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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
--------------------------------------
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 (IRS Employer
of incorporation or organization) Identification Number)
32 Wilson Boulevard 100, Addison, Alabama 35540
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(256) 747-9800
--------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last year)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at August 12, 2002
- ------------------------------ -----------------------------
Common Stock, $.10 Par Value 17,665,644 Shares
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - dollars in thousands, except per share amounts)
June 29, December 31,
ASSETS 2002 2001
----------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 28,491 $ 43,256
Accounts receivable, less allowance for losses of $340 (2002) and $625 (2001) 19,360 7,293
Notes and installment contracts receivable - current 4,857 1,708
Inventories 21,064 20,672
Deferred income taxes 12,198 8,075
Other current assets 2,139 2,011
----------- -------------
Total current assets 88,109 83,015
----------- -------------
PROPERTY, PLANT AND EQUIPMENT (Net) 57,375 59,692
----------- -------------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $757 (2002) and $829 (2001) 3,538 3,232
----------- -------------
GOODWILL, less accumulated amortization of $6,968 (2001) - 15,468
----------- -------------
DEFERRED INCOME TAXES 2,858 7,787
----------- -------------
OTHER ASSETS 5,251 4,922
----------- -------------
TOTAL $ 157,131 $ 174,116
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,304 $ 1,294
Notes payable under retail floor plan agreements 2,509 2,364
Accounts payable 10,216 8,059
Amounts payable under dealer incentive programs 12,989 17,542
Accrued compensation and related withholdings 5,232 4,260
Estimated warranties 12,200 11,700
Estimated repurchase commitments 3,300 3,200
Accrued insurance 6,990 7,083
Other accrued expenses 7,999 9,330
----------- -------------
Total current liabilities 62,739 64,832
----------- -------------
LONG-TERM DEBT 23,011 23,999
----------- -------------
OTHER LONG-TERM LIABILITIES 4,101 5,093
----------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; authorized 50,000,000 shares,
issued 18,682,944 (2002) shares and 18,677,651 (2001) shares 1,868 1,868
Additional paid-in capital 55,926 55,918
Treasury stock, at cost; 1,017,300 shares (2002 and 2001) (4,101) (4,101)
Retained earnings 13,587 26,507
----------- -------------
Total stockholders' equity 67,280 80,192
----------- -------------
TOTAL $ 157,131 $ 174,116
=========== =============
See notes to condensed consolidated financial statements.
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - dollars in thousands except per share amounts)
Thirteen Weeks Ended Twenty-six Weeks Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -------------
REVENUE $ 106,643 $ 94,337 $ 201,556 $ 153,515
COST OF SALES 91,764 82,293 173,347 136,448
SELLING, GENERAL AND ADMINISTRATIVE 14,558 16,204 30,058 31,697
----------- ----------- ----------- -------------
OPERATING PROFIT (LOSS) 321 (4,160) (1,849) (14,630)
----------- ----------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest expense (386) (574) (759) (1,095)
Other, net 243 121 638 254
----------- ----------- ----------- -------------
(143) (453) (121) (841)
----------- ----------- ----------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 178 (4,613) (1,970) (15,471)
INCOME TAXES (BENEFIT) 62 - (3,212) (600)
----------- ----------- ----------- -------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 116 (4,613) 1,242 (14,871)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT OF $1,306 - - (14,162) -
----------- ----------- ----------- -------------
NET INCOME (LOSS) $ 116 $ (4,613) $ (12,920) $ (14,871)
=========== =========== =========== =============
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 0.01 $ (0.26) $ 0.07 $ (0.85)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ - $ - $ (0.80) $ -
----------- ----------- ----------- -------------
NET INCOME (LOSS) $ 0.01 $ (0.26) $ (0.73) $ (0.85)
=========== =========== =========== =============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 17,665,380 17,487,843 17,664,138 17,511,405
=========== =========== =========== =============
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 17,759,868 17,487,843 17,741,938 17,511,405
=========== =========== =========== =============
See notes to condensed consolidated financial statements.
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Twenty-six Weeks Ended
June 29, June 30,
2002 2001
----------- -------------
OPERATING ACTIVITIES:
Net loss $ (12,920) $ (14,871)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle 14,162 -
Depreciation and amortization 3,318 4,183
Provision for credit and accounts receivable losses (357) 8
Gain on sale of installment contracts (603) (777)
Gain on sale of property, plant and equipment (37) (251)
Other, net (322) 26
Changes in assets and liabilities:
Accounts receivable (11,782) (17,791)
Inventories (392) 2,649
Income tax receivable - 15,052
Accounts payable 2,157 3,765
Other assets and liabilities (1,915) 3,339
----------- -------------
Net cash used in operating activities (8,691) (4,668)
----------- -------------
INVESTING ACTIVITIES:
Proceeds from disposition of property, plant and equipment 348 541
Capital expenditures (1,312) (2,595)
Proceeds from sale of installment contracts 18,165 15,154
Net change in notes and installment contracts (21,004) (18,460)
Other investing activities (1,446) 138
----------- -------------
Net cash used in investing activities (5,249) (5,222)
----------- -------------
FINANCING ACTIVITIES:
Net borrowings (payments) on notes payable 145 (760)
Payments on long-term debt (978) (859)
Proceeds from long-term borrowings - 1,250
Proceeds from exercise of stock options 8 1
Net proceeds from sales of common stock - 361
Purchase of treasury stock - (608)
----------- -------------
Net cash used in financing activities (825) (615)
----------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (14,765) (10,505)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,256 35,394
----------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,491 $ 24,889
=========== =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (received) for:
Interest $ 794 $ 1,097
Income taxes (4,760) (16,934)
See notes to condensed consolidated financial statements.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements (Unaudited - dollars in thousands except per share data)
1. BASIS OF PRESENTATION
o The accompanying condensed consolidated financial statements have been
prepared in compliance with standards for interim financial reporting
and Form 10-Q instructions and thus do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. In the opinion of management, these statements contain all
adjustments necessary to present fairly the Company's financial
position as of June 29, 2002, and the results of its operations and its
cash flows for the twenty-six week periods ended June 29, 2002 and
June 30, 2001. All such adjustments are of a normal, recurring nature
except for the goodwill impairment described in Note 2.
