1,644,815 9.14 10.38 1,644,815 10.38
$11.00 - $16.60 509,525 8.58 13.93 476,925 13.98
---------- ----------
$0.55 - $16.60 2,795,403 10.02 $ 10.20 2,762,803 $ 10.17
========== ====== ======== ========== ========
49
9. INCOME TAXES
Provision for income taxes consist of:
1999 1998 1997
Current:
Federal $ 5,337 $ 12,469 $ 9,574
State 750 2,238 921
-------- --------- --------
6,087 14,707 10,495
-------- --------- --------
Deferred:
Federal (4,140) (1,337) (2,368)
State (544) (743) (35)
-------- --------- ---------
(4,684) (2,080) (2,403)
-------- --------- ---------
Total $ 1,403 $ 12,627 $ 8,092
======== ========= =========
Total income tax expense for 1999, 1998, and 1997 is different from the
amount that would be computed by applying the expected federal income tax
rate of 35% to income before income taxes. The reasons for this difference
are as follows:
1999 1998 1997
Income tax at expected federal income tax rate $ 1,143 $ 10,948 $ 6,419
State income taxes, net of federal tax effect 125 1,100 651
Non-taxable life insurance proceeds - (525)
Non-deductible operating expenses 262 295 387
State jobs tax credits (38) (126) (40)
Non-deductible merger related expenses - 1,085
Other (89) 410 115
-------- --------- --------
$ 1,403 $ 12,627 $ 8,092
======== ========= ========
Deferred tax assets and liabilities are based on the expected future tax
consequences of temporary differences between the book and tax bases of
assets and liabilities. The approximate tax effects of temporary
differences at December 31, 1999 and 1998 were as follows:
1999 1998
Assets (Liabilities)
Current differences:
Warranty expense $ 4,460 $ 4,051
Inventory capitalization 732 561
Allowance for losses on receivables 2,483 718
Accrued expenses 4,974 4,059
Asset valuation 1,850
Other 667 24
--------- --------
$ 15,166 $ 9,413
========= ========
50
1999 1998
Assets (Liabilities)
Noncurrent differences:
Depreciation and basis differential of acquired assets $ (2,384) $ (2,061)
Goodwill (289) (569)
Merger related expenses 684 1,007
Other 530 1,233
--------- ---------
$ (1,459) $ (390)
========= =========
Cash paid for income taxes for the years ended December 31, 1999, 1998 and
1997 was $11,835, $12,250 and $10,632, respectively.
10. EMPLOYEE BENEFIT PLANS
The Company has self-funded group medical plans which are administered by
third party administrators. The Plans have reinsurance coverage limiting
liability for any individual employee loss to a maximum of $100, with an
aggregate limit of losses in any one year based on the number of covered
employees. Incurred claims identified under the Company's incident
reporting system and incurred but not reported claims are funded or
accrued based on estimates that incorporate the Company's past experience,
as well as other considerations such as the nature of each claim or
incident, relevant trend factors and advice from consulting actuaries. The
Company has established self insurance trust funds for payment of claims
and makes deposits to the trust funds in amounts determined by consulting
actuaries. The cost of these plans to the Company was $8,022, $5,517 and
$4,693 for years ended December 31, 1999, 1998 and 1997, respectively.
The Company sponsors employee 401(k) retirement plans covering all
employees who meet participation requirements. Employee contributions are
limited to a percentage of compensation as defined in the Plans. The
amount of the Company's matching contribution is discretionary as
determined by the Board of Directors. Company contributions amounted to
$1,071, $623 and $545 for the years ended December 31, 1999, 1998 and
1997, respectively.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases:
Two of the Company's manufacturing facilities are leased under separate
operating lease agreements (the "Related Leases") with partnerships or
companies among whose owners are certain officers, directors or
stockholders of the Company. The Related Leases require monthly payments
ranging from $6 to $13 and provide for lease terms ending from July 2000
to April 2004 as well as renewal option periods. The Related Leases also
contain purchase options whereby the Company can purchase the respective
manufacturing facility for $850 and $1,125 at any time during the lease
terms.