o The results of operations for the thirteen and twenty-six weeks ended
June 29, 2002 are not necessarily indicative of the results to be
expected for the full year. The information included in this Form 10-Q
should be read in conjunction with Management's Discussion and Analysis
and financial statements and notes thereto included in the Company's
2001 Annual Report on Form 10-K.
o The Company reports two separate net income (loss) per share numbers,
basic and diluted. Both are computed by dividing net income (loss) by
the weighted average shares outstanding (basic) or weighted average
shares outstanding assuming dilution (diluted) as detailed below:
Thirteen Weeks Ended Year Ended
------------------------ ------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ----------- ---------- ----------
Weighted average common shares outstanding - basic 17,665,380 17,487,843 17,664,138 17,511,405
Dilutive effect if stock options and warrants were exercised 94,488 - 77,800 -
---------- ---------- ----------- ----------
Weighted average common shares outstanding - diluted 17,759,868 17,487,843 17,741,938 17,511,405
========== ========== =========== ==========
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. All
options and warrants for 2001 are excluded due to their antidilutive
effect as a result of the Company's net loss. Antidilutive options and
warrants were 2,474,767 in 2002 and 2,665,058 in 2001.
o Certain amounts from the prior period have been reclassified to conform
to the 2002 presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets. This statement is effective for financial
statements issued for years beginning after December 15, 2001. SFAS No. 142
specifies that goodwill and certain intangible assets will no longer be
amortized but instead will be subject to periodic impairment testing. The
Company adopted SFAS No. 142 effective January 1, 2002. Under the
provisions of this statement, the Company recorded a charge of $14,162, net
of tax, or $0.80 per diluted share, as a cumulative effect of a change in
accounting principle, to eliminate all of its goodwill due to impairment.
This charge was recorded in the first quarter of 2002, and the entire
amount of the goodwill was associated with the Company's home manufacturing
unit.
The Company and the manufactured housing industry have been impacted by
inventory oversupply at the retail level, an increase in dealer failures, a
reduction in available consumer credit and wholesale (dealer) financing for
manufactured housing, more restrictive credit standards and increased home
repossessions which re-enter home distribution channels. All of these
factors have caused the Company to suffer significant losses since the last
half of 1999, for 2000 and the first half of 2001. The fair value of the
home manufacturing unit was determined by a third party valuation
specialist, using projections provided by Company management as well as
industry and other market data. The fair value of the home manufacturing
unit was lower than the carrying value, which required allocation of the
fair value to the assets and liabilities of the unit. In this allocation
process, various independent parties were used to appraise certain of the
Company's manufacturing fixed assets. Additionally, Company management
estimated fair value of other assets and liabilities based on assumptions
believed to be appropriate to the valuation process. As a result of this
fair value allocation process, the Company's goodwill was considered
impaired and an adjustment was made during the first quarter of 2002.
The following represents pro forma information as if goodwill had not been
amortized or impaired under this new statement.
For the 13 weeks Ended For the 26 weeks Ended
----------------------------- ------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------- ----------- ----------- ------------
Pro Forma Information:
Net income (loss) as reported $ 116 $ (4,613) $ (12,920) $ (14,871)
Amortization of goodwill - 245 - 489
----------- ----------- ----------- ------------
Adjusted net income (loss) 116 (4,368) (12,920) (14,382)
Cumulative effect of change in accounting principle, net of tax - - 14,162 -
----------- ----------- ----------- ------------
Pro forma net income (loss) $ 116 $ (4,368) $ 1,242 $ (14,382)
=========== =========== =========== ============
Basic and diluted income (loss) per share:
Net income (loss) as reported $ 0.01 $ (0.26) $ (0.73) $ (0.85)
Amortization of goodwill - 0.01 - 0.03
----------- ----------- ----------- ------------
Adjusted net income (loss) 0.01 (0.25) (0.73) (0.82)
Cumulative effect of change in accounting principle - - 0.80 -
----------- ----------- ----------- ------------
Pro forma net income (loss) $ 0.01 $ (0.25) $ 0.07 $ (0.82)
=========== =========== =========== ============
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144
effective January 1, 2002. The adoption of SFAS No. 144 did not have an
impact on the Company's consolidated financial statements.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Work-in-process and finished goods inventories include an
allocation for labor and overhead costs. Inventories at June 29, 2002 and
December 31, 2001 were as follows:
June 29, December 31,
2002 2001
-------------- --------------
Raw materials $ 13,293 $ 13,917
Work-in-process 2,040 2,086
Finished goods 5,731 4,669
-------------- --------------
Total inventories $ 21,064 $ 20,672
============== ==============
4. IMPAIRMENT AND OTHER RELATED CHARGES
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, in addition to goodwill and other intangible assets
covered under SFAS No. 142, when events and circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is less than
its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair market value of the long-lived
asset. Fair market value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Losses on
long-lived assets to be disposed of are determined in a similar manner,
except that the fair market values are primarily based on independent
appraisals and preliminary or definitive contractual arrangements less
costs to dispose.
During the fourth quarter of 2001, the Company recorded impairment and
other related charges of $1,003 ($1,003 after tax or $0.06 per diluted
share) in connection with the closing of a home manufacturing facility to
be disposed of. The charge includes writedowns of $332 for property, plant
and equipment, $84 for lease obligations and $587 for involuntary
termination benefits for 93 employees. Termination benefits paid and
charged against the liability through June 29, 2002 were $562 for 93
terminated employees.
5. INCOME TAX BENEFIT
The Company recorded an income tax benefit of $3,212 in the first half of
2002, reflecting the benefit of both the current year's net loss and the
new Jobs Creation and Workers' Assistance Act that was passed in March
2002. Under this law, companies are able to carry back net operating losses
five years instead of two years as provided under the previous rules. In
the first half of 2001, the Company recorded an income tax benefit of $600
relating to future income tax refunds and certain carryforward items, but
did not record any additional benefit for net operating losses because
management believed it was no longer appropriate to record income tax
benefits on current losses in excess of anticipated refunds and certain
carryforward items under the provisions of Statement of Financial
Accounting Standards No.109 Accounting for Income Taxes.
6. CONTINGENCIES
o 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 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 the risk of loss is further reduced by the resale value of
repurchased homes. The maximum amount for which the Company is
contingently liable under such agreements approximated $152,000 at June
29, 2002. The Company has a reserve for estimated repurchase
commitments of $3,300 and $3,200 at June 29, 2002 and December 31,
2001, respectively, based on prior experience and market conditions.
o The Company's workers' compensation (prior to February 1, 1999 and
after April 1, 2001), product liability and general liability (prior to
April 1, 2001) insurance coverages were provided under incurred loss,
retrospectively rated premium plans. Under these plans, the Company
incurs insurance expenses 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. At
June 29, 2002, the Company was contingently liable for future
retrospective premium adjustments up to a maximum of approximately
$19,675 in the event that additional losses are reported related to
prior periods. The Company's worker's compensation insurance coverage
from February 1999 through March 2001 was provided under a fully
insured, large deductible policy, and during 2001, the Company's
product liability and general liability insurance coverages were
converted to fully insured, large deductible policies.
o 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.
o 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. At June 29, 2002, $4,893 of debt was outstanding, of which the
Company had guaranteed $1,582, which is the maximum guaranty.
* See Safe Harbor Statement on page 17.
7. SEGMENT INFORMATION
Segment information relating to the thirteen and twenty-six weeks ending
June 29, 2002 and June 30, 2001 is presented below:
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------------- ---------------------------------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
--------------- ------------------- ---------------- -------------------
Gross revenue:
Home manufacturing $ 104,639 $ 91,363 $ 197,980 $ 147,447
Financial services 715 785 1,147 1,480
Retail 2,030 1,751 3,619 3,393
Other 11,572 5,447 20,840 11,584
--------------- ------------------- ---------------- -------------------
Gross revenue $ 118,956 $ 99,346 $ 223,586 $ 163,904
=============== =================== ================ ===================
Intersegment revenue:
Home manufacturing $ 1,516 $ 1,031 $ 2,869 $ 1,552
Financial services - - - -
Retail - - - -
Other 10,797 3,978 19,161 8,837
--------------- ------------------- ---------------- -------------------
Intersegment revenue $ 12,313 $ 5,009 $ 22,030 $ 10,389
=============== =================== ================ ===================
Revenue from external customers:
Home manufacturing $ 103,123 $ 90,332 $ 195,111 $ 145,895
Financial services 715 785 1,147 1,480
Retail 2,030 1,751 3,619 3,393
Other 775 1,469 1,679 2,747
--------------- ------------------- ---------------- -------------------
Total revenue $ 106,643 $ 94,337 $ 201,556 $ 153,515
=============== =================== ================ ===================
Operating profit (loss):
Home manufacturing $ (777) $ (2,800) $ (1,690) $ (11,197)
Financial services 9 61 (139) 17
Retail (10) 83 (81) 74
Other 1,052 605 1,852 448
Elimination (46) (9) (90) 53
--------------- ------------------- ---------------- -------------------
Segment operating profit (loss) 228 (2,060) (148) (10,605)
General corporate 93 (2,100) (1,701) (4,025)
--------------- ------------------- ---------------- -------------------
Operating profit (loss) $ 321 $ (4,160) $ (1,849) $ (14,630)
=============== =================== ================ ===================
June 29, 2002 December 31, 2001
---------------- -------------------
Identifiable assets:
Home manufacturing $ 94,473 $ 109,429
Financial services 12,587 12,387
Retail 6,226 5,566
Other 15,082 11,709
---------------- -------------------
Segment assets 128,368 139,091
General Corporate 28,763 35,025
---------------- -------------------
Total assets 157,131 174,116
================ ===================
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (See pages 2 through 8)
Item 2: 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. As a result
of the growth in the industry during much of the 1990s, the number of retail
dealerships, manufacturing capacity and wholesale shipments expanded
significantly, which ultimately created slower retail turnover, higher retail
inventory levels and increased price competition. Inventory oversupply at the
retail level continues to have a significant impact on wholesale shipments as it
did during much of 1999 and all of 2000 and 2001. The Manufactured Housing
Institute ("MHI") reported that wholesale floor shipments were essentially flat
through May 2002 (the most current available information) as compared to the
same period of 2001 following significant declines in 2000 and 2001. The
industry also has been impacted by an increase in dealer failures, a reduction
in available consumer credit and wholesale (dealer) financing for manufactured
housing, more restrictive credit standards and increased home repossessions
which re-enter home distribution channels. In response to deteriorating market
conditions, manufacturers have closed or idled some of their manufacturing
facilities and retail dealers have closed many locations. A major industry
lender recently discontinued wholesale (dealer) financing of manufactured homes,
which is currently not expected to have a material adverse effect on the
Company's ability to find financing for home purchases by dealers whose floor
plan financing was with that lender. * The Company believes that the possibility
exists for additional retail dealer failures, as well as for the loss of
additional lenders from the industry, further tightening of credit standards and
a further reduction in the availability of wholesale and retail financing. * The
current industry trend is toward more land/home (real estate) financing rather
than chattel or home only loans. While land home financing generally offers more
favorable credit terms to the retail buyer of manufactured housing, the length
of time involved in closing land/home deals is greater. Additionally, effective
January 1, 2002, the State of Texas, which historically has been the largest
state for consumer purchases of manufactured housing, enacted a law that, among
other things, classifies and taxes manufactured homes as real property, and not
personal property, under certain conditions as set forth in the Texas law. The
classification as real property could change the rates and methods of taxation
assessed against such homes in Texas. The law also may affect the form and
structure of permanent financing extended to Texas manufactured home consumers
because such financing historically has treated manufactured homes as personalty
rather than as real estate.
Since the fall of 1999, Cavalier has reduced the number of operating home
manufacturing plants from 24 to 14, reflecting an approximate one-third
reduction in manufacturing capacity. The most recent plant closure was at
December 31, 2001. Despite this consolidation of its manufacturing facilities,
the Company does not believe it has reduced the breadth of its product offering.