Additionally, the Company is obligated under various operating lease
agreements with varying monthly payments and expiration dates through June
2017. Total rent expense under operating leases was $1,191, $1,353 and
$1,418 for the years ended December 31, 1999, 1998 and 1997, respectively,
including rents paid to related parties of $354 (1999), $865 (1998) and
$817 (1997).
51
Future minimum rents payable under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at December 31,
1999 are as follows:
Year Ending
December 31,
2000 $ 891
2001 661
2002 585
2003 404
2004 183
Thereafter 154
--------
Total $ 2,878
========
Contingent Liabilities and Other:
a. The Company is contingently liable under terms of repurchase
agreements with financial institutions providing inventory financing
for retailers of its products. These arrangements, which are
customary in the industry, provide for the repurchase of products
sold to retailers in the event of default on payments by the
retailer. The risk of loss under these agreements is spread over
numerous retailers. The price the Company is obligated to pay
generally declines over the period of the agreement and is further
reduced by the resale value of repurchased homes. The estimated
potential obligations under such agreements approximated $273,000
at December 31, 1999. The Company has an allowance for losses of
$3,464 (1999) and $1,201 (1998) based on prior experience and market
conditions.
b. Under the insurance plans described in Note 1, the Company was
contingently liable at December 31, 1999 for future retrospective
premium adjustments up to a maximum of approximately $14,456 in the
event that additional losses are reported related to prior years.
c. The Company is engaged in various legal proceedings that are
incidental to and arise in the course of its business. Certain of
the cases filed against the Company and other companies engaged in
businesses similar to the Company allege, among other things, breach
of contract and warranty, product liability, personal injury and
fraudulent, deceptive or collusive practices in connection with
their businesses. These kinds of suits are typical of suits that
have been filed in recent years, and they sometimes seek
certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. In the
opinion of management, the ultimate liability, if any, with respect
to the proceedings in which the Company is currently involved is not
presently expected to have a material adverse effect on the Company.
However, the potential exists for unanticipated material adverse
judgments against the Company.
d. The Company and certain of its equity partners have guaranteed
certain debt for companies in which the Company owns various equity
interests. The guarantees are limited to various percentages of the
outstanding debt up to a maximum guaranty of $3,985. At December 31,
1999, $9,121 was outstanding under the various guarantees, of which
the Company had guaranteed $3,076.
52
12. SEGMENT INFORMATION
The Company's reportable segments are organized around products and
services. Through its Home manufacturing segment, the Company's 11
divisions, which are aggregated for reporting purposes, design and
manufacture homes which are sold in the United States to a network of
dealers which includes Company owned retail locations. Through its
Financial services segment, the Company offers retail installment sale
financing and related insurance products for manufactured homes sold
through the Company's exclusive dealer network and Company-owned retail
locations. The Company's retail segment is comprised of company owned
retail lots that derive their revenues from home sales to individuals.
Included in the "other" category are component manufacturers who sell
their products to the manufacturing segment of the Company as well as
other manufacturers. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies
except that intercompany profits, transactions and balances have not been
eliminated. The Company's determination of segment operating profit does
not reflect other income (expenses) or income taxes.