* On the retail side, the Company has closed or disposed of 11 of its 16 retail
sales centers. In terms of operating costs, Cavalier has made cost reductions in
virtually all areas of the Company, including its exclusive dealer and marketing
programs and its administrative personnel and associated costs. Altogether, the
Company has had a net reduction in its production and administrative workforce
by approximately 44% since December 31, 1998. The Company's workforce has
included approximately 3,200 employees since June 30, 2001. The Company is
continuing to evaluate capacity, cost and overhead issues, the need for further
plant, retail and other consolidations, reductions, idlings and closings and
methods designed to address the Company's financial performance in light of
developing market and business conditions. * The Company can give no assurance
as to which one or more of these options, if any, it may ultimately adopt, and,
if adopted, whether and to what extent these actions will have an effect on the
financial condition and results of operations of the Company.
After substantial losses since the third quarter of 1999, the Company's results
during the latter part of 2001 and during 2002 (before cumulative effect of a
change in accounting principle discussed below) showed significant improvement.
Although industry conditions remained challenging, the Company's floor shipments
increased 8.3% and 27.9% during the thirteen and twenty-six weeks ended June
29,2002 as compared to the same periods in 2001. This is the fifth consecutive
interim period since the first quarter of 1999 that quarterly floor shipments
have improved on a year-over-year basis and the fourth consecutive interim
period since the first quarter of 1999 in which the Company recorded revenue
growth over the comparable prior year period. During the industry downturn, the
Company's market share improved from a low of 4.6% for 2000 to 7.5% through May
2002. The Company is uncertain at this time as to the extent and duration of the
general economic conditions and continuing adverse industry conditions will have
on the Company's future revenue and earnings. * While the Company currently
expects the results of operations for the third quarter of 2002 to be in the
range of a small profit to a modest loss, changes in general economic conditions
that affect consumer purchases, availability of adequate financing sources,
increases in repossessions or dealer failures could affect the results of
operations of the Company. *
* See Safe Harbor Statement on page 17.
Results of Operations (dollars in thousands)
The following tables set forth, for the periods and dates indicated, certain
financial and operating data, including, as applicable, the percentage of total
revenue:
STATEMENT OF OPERATIONS DATA For the Thirteen Weeks Ended
---------------------------------------------------------------
June 29, 2002 June 30,2001 Difference
----------- ---------- ---------
Revenue:
Home manufacturing net sales $ 103,123 $ 90,332 $ 12,791
Financial services 715 785 (70)
Retail 2,030 1,751 279
Other 775 1,469 (694)
----------- ---------- ---------
Total revenue $ 106,643 100.0% $ 94,337 100.0% $ 12,306 13.0%
Cost of sales 91,764 86.0% 82,293 87.2% 9,471 11.5%
----------- ------ ---------- ------ --------- ------
Gross profit $ 14,879 14.0% $ 12,044 12.8% $ 2,835 23.5%
=========== ====== ========== ====== ========= ======
Selling, general and administrative $ 14,558 13.7% $ 16,204 17.2% $ (1,646) -10.2%
Operating profit (loss) $ 321 0.3% $ (4,160) -4.4% $ (4,481) -107.7%
----------- ------ ---------- ------ --------- ------
Other income (expense):
Interest expense $ (386) -0.4% $ (574) -0.6% $ (188) -32.8%
Other, net 243 0.2% 121 0.1% 122 100.8%
----------- ---------- --------- ------
$ (143) $ (453) (310) 68.4%
=========== ========== ========= ======
Income (loss) before income taxes $ 178 0.2% $ (4,613) -4.9% $ (4,791) -103.9%
Income taxes $ 62 0.1% $ - 0.0% $ (62) 0.0%
----------- ---------- --------- ------
Net income (loss) $ 116 0.1% $ (4,613) -4.9% $ (4,729) -102.5%
=========== ====== ========== ====== ========= ======
For the Twenty-six Weeks Ended
---------------------------------------------------------------
June 29, 2002 June 30,2001 Difference
----------- ---------- ---------
Revenue:
Home manufacturing net sales $ 195,111 $ 145,895 $ 49,216
Financial services 1,147 1,480 (333)
Retail 3,619 3,393 226
Other 1,679 2,747 (1,068)
----------- ---------- ---------
Total revenue $ 201,556 100.0% $ 153,515 100.0% $ 48,041 31.3%
Cost of sales 173,347 86.0% 136,448 88.9% 36,899 27.0%
----------- ------ ---------- ------ --------- ------
Gross profit $ 28,209 14.0% $ 17,067 11.1% $ 11,142 65.3%
=========== ====== ========== ====== ========= ======
Selling, general and administrative $ 30,058 14.9% $ 31,697 20.6% $ (1,639) -5.2%
Operating loss $ (1,849) -0.9% $ (14,630) -9.5% $ (12,781) -87.4%
----------- ------ ---------- ------ --------- ------
Other income (expense):
Interest expense $ (759) -0.4% $ (1,095) -0.7% $ (336) -30.7%
Other, net 638 0.3% 254 0.2% 384 151.2%
----------- ---------- --------- ------
$ (121) $ (841) (720) 85.6%
=========== ========== ========= ======
Loss before income tax benefit $ (1,970) -1.0% $ (15,471) -10.1% $ (13,501) -87.3%
- -
Income tax benefit $ (3,212) -1.6% $ (600) -0.4% $ 2,612 435.3%
----------- ---------- --------- ------
Income (loss) before cumulative
effect of change in accounting $ 1,242 0.6% $ (14,871) -9.7% $ (16,113) -108.4%
principle
Cumulative effect of change in
accounting principle, net of tax (14,162) -7.0% - 0.0% 14,162 100.0%
----------- ---------- ---------
Net loss $ (12,920) -6.4% $ (14,871) -9.7% $ (1,951) -13.1%
=========== ====== ========== ====== ========= ======
OPERATING DATA For the Thirteen Weeks Ended
--------------------------------------------------------------
June 29, 2002 June 30,2001
------------------------------ -----------------------------
Home manufacturing sales:
Floor shipments 6,020 5,557
Home shipments:
Single section 699 20.8% 1,214 35.9%
Multi-section 2,661 79.2% 2,172 64.1%
---------------- ----------- -------------- -----------
Total shipments 3,360 100.0% 3,386 100.0%
Shipments to company-owned retail locations (47) 1.4% (36) 1.1%
---------------- ----------- -------------- -----------
Wholesale shipments to independent dealers 3,313 98.6% 3,350 98.9%
================ =========== ============== ===========
Retail sales:
Single section 14 28.0% 18 36.0%
Multi-section 36 72.0% 32 64.0%
---------------- ----------- -------------- -----------
Total sales 50 100.0% 50 100.0%
================ =========== ============== ===========