53
1999 1998 1997
Gross revenue:
Home manufacturing $ 573,129 $ 603,369 $ 553,730
Financial services 6,107 6,088 5,346
Retail 20,914 7,167
Other 40,315 36,699 22,688
---------- ---------- ---------
Gross revenue 640,465 653,323 581,764
========== ========== =========
Intersegment revenue:
Home manufacturing 17,373 5,253
Financial services
Retail
Other 35,292 34,000 20,576
---------- ---------- ----------
Intersegment revenue 52,665 39,253 20,576
========== ========== ==========
Revenue from external customers:
Home manufacturing 555,756 598,116 553,730
Financial services 6,107 6,088 5,346
Retail 20,914 7,167
Other 5,023 2,699 2,112
---------- ---------- ----------
Total revenue $ 587,800 $ 614,070 $ 561,188
========== ========== ==========
Operating profit (loss):
Home manufacturing $ 7,866 $ 26,193 $ 23,742
Financial services (219) 2,215 2,015
Retail (1,935) (427)
Other 466 2,314 598
Elimination (744) (826) (77)
---------- ---------- ----------
Segment operating profit 5,434 29,469 26,278
General corporate (1,917) 282 (9,197)
---------- ---------- ----------
Operating profit $ 3,517 $ 29,751 $ 17,081
========== ========== ==========
Depreciation and amortization:
Home manufacturing $ 8,215 $ 7,305 $ 6,686
Financial services 359 209 208
Retail 544 146
Other 463 385 337
---------- ---------- ----------
Segment depreciation and amortization 9,581 8,045 7,231
General corporate 669 320 261
---------- ---------- ----------
Total depreciation and amortization $ 10,250 $ 8,365 $ 7,492
========== ========== ==========
Capital expenditures:
Home manufacturing $ 17,486 $ 13,173 $ 8,370
Financial services 167 181 265
Retail 986 601
Other 1,208 384 89
---------- ---------- ----------
Segment capital expenditures 19,847 14,339 8,724
General corporate 4,699 316 1,462
---------- ---------- ----------
Total capital expenditures $ 24,546 $ 14,655 $ 10,186
========== ========== ==========
54
1999 1998 1997
Identifiable assets:
Home manufacturing $ 155,947 $ 156,219 $ 142,998
Financial services 17,254 28,424 52,020
Retail 23,614 7,665
Other 13,988 11,683 7,509
Elimination (32,752) (9,548) (17,142)
---------- ---------- ----------
Segment assets 178,051 194,443 185,385
General corporate 51,523 41,509 26,169
---------- ---------- ----------
Total assets $ 229,574 $ 235,952 $ 211,554
========== ========== ==========
The Financial services segment's operating profit includes net interest
income of $1,968, $2,987, and $3,283 and gains from the sale of
installment contracts of $2,257, $2,048 and $-0- for the years ended
December 31, 1999, 1998, and 1997, respectively.
Identifiable assets for the General corporate category include $1,604,
$1,447, and $1,264 of investment in equity method investees at December
31, 1999, 1998 and 1997, respectively. General corporate operating income
includes equity in the net income of investees accounted for by the equity
method of $397, $250, and $296 for the years ended December 31, 1999, 1998
and 1997, respectively.
55
CAVALIER HOMES INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(Dollars in Thousands)
Increases Additions
Balance at Attributable Charged to Charged Balance at
Beginning of to Costs and to Other End of
Period Acquisitions Expenses Accounts Deductions Period
------------ ------------ ------------- ------------- ------------ -------------
Allowance for losses on Accounts
Receivable:
Year Ended December 31, 1999 $ 1,201 3,215 (952)$ 3,464
============ ============ ============= ============= ============ =============
Year Ended December 31, 1998 $ 1,175 407 (381)$ 1,201
============ ============ ============= ============= ============ =============
Year Ended December 31, 1997 $ 837 527 (189)$ 1,175
============ ============ ============= ============= ============ =============
Allowance for credit losses:
Year Ended December 31, 1999 $ 760 2,192 (1,296)$ 1,656
============ ============ ============= ============= ============ =============
Year Ended December 31, 1998 $ 1,272 1,042 (1,554)$ 760
============ ============ ============= ============= ============ =============
Year Ended December 31, 1997 $ 941 1,329 (998)$ 1,272
============ ============ ============= ============= ============ =============
Accumulated amortization of goodwill:
Year Ended December 31, 1999 $ 4,154 1,278 $ 5,432
============ ============ ============= ============= ============ =============
Year Ended December 31, 1998 $ 3,102 1,052 $ 4,154
============ ============ ============= ============= ============ =============
Year Ended December 31, 1997 $ 1,947 1,068 87 $ 3,102
============ ============ ============= ============= ============ =============
Accumulated amortization of non-compete
agreement:
Year Ended December 31, 1999 $ 353 100 $ 453
============ ============ ============= ============= ============ =============
Year Ended December 31, 1998 $ 277 76 $ 353
============ ============ ============= ============= ============ =============
Year Ended December 31, 1997 $ 221 56 $ 277
============ ============ ============= ============= ============ =============
Warranty reserve:
Year Ended December 31, 1999 $ 12,400 33,653 (33,053)$ 13,000
============ ============ ============= ============= ============ =============
Year Ended December 31, 1998 $ 11,700 27,771 (27,071)$ 12,400
============ ============ ============= ============= ============ =============
Year Ended December 31, 1997 $ 10,566 24,357 (23,223)$ 11,700
============ ============ ============= ============= ============ =============
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For a description of the directors and executive officers of the Company, see
"Election of Directors," "Executive Officers and Principal Stockholders," and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 16, 2000,
which are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For a description of the Company's executive compensation, see "Election of
Directors," "Executive Officers and Principal Stockholders," "Executive
Compensation" (other than the "Report of the Compensation Committee on Executive
Compensation" and the "Performance Graph"), "Compensation Committee Interlocks
and Insider Participation," and "Certain Relationships and Related Transactions"
of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 16, 2000, which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
For a description of the security ownership of management and certain beneficial
owners, see "Executive Officers and Principal Stockholders" of the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 16,
2000, which are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of certain relationships and related transactions of the
Company, see "Compensation Committee Interlocks and Insider Participation," and
"Certain Relationships and Related Transactions" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 16, 2000,
which are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements contained in this report and the page
on which they may be found are as follows:
Financial Statement Description Form 10-K Page No.
------------------------------- ------------------
Independent Auditors' Report 34
Consolidated Balance Sheets as of December 31, 1999 and 1998 35
Consolidated Statements of Income for the years ended December 31, 1999, 37
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended 38
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 39
1999, 1998 and 1997
Notes to Consolidated Financial Statements 40
57
2. The financial statement schedules required to be filed with
this report and the pages on which they may be found are as follows:
No. Schedule Description Form 10-K Page
--- --------------------------------- ---------------
II Valuation and Qualifying Accounts 55
3. The exhibits required to be filed with this report are listed
below. The Company will furnish upon request any of the exhibits listed upon the
receipt of $15.00 per exhibit, plus $.50 per page, to cover the cost to the
Company of providing the exhibit.
(3) Articles of Incorporation and By-laws.
* (a) The Composite Amended and Restated Certificate of
Incorporation of the Company, filed as Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
* (b) The Certificate of Designation of Series A Junior
Participating Preferred Stock of Cavalier Homes, Inc. as filed with the Office
of the Delaware Secretary of State on October 24, 1996 and filed as Exhibit A to
Exhibit 4 to the Company's Registration Statement on form 8-A filed on October
30, 1996.
* (c) The Amended and Restated By-laws of the Company,
filed as Exhibit 3(d) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 27, 1997, and the amendments thereto filed as Exhibit 3(e) to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 26,
1997 and as Exhibit 3(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 25, 1998.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
* (a) Articles four, six, seven, eight and nine of the
Company's Amended and Restated Certificate of Incorporation, as amended,
included in Exhibit 3(a) above.
* (b) Article II, Sections 2.1 through 2.18; Article
III, Sections 3.1 and 3.2; Article IV, Sections 4.1 and 4.3; Article VI,
Sections 6.1 through 6.5; Article VIII, Sections 8.1 and 8.2; and Article IX of
the Company's Amended and Restated By-laws, included in Exhibit 3(c) above.
* (c) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
(10) Material contracts
* (a) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
58
(b) Lease Agreement dated April 1, 1999, between
Development Authority of Johnson County, Georgia and Bellcrest Homes, Inc.
regarding the lease of the manufacturing facility located in Adrian, Georgia.
* (c) Lease Agreement with Option to Purchase between John
H. Beard and Alexander P. Beard, Trustees under the Will of Bryce Parker Beard,
and BRC Components, Inc. dated March 4, 1999, filed as Exhibit 10(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1999.
* (d) Sub-lease Agreement with Option to Purchase between
Winfield Industrial Development Association, Inc and Buccaneer Homes of Alabama,
Inc. dated May 9, 1994, filed as Exhibit 10(k) to Amendment No. 1 to the
Company's Registration Statement on Form S-2 (Registration No. 33-78644).
* (e) Lease Agreement dated March 1, 1997, between the
City of Winfield and Buccaneer Homes, a division of Cavalier Manufacturing,
Inc., filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
* (f) Lease Agreement between the Industrial Development
Board of the Town of Addison and Jerry F. Wilson, Robert Lowell Burdick and John
W Lowe, dated as of June 1, 1984, filed as Exhibit 10(j) to the Company's
Registration Statement on Form S-1, Registration No. 33-3525, dated February 21,
1986.
(g) Assignment and Assumption Agreement by and among the
Estate of Jerry F. Wilson, Robert Lowell Burdick, John W Lowe, Cavalier
Manufacturing, Inc. and Cavalier Real Estate Co., Inc., dated January 13, 1999,
regarding the lease of the manufacturing facility located in Addison, Alabama.
(h) Lease Agreement between the Industrial Development
Board of the Town of Addison and the Winston County Industrial Development
Association, dated as of February 1, 1994, regarding the lease of the
manufacturing facility located in Addison, Alabama.
* (i) Lease Agreement between The Industrial Development
Board of the Town of Addison and Cavalier Homes of Alabama, a division of
Cavalier Manufacturing, Inc., dated November 1, 1997, filed as Exhibit 10(yy) to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
(j) Lease Agreement dated April 1, 1999, between Crisp
County-Cordele Industrial Development Authority and Cavalier Industries, Inc.
regarding the lease of the manufacturing facility located in Cordele, Georgia.
* (k) Lease Agreement dated October 16, 1996, between
Virginia Cary L. McDonald and Star Industries, Inc. regarding the lease of the
manufacturing facility located in Robbins, North Carolina, filed as Exhibit
10(b) to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
* (l) Assignment and Assumption Agreement between Star
Industries, Inc. and Cavalier Industries, Inc. regarding the lease of the
manufacturing facility located in Robbins, North Carolina, filed as Exhibit
10(c) to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
* (m) Lease Agreement with Option to Purchase between
Marion County Industrial Development Corporation, Inc and Quality Housing
Supply, Inc. dated May 9, 1994, filed as Exhibit 10(l) to Amendment No. 1 to the
Company's Registration Statement on Form S-2 (Registration No. 33-78644).
* (n) Commercial Sub-Lease and Agreement between Perfect
Panels, Inc. and Quality Housing Supply, Inc., dated July 1, 1996, filed as
Exhibit 10(zz) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
* (o) Lease Agreement dated March 1, 1995, between the
Industrial Development Board of the City of Haleyville, Alabama and Wheel House
Properties, Inc., as assigned to and assumed by Star Industries, Inc. on January
11, 1996, and as further assigned to and assumed by Cavalier Manufacturing, Inc.
in December 1996, filed as Exhibit 10(bb) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
* (p) Lease Agreement between City of Mineral Wells, Texas
and Cavalier Homes of Texas dated February 27, 1996, filed as Exhibit 10(c) to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(q) Lease Agreement dated June 1, 1997, between Graham
Industrial Association, Inc. and Cavalier Manufacturing, Inc. regarding the
lease of the manufacturing facility located in Graham, Texas.
(r) Lease Agreement dated November 1, 1997, between
Greenstar, L.L.C. and The Colonial Group, regarding the lease of an
administrative facility in Greensboro, North Carolina.
(s) Addendum to Lease Agreement dated January 18, 1999,
between Greenstar, L.L.C. and The Colonial Group, regarding the lease of an
administrative facility in Greensboro, North Carolina.
(t) Assignment and Assumption Agreement dated April 29,
1999, between The Colonial Group and Cavalier Homes, Inc. regarding the lease of
the administrative facility in Greensboro, North Carolina.