Cavalier-produced homes sold 42 84.0% 39 78.0%
================ =========== ============== ===========
Used homes sold 8 16.0% 10 20.0%
================ =========== ============== ===========
Other Operating Data:
Installment loan purchases $ 13,281 $ 9,676
Capital expenditures $ 559 $ 481
Home manufacturing facilities - operating 14 15
Independent exclusive dealer locations 259 208
Company-owned retail locations 5 5
For the Twenty-six Weeks Ended
--------------------------------------------------------------
June 29, 2002 June 30,2001
------------------------------ -----------------------------
Home manufacturing sales:
Floor shipments 11,671 9,126
Home shipments:
Single section 1,360 20.9% 1,722 31.7%
Multi-section 5,156 79.1% 3,703 68.3%
---------------- ----------- -------------- -----------
Total shipments 6,516 100.0% 5,425 100.0%
Shipments to company-owned retail locations (94) 1.4% (58) 1.1%
---------------- ----------- -------------- -----------
Wholesale shipments to independent dealers 6,422 98.6% 5,367 98.9%
================ =========== ============== ===========
Retail sales:
Single section 34 35.1% 30 32.3%
Multi-section 63 64.9% 63 67.7%
---------------- ----------- -------------- -----------
Total sales 97 100.0% 93 100.0%
================ =========== ============== ===========
Cavalier-produced homes sold 84 86.6% 79 84.9%
================ =========== ============== ===========
Used homes sold 13 13.4% 13 14.0%
================ =========== ============== ===========
Other Operating Data:
Installment loan purchases $ 21,879 $ 18,590
Capital expenditures $ 1,312 $ 2,595
Home manufacturing facilities - operating 14 15
Independent exclusive dealer locations 259 208
Company-owned retail locations 5 5
Thirteen weeks ended June 29, 2002 and June 30, 2001
Revenue
Revenue for the second quarter of 2002 totaled $106,643, an increase of 13% from
2001's second quarter revenue of $94,337.
Home manufacturing net sales accounted for virtually the entire increase against
the comparable 2001 period, increasing 14.2% to $103,123, net of intercompany
eliminations of $1,516. Home manufacturing net sales for the second quarter of
2001 were $90,332, net of intercompany eliminations of $1,031. Home shipments
remained flat against the comparable 2001 period, with floor shipments
increasing by 8.3%. Multi-section home shipments, as a percentage of total
shipments, continued to increase, from 64.1% of shipments in the second quarter
of 2001 to 79.1% of shipments in 2002 in response to increasing consumer demand
for multi-section homes, as compared to single section homes, caused in part by
favorable changes in financing rates and terms available for multi-section
homes, especially for land/home financing. Actual shipments of homes for the
second quarter were 3,360 versus 3,386 in 2001. Shipments to exclusive dealers
were approximately 58% for the second quarter of 2002, compared to 49% for the
same period in 2001.
Cavalier attributes the increase in sales and shipments primarily to its
aggressive distribution and marketing strategies and its value-based product
offerings.* Approximately 83% of Cavalier's shipments were to its core market of
11 states, where the Company's floor shipments increased 3.9% compared to the
second quarter of 2001.
Revenue from the financial services segment declined to $715 for the second
quarter of 2002 compared to $785 in 2001. The revenue decline primarily was due
to a reduction in the rate earned on resold loans due to competitive industry
conditions and due to reduced interest income on loans held in its portfolio as
a result of loans sold from the portfolio in the fourth quarter of 2001. During
the second quarter of 2002, CIS Financial Services, Inc. ("CIS"), the Company's
wholly owned finance subsidiary, purchased contracts of $13,281 and resold
installment contracts totaling $10,773. In the second quarter of 2001, CIS
purchased contracts of $9,676 and resold installment contracts totaling $8,794.
CIS does not retain the servicing function and does not earn the interest income
on these resold loans.
Revenue from the retail segment was $2,030 for 2002 compared to $1,751 for 2001,
an increase of 15.9%. The increase is primarily due to higher multi-section
homes sold as compared to single section homes.
Other revenue consists mainly of revenue from the Company's wholesale component
manufacturing businesses. Revenues from external customers declined for the
second quarter of 2002 to $775 compared to $1,469 for the second quarter of
2001. The decrease is primarily due to the scaled back operations of a supply
company.
Gross Profit
Gross profit was $14,879, or 14.0% of total revenue, for the second quarter of
2002, versus $12,044, or 12.8%, in 2001. Of the $2,835 increase, approximately
$1,600 was due to the volume increase and $1,300 to improved margin due to cost
reductions as a result of continued efficiencies gained from higher production
levels and restructured product and work processes.
Selling, General and Administrative
Selling, general and administrative expenses during the second quarter of 2002
were $14,558, or 13.7% of total revenue, versus $16,204 or 17.2% in 2001, a
decrease of $1,646 or 10.2%. The overall decrease includes a $660 reduction in
advertising and promotion costs, including costs to support the exclusive dealer
program, a benefit of $1,163 from the settlement of a 1998 insurance claim
related to the Company's employee benefits plan, and a $245 decrease in goodwill
amortization expense (see Cumulative Effect of Change in Accounting Principle
discussed below), offset by a $417 increase in employee benefits cost (primarily
health insurance).
Operating Income (Loss)
Operating income for the quarter was $321 compared to an operating loss of
$4,160 in the second quarter of 2001. Segment operating results were as follows:
(1) Home manufacturing operating loss decreased primarily due to increased
sales and improved gross margin. (2) Financial services operating income
decreased due to the decline in revenue as described above. (3) The retail
segment's operating loss compared to operating profit in the same quarter of
2001 is due to lower gross margin and increased selling, general and
administrative expenses. (4) The other segment operating profit increased
primarily due to the addition, in mid 2001, of a supply company that has been
profitable and the improved profitability of another supply company. (5) General
corporate operating expense, which is not identifiable to a specific segment,
improved significantly over the comparable 2001 period primarily due to reduced
legal and professional fees and insurance settlement proceeds of $1,163.