* (u) Revolving, Warehouse and Term Loan Agreement among
the Company and First Commercial Bank dated February 17, 1994, filed as Exhibit
10(u) to the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
* (v) Amendments to the Revolving, Warehouse and Term Loan
Agreement among the Company and First Commercial Bank dated March 14, 1996,
filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
* (w) Second Amendment to the Revolving Warehouse and Term
Loan Agreement among Cavalier Homes, Inc. and First Commercial Bank, dated June
1, 1998, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 26, 1998.
* (x) Assumption Agreement dated as of January 2, 1997,
by and among the Company, First Commercial Bank and certain subsidiaries of the
Company, filed as Exhibit 10(q) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
* (y) Assumption Agreement among Cavalier Homes, Inc. and
First Commercial Bank, dated June 1, 1998, filed as Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 26, 1998.
(z) Commitment Letter and Addendum among Cavalier Homes,
Inc., Cavalier Acceptance Corporation and First Commercial Bank, dated February
29, 2000.
* (aa) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Lamraft, LP filed as Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 26, 1997. 10-K for the year ended December
31, 1998.
60
* (bb) Amendment to the Limited Credit Guaranty
Agreement between First Commercial Bank and Cavalier Homes, Inc., executed as of
March 24, 1999, relating to guaranty of payments by Lamraft, LP filed as Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended April
2, 1999.
* (cc) Guaranty Agreement between First Commercial Bank
and Cavalier Homes, Inc., dated as of September 1, 1999, relating to guaranty of
payments by Lamraft, LP, filed as Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 1, 1999.
* (dd) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Hillsboro Manufacturing, LP filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26, 1997.
* (ee) Amendment to the Limited Credit Guaranty Agreement
between First Commercial Bank and Cavalier Homes, Inc. executed as of March 24,
1999, relating to guaranty of payments by Hillsboro Manufacturing, LP filed as
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 2, 1999.
* (ff) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Woodperfect of Texas, LP filed as Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26, 1997.
* (gg) Amendment to the Limited Credit Guaranty Agreement
between First Commercial Bank and Cavalier Homes, Inc. executed March 24, 1999,
relating to guaranty of payments by Woodperfect of Texas, LP filed as Exhibit
10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended April
2, 1999.
(hh) Release of Guarantor and Amendment to Guaranty
Agreements among First Commercial Bank, Patriot Homes, Inc., Cavalier Homes,
Inc., Southern Energy Homes, Inc. and Lee Roy Jordan, dated as of December 31,
1999.
* (ii) Guaranty Agreement between SouthTrust Bank and
Cavalier Homes, Inc. dated as of July 27, 1998, relating to guaranty of payments
by Woodperfect, Ltd., filed as Exhibit 10(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended October 1, 1999.
* (jj) Agreement dated March 10, 1998, by and between
Cavalier Acceptance Corporation and Green Tree Financial Servicing Corporation,
filed as Exhibit 10(xx) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
* (kk) Amended and Restated Finance Agreement among Cavalier
Manufacturing, Inc., Cavalier Acceptance Corporation and certain related
entities and Green Tree Financial Corp. and certain related entities, filed as
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 27, 1998.
* (ll) Manufactured Home Loan Purchase Agreement dated as
of June 30, 1999, by and between Cavalier Acceptance Corporation and Green Tree
Financial Corporation and certain of its affiliates, filed as Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1999.
* ** (mm) Cavalier Homes, Inc. 1988 Nonqualified Stock Option
Plan, as amended, filed as Exhibit 10(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.
61
* ** (nn) Cavalier Homes, Inc. 1993 Amended and Restated
Nonqualified Stock Option Plan, filed as Exhibit 10(z) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
* ** (oo) Cavalier Homes, Inc. Executive Incentive Compensation
Plan, filed as an Appendix to the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders held May 15, 1996.
* ** (pp) Amendment to Cavalier Homes, Inc. Executive Incentive
Compensation Plan, filed as Exhibit 10(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 28, 1997.
* ** (qq) Cavalier Homes, Inc. Employee Stock Purchase Plan,
filed as an Appendix to the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held May 15, 1996.
* ** (rr) Cavalier Homes, Inc. Key Employee Stock Incentive
Plan, filed as an Appendix to the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders held May 15, 1996.