Other Income (Expense)
Interest expense decreased $188 due primarily to a reduction in interest rate
paid on the $15,000 outstanding under the Company's line of credit. Other, net
increased $122 primarily due to increased income recognized from equity method
investees, partially offset by lower interest income rates earned during the
second quarter of 2002.
Income (Loss) before Income Taxes (Benefit)
Income before taxes for the second quarter was $178, compared to the pre-tax
loss of $4,613 in the second quarter of 2001. Earnings for the second quarter of
2002 included a benefit of $1,163 from the settlement of a 1998 insurance claim
related to an employee benefits plan. Also, the loss in the second quarter of
2001 included $245 in goodwill amortization; no goodwill amortization has been
recorded in fiscal 2002 pursuant to Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Excluding
these items, the loss before income taxes (benefit) for the second quarter of
2002 was $985, down 77% from the comparable pre-tax loss of $4,368 reported in
the year-earlier quarter and less than one-half the pre-tax loss registered in
the first quarter of 2002.
* See Safe Harbor Statement on page 17.
Income Taxes
The Company recorded income tax expense in the second quarter of 2002 of $62,
with no expense or benefit being recorded in the comparable period of 2001
because management believed it was no longer appropriate to record income tax
benefits on current losses in excess of anticipated refunds and certain
carry-forward items under the provisions of Statement of Financial Accounting
Standards No.109 Accounting for Income Taxes.
Net Income (Loss)
The net income for the second quarter of 2002 was $116 or $0.01 per diluted
share compared with a net loss in the prior-year period of $4,613 or $0.26 per
diluted share. The major components of this income and loss are discussed above
under Revenue, Gross Profit, and Selling, General and Administrative Expenses.
Twenty-six weeks ended June 29, 2002 and June 30, 2001
Revenue
Revenue for the first half of 2002 totaled $201,556, an increase of 31.3% from
2001's twenty-six weeks revenue of $153,515.
Home manufacturing net sales accounted for virtually the entire increase against
the comparable 2001 period, increasing 33.7% to $195,111, net of intercompany
eliminations of $2,869. Home manufacturing net sales for the first half of 2001
were $145,895, net of intercompany eliminations of $1,552. Home shipments
increased 20.1% against the comparable 2001 period, with floor shipments
increasing by 27.9%. Multi-section home shipments, as a percentage of total
shipments, continued to increase, from 68.3% of shipment in the first six months
of 2001 to 79.1% of shipments in 2002 in response to increasing consumer demand
for multi-section homes as compared to single section homes. Actual shipments of
homes for the twenty-six weeks were 6,516 versus 5,425 in 2001. Shipments to
exclusive dealers for the first half of 2002 were approximately 57% compared to
48% for the same period in 2001.
Cavalier attributes the increase in sales and shipments primarily to its
aggressive distribution and marketing strategies and its value-based product
offerings. * Approximately 84% of Cavalier's shipments were to its core market
of 11 states, where the Company's floor shipments increased 23.4% compared to
the first six months of 2001.
Revenue from the financial services segment declined to $1,147 for the first six
months of 2002 compared to $1,480 in 2001. The Company's inventory at all retail
locations, including five company-owned retail sales centers, increased 5% to
approximately $173,000 at June 29, 2002 from $164,000 at June 30, 2001, despite
the significant increase in sales during the year-to-date. At its peak in June
1999, dealer inventory approximated $314,000.
The revenue decline primarily was due to a reduction in the rate earned on
resold loans due to competitive industry conditions and due to reduced interest
income on loans held in its portfolio as a result of loans sold from the
portfolio in the fourth quarter of 2001. During the first half of 2002, CIS
purchased contracts of $21,879 and resold installment contracts totaling
$17,562. In the first six months of 2001, CIS purchased contracts of $18,590 and
resold installment contracts totaling $14,377. CIS does not retain the servicing
function and does not earn the interest income on these resold loans.
Revenue from the retail segment was $3,619 for the first six months of 2002
compared to $3,393 for 2001, an increase of 6.7% due to increased volume.
Other revenue consists mainly of revenue from the Company's wholesale component
manufacturing businesses. Revenues from external customers declined for the
first half of 2002 to $1,679 compared to $2,747 for the comparable period of
2001. The decrease is primarily due to the closure of a supply company in March
2001 and the scaled back operations of another supply company.
Gross Profit
Gross profit was $28,209, or 14.0% of total revenue, for the first half of 2002,
versus $17,067, or 11.1%, in 2001. Of the $11,142 increase, approximately $5,300
was due to the volume increase and $5,800 to improved margin due to cost
reductions as a result of continued efficiencies gained from higher production
levels and restructured product and work processes.
Selling, General and Administrative
Selling, general and administrative expenses during the first six months of 2002
were $30,058, or 14.9% of total revenue, versus $31,697 or 20.6% in 2001, a
decrease of $1,639, or 5.2%. The overall decrease includes a $1,001 reduction in
advertising and promotion costs, including costs to support the exclusive dealer
program, a benefit of $1,163 from the settlement of a 1998 insurance claim
related to the Company's employee benefits plan, and a $489 decrease in goodwill
amortization expense (see Cumulative Effect of Change in Accounting Principle
discussed below), offset by a $456 increase in salaries, wages and incentive
compensation, and a $654 increase in employee benefits cost (primarily health
insurance).
* See Safe Harbor Statement on page 17.
Operating Loss
Operating loss for the first six months of 2002 was $1,849 compared to $14,630
in the comparable period of 2001. Segment operating results were as follows: (1)
Home manufacturing operating loss decreased primarily due to increased sales and
an improved gross margin. (2) Financial services operating income decreased to a
loss due to the decline in revenue as described above. (3) The retail segment's
operating loss, compared to operating profit in the same period of 2001 is due
to lower gross margin and increased selling, general and administrative
expenses. (4) The other segment operating income increased primarily due to the
addition, in mid 2001, of a supply company that has been profitable and the
improved profitablity of another supply company. (5) General corporate operating
expense, which is not identifiable to a specific segment, improved significantly
over the comparable 2001 period primarily due to reduced legal and professional
fees and the insurance settlement proceeds of $1,163.