* ** (ss) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, filed as Exhibit 10(i) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 28, 1997.
* ** (tt) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, effective December 30, 1997, filed as Exhibit 10(j) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
* ** (uu) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, effective January 23, 1998, filed as Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
* ** (vv) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, effective October 20, 1998, filed as Exhibit 10(l) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
* ** (ww) Cavalier Homes, Inc. Amended and Restated Nonemployee
Directors Stock Option Plan, filed as an Appendix to the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders held May 15, 1996.
* ** (xx) Amendment to Cavalier Homes, Inc. Amended and
Restated Nonemployee Directors Plan filed as Exhibit 10(i) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
* ** (yy) Amendment to Cavalier Homes, Inc. Amended and
Restated Nonemployee Directors Plan, filed as Exhibit 10(n) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
* (zz) Cavalier Homes, Inc. Amended and Restated Dividend
Reinvestment Plan, filed as Appendix A to the Prospectus appearing in the
Company's Post-Effective Amendment No. 1 to Form S-3, Registration No.
333-48111, filed on September 29, 1998.
62
* (aaa) Cavalier Homes, Inc. Amended and Restated Dealership
Stock Option Plan filed as Appendix A to the Company's Registration Statement on
Form S-3, Amendment No. 2, Registration No. 33-62487, dated June 18, 1998.
* ** (bbb) Cavalier Homes, Inc. Deferred Compensation Plan,
effective April 1, 1998, filed as Exhibit 10(d) to the Quarterly Report on Form
10-Q for the quarter ended June 26, 1998.
* ** (ccc) Cavalier Homes, Inc. Flexible Option Plan filed as
Exhibit 4(e) to the Company's Registration Statement on Form S-8, Registration
No. 333-57743, dated June 28, 1998.
* ** (ddd) Belmont Homes, Inc. 1994 Incentive Stock Plan, filed
as an Exhibit to the Belmont Homes, Inc. Registration Statement on Form S-1,
Registration No. 33-87868.
* ** (eee) Belmont Homes, Inc. 1994 Non-Qualified Stock Option
Plan for Non-Employee Directors, filed as an Exhibit to the Belmont Homes, Inc.
Registration Statement on Form S-1, Registration No. 33-87868.
* (fff) Form of Indemnification Agreement between Belmont
Homes, Inc. and the Directors and Executive Officers of Belmont Homes, Inc.,
filed as Exhibit 10.2 to Belmont Homes, Inc. Current Report on Form 8-K filed on
September 8, 1997.
* (ggg) Form of Indemnification Agreement by and between
Cavalier Homes, Inc. and each member of its Board of Directors, filed as Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 25, 1998.
* (hhh) Split dollar Agreement dated May 15, 1998, by and
between the Company and Jerry F. Wilson, Jr. as Trustee of the David Allen
Roberson Family Trust, filed as Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 26, 1998.
* ** (iii) Retention and Severance Agreement, dated August 26,
1998, by and between Cavalier Homes, Inc. and Barry B. Donnell, filed as Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 25, 1998.
* ** (jjj) Retention and Severance Agreement, dated August 26,
1998, by and between Cavalier Homes, Inc. and David A. Roberson, originally
filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 25, 1998 and filed as 10(ggg) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 in order to correct a
typographical error.
* ** (kkk) Retention and Severance Agreement, dated August 26,
1998, by and between Cavalier Homes, Inc. and Michael R. Murphy, filed as
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 25, 1998.
* (lll) Stock Purchase Agreement dated October 25, 1996,
among Belmont Homes, Inc., Bellcrest Holding Co., Inc., G. Hiller Spann, Joe H.
Bell, James M. Birdwell and Delroy Dailey, Jr., filed as an exhibit to Belmont
Homes, Inc. Current Report on Form 8-K filed November 13, 1996, File No.
0-26142.
* (mmm) First Amendment to Stock Purchase Agreement between
Belmont Homes, Inc. And the former shareholders of Bellcrest Homes, Inc. filed
as Exhibit 10.1 to Belmont Homes, Inc. Current Report on Form 8-K filed on
September 8, 1997.