Other Income (Expense)
Interest expense decreased $336 due primarily to a reduction in interest rate
paid on the $15,000 outstanding under the Company's line of credit. Other, net
increased $384 primarily due to increased income recognized from equity method
investees, partially offset by lower interest income rates earned during the
first half of 2002.
Loss before Income Tax Benefit
Loss before income tax benefit for the first six months of 2002 was $1,970, down
87.3% from the pre-tax loss of $15,471 in the year-earlier period. As noted
earlier, the loss for the first half of 2002 was reduced by a $1,163 benefit
from the settlement of an insurance claim in the second quarter. Also, the loss
in the first half of 2001 included $489 in goodwill amortization; no goodwill
amortization has been recorded in fiscal 2002. Excluding these items, the loss
before income tax benefit for the first half of 2002 was $3,133, down 79% from
the comparable pre-tax loss of $14,982 reported in the year-earlier period.
Income Tax Benefit
An income tax benefit of $3,212 was recorded in the first half of 2002,
reflecting the taxes and benefit of both the current quarter's net income and
the new Jobs Creation and Workers' Assistance Act that was passed in March 2002.
Under this law, companies are able to carry back net operating losses five years
instead of two years as provided under the previous rules. In the first quarter
of 2001, the Company recorded an income tax benefit of $600 relating to future
income tax refunds and certain carry-forward items, but did not record any
additional benefit for net operating losses because management believed it was
no longer appropriate to record income tax benefits on current losses in excess
of anticipated refunds and certain carry-forward items under the provisions of
Statement of Financial Accounting Standards No.109 Accounting for Income Taxes.
Cumulative Effect of Change In Accounting Principle
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. This statement is effective for financial statements issued
for years beginning after December 15, 2001. SFAS No. 142 specifies that
goodwill and certain intangible assets will no longer be amortized but instead
will be subject to periodic impairment testing. The Company adopted SFAS No. 142
effective January 1, 2002. Under the provisions of this statement, the Company
recorded a charge of $14,162, net of tax, or $0.80 per diluted share, as a
cumulative effect of a change in accounting principle, to eliminate all of its
goodwill due to impairment. This charge was recorded in the first quarter of
2002, and the entire amount of the goodwill was associated with the Company's
home manufacturing unit.
Net loss
The net loss for the first six months of 2002 was $12,920 or $0.73 per diluted
share compared with a net loss in the prior-year period of $14,871 or $0.85 per
diluted share. The major components of these losses are discussed above under
Revenue, Gross Profit, Selling, General and Administrative Expenses, Income Tax
Benefit and Cumulative Effect of Change In Accounting Principle.
Liquidity and Capital Resources (dollars in thousands)
BALANCE SHEET DATA Balances as of
-------------------------------------------------
June 29, 2002 December 31, 2001
------------------ -----------------
Cash and cash equivalents $ 28,491 $ 43,256
Working capital $ 25,370 $ 18,183
Current ratio 1.4 to 1 1.3 to 1
Accounts receivable $ 19,360 $ 7,293
Long-term debt $ 23,011 $ 23,999
Ratio of long-term debt to equity 1 to 3 1 to 3
Installment loan portfolio $ 8,833 $ 4,991
Operating activities during the first six months of 2002 used net cash of
$8,691. Effective March 9, 2002, the Jobs Creation and Workers' Assistance Act
was passed which enabled companies to carry back net operating losses five years
instead of two years as under the previous rules. In April 2002, the Company
received approximately $4,600 in tax refunds as a result of this change.
The increase in accounts receivable and reduction in cash and cash equivalents
from December 31, 2001 to June 29, 2002 is a normal seasonal occurrence. As is
customary for the Company, most of its manufacturing operations are idle during
the final two weeks of the year for vacations, holidays and reduced product
demand, during which time the Company collects the majority of its outstanding
receivables, resulting in higher year end cash balances.
The Company's capital expenditures were $1,312 for the twenty-six weeks ended
June 29, 2002, as compared to $2,595 for the comparable period of 2001. Capital
expenditures during these periods included normal property, plant and equipment
additions and replacements and the exercise of a purchase option for a
previously leased facility for $1,250 in 2001. The proceeds for this purchase
came from an industrial development revenue bond issue.
In May 2002, the Company paid $1,250 to purchase additional partnership interest
in an equity investee. This partnership is now wholly-owned by the Company and
continues to be included in the consolidated financial statements.
The decrease in long-term debt was due to scheduled principal payments.
The Company did not purchase any shares of treasury stock during the first six
months of 2002. The Company has authorization to acquire up to 831,200
additional shares under the current program.
The increase in the installment loan portfolio of $3,842 is due primarily to a
timing difference in the sale of loans, some of which were sold subsequent to
June 29, 2002.
On June 21, 2002, the Company amended its revolving and term-loan agreement (the
"Credit Facility") with its primary lender to extend the maturity date under the
revolving line of credit available under the Credit Facility to November 2003.
Previous terms and conditions under the Credit Facility remain unchanged. The
Credit Facility currently consists of a $35,000 revolving and term-loan
agreement and contains a revolving line of credit that provides for borrowings
(including letters of credit) up to a maximum of $35,000. At certain levels of
tangible net worth, defined as the total of the Company's tangible net worth and
treasury stock purchases for 2000 and 2001, the amount available under the
Credit Facility and applicable interest rate changes are noted in the following
table.