* (nnn) The Agreement and Plan of Merger dated August 14,
1997, by and among the Company, Crimson Acquisition Corp. and Belmont Homes,
Inc., filed as Exhibit 2 to the Company's Current Report on Form 8-K dated
August 19, 1997.
63
* (ooo) Amendment No. 1 to the Agreement and Plan of Merger
referenced in Exhibit 10(nn) above filed as Exhibit 10(e) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1997.
(11) Statement re Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedule
- -----------------------------------------
* Incorporated by reference herein.
** Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CAVALIER HOMES, INC.
--------------------
Registrant
By: /s/ DAVID A. ROBERSON
-----------------------
Its President
Date: March 30, 2000
Pursuant to the requirements of Section 13 or 15(d) 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.
Signature Title Date
/s/ DAVID A. ROBERSON Director and Principal Executive March 30, 2000
- ------------------------------------
Officer
/s/ MICHAEL R. MURPHY Director and Principal Financial and March 30, 2000
- ---------------------------
Accounting Officer
/s/ BARRY DONNELL Chairman of the Board and Director March 30, 2000
- ---------------------------
/s/ THOMAS A. BROUGHTON, III Director March 30, 2000
- ------------------------------------
/s/ JOHN W LOWE Director March 30, 2000
--------------------------
/s/ LEE ROY JORDAN Director March 30, 2000
- ------------------------------------
/s/ GERALD W. MOORE Director March 30, 2000
- ------------------------------------
/s/ A. DOUGLAS JUMPER, SR. Director March 30, 2000
- ---------------------------
/s/ MIKE KENNEDY Director March 30, 2000
- ---------------------------
INDEX
Exhibit
Number
(10) Material Contracts
(b) Lease Agreement dated April 1, 1999, between Development
Authority of Johnson County, Georgia and Bellcrest Homes, Inc.
regarding the lease of the manufacturing facility located in
Adrian, Georgia.
(g) Assignment and Assumption Agreement by and among the Estate of
Jerry F. Wilson, Robert Lowell Burdick, John W Lowe, Cavalier
Manufacturing, Inc. and Cavalier Real Estate Co., Inc., dated
January 13, 1999, regarding the lease of the manufacturing facility
located in Addison, Alabama.
(h) Lease Agreement between the Industrial Development Board of the
Town of Addison and the Winston County Industrial Development
Association, dated as of February 1, 1994, regarding the lease of
the manufacturing facility located in Addison, Alabama.
(j) Lease Agreement dated April 1, 1999, between Crisp County-Cordele
Industrial Development Authority and Cavalier Industries, Inc.
regarding the lease of the manufacturing facility located in
Cordele, Georgia.
(q) Lease Agreement dated June 1, 1997, between Graham Industrial
Association, Inc. and Cavalier Manufacturing, Inc. regarding the
lease of the manufacturing facility located in Graham, Texas.
(v) Lease Agreement dated November 1, 1997, between Greenstar, L.L.C.
and The Colonial Group, regarding the lease of an administrative
facility in Greensboro, North Carolina.
(s) Addendum to Lease Agreement dated January 18, 1999, between
Greenstar, L.L.C. and The Colonial Group, regarding the lease of an
administrative facility in Greensboro, North Carolina.
(x) Assignment and Assumption Agreement dated April 29, 1999, between
The Colonial Group and Cavalier Homes, Inc. regarding the lease of
the administrative facility in Greensboro, North Carolina.
(z) Commitment Letter and Addendum among Cavalier Homes, Inc., Cavalier
Acceptance Corporation and First Commercial Bank, dated February
29, 2000.
(hh)Release of Guarantor and Amendment to Guaranty Agreements among
First Commercial Bank, Patriot Homes, Inc., Cavalier Homes, Inc.,
Southern Energy Homes, Inc. and Lee Roy Jordan, dated as of
December 31, 1999.
(11) Statement Re Computation of Per Share Earnings
(21) Subsidiaries of the Registrant
(23) Consent of Deloitte & Touche LLP
(27) Financial Data Schedule (Filed as an EDGAR exhibit only)