Tangible net worth Credit Facility Applicable interest rate
--------------------------------
("TNW") Available Bank's Prime LIBOR
- ---------------------- ---------------- ----------------- ------------
Above $85,000 $35,000 less 0.50% plus 2.00%
$85,000 - $77,000 35% of TNW less 0.50% plus 2.00%
$77,000 - $65,000 35% of TNW prime plus 2.50%
$65,000 - $58,000 30% of TNW plus 0.25% plus 2.75%
However, in no event may the aggregate outstanding borrowings under the
revolving line of credit and term-loan agreement exceed $35,000 (or such lesser
amount as may be available). At June 29, 2002, $15,000 was outstanding under the
revolving line of credit, against a total borrowing capacity of $20,367 based on
the Company's tangible net worth. At December 31, 2001, $15,000 was outstanding
under the revolving line of credit, against a total borrowing capacity of
$20,087 based on the Company's tangible net worth. The Credit Facility provides
the option for amounts drawn down for CIS's benefit to be converted to a term
loan with respect to borrowings of up to 80% of the Company's eligible (as
defined) installment sales contracts, up to a maximum of $35,000 (or such lesser
amount as may be available). Interest under 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 Credit Facility, as amended, contains certain restrictive covenants which
limit, among other things, the Company's ability without the lender's consent 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, $1,000,
(iii) incur additional indebtedness, including lease obligations, which exceed
in the aggregate $18,000, excluding floor plan notes payable which cannot exceed
$6,000 and (iv) make annual capital expenditures in excess of $10,000. 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 $15,000), debt to tangible net worth ratio (not to
exceed 2 to 1) and cash flow to debt service ratio (not less than 1.75 to 1)
commencing with the year ending December 31, 2002 and thereafter, and to
maintain a current ratio of at least 1.17 to 1 and the sum of consolidated
tangible net worth plus treasury stock purchases, in 2000 and 2001, of at least
$58,000. The Credit Facility also requires CIS to comply with certain specified
restrictions and financial covenants. Cavalier was not in violation of any
financial covenants of the Credit Facility at June 29, 2002.
Since its inception, CIS 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. From
time to time, the Company evaluates the potential to sell all or a portion of
its remaining installment loan portfolio, in addition to the periodic sale of
installment contracts purchased by CIS in the future. * CIS is currently
re-selling loans to other lenders under various retail finance contracts. The
Company believes the periodic sale of installment contracts under these retail
finance agreements 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 CIS to increase its volume
of loan purchases. * There can be no assurance, however, that additional sales
will be made under these agreements, or that CIS and the Company will be able to
realize the expected benefits from such agreements. *
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. * However,
there can be no assurances to this effect. If it is not, or if the Company is
unable to remain in compliance with its covenants under its Credit Facility, the
Company would seek to maintain or enhance its liquidity position and capital
resources through further modifications to or waivers under the Credit Facility,
incurrence of additional short or long-term indebtedness or other forms of
financing, asset sales, restructuring of debt, and/or the sale of equity or debt
securities in public or private transactions, the availability and terms of
which will depend on various factors and market and other conditions, some of
which are beyond the control of the Company.
Projected cash to be provided by operations in the coming year is largely
dependent on sales volume. The Company's manufactured homes are sold mainly
through independent dealers who generally rely on third-party lenders to provide
floor plan financing for homes purchased. In addition, 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 departure of financial
institutions from 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. A major industry lender
recently discontinued wholesale (dealer) financing of manufactured homes, which
is not currently expected to have a material adverse effect on the Company's
ability to find financing for home purchases by dealers whose floor plan
financing was with that lender. * Reduced availability of such financing is
currently having an adverse effect on the manufactured housing industry. * In
addition, many 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. Additionally, effective January 1,
2002, the State of Texas enacted a law that, among other things, classifies and
taxes manufactured homes as real property, and not personal property, under
certain conditions as set forth in the Texas law. The classification as real
property could change the rates and methods of taxation assessed against such
homes in Texas. The law also may affect the form and structure of permanent
financing extended to Texas manufactured home consumers because such financing
historically has treated manufactured homes as personalty rather than as real
estate.
Critical Accounting Policies
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. This statement is effective for financial statements issued
for years beginning after December 15, 2001. SFAS No. 142 specifies that
goodwill and certain intangible assets will no longer be amortized but instead
will be subject to periodic impairment testing. The Company adopted SFAS No. 142
effective January 1, 2002. Under the provisions of this statement, the Company
recorded a charge of $14,162, net of tax, or $0.80 per diluted share, as a
cumulative effect of a change in accounting principle, to eliminate all of its
goodwill due to impairment. The entire amount of the goodwill was associated
with the Company's home manufacturing unit.
The Company and the manufactured housing industry have been impacted by
inventory oversupply at the retail level, an increase in dealer failures, a
reduction in available consumer credit and wholesale (dealer) financing for
manufactured housing, more restrictive credit standards and increased home
repossessions which re-enter home distribution channels. All of these factors
have caused the Company to suffer significant losses since the last half of
1999, for 2000 and the first half of 2001. The fair value of the home
manufacturing unit was determined by a third party valuation specialist, using
projections provided by Company management as well as industry and other market
data. The fair value of the home manufacturing unit was lower than the carrying
value which required allocation of the fair value to the assets and liabilities
of the unit. In this allocation process, various independent parties were used
to appraise certain of the Company's manufacturing fixed assets. Additionally,
Company management estimated fair value of other assets and liabilities based on
assumptions believed to be appropriate to the valuation process. As a result of
this fair value allocation process, the Company's goodwill was considered
impaired and an adjustment was made during the first quarter of 2002.
* See Safe Harbor Statement on page 17.
Also note that, in our Annual Report on Form 10-K for the period ending December
31, 2001, under the heading "Critical Accounting Policies", we have provided a
list of accounting policies that we believe are most important to the portrayal
of our financial condition and results of operations that require our most
difficult, complex or subjective judgements as a result of the need to make
estimates about the effect of matters that are inherently uncertain. *
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, but 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 $2,354 at June 29, 2002 and the related deferred
compensation liability was $3,174. 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 dealers, at fixed
interest rates, in the ordinary course of business, and periodically resells a
majority of these loans to financial institutions under the terms of retail
finance agreements. 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. The Company's portfolio consists of fixed
rate contracts with interest rates generally ranging from 8.75% to 14.5% and an
average original term of 285 months at June 29, 2002. At June 29, 2002, the
estimated fair value of installment contracts was $9,151. The Company estimated
the fair value of its installment contracts receivable using discounted cash
flows and interest rates offered by CIS on similar contracts at that time.
The Company has notes payable under retail floor plan agreements, two industrial
development revenue bond issues and a revolving line of credit that are exposed
to interest rate changes. Since these borrowings are floating rate debt, an
increase in short-term interest rates would adversely affect interest expense.
Additionally, Cavalier has five industrial development revenue bond issues at
fixed interest rates. At June 29, 2002, the estimated fair value of borrowings
was $24,890. 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.
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 Quarterly Report on Form 10-Q 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 also may 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;
o changes in the availability of retail (consumer) financing;
o changes in the availability of wholesale (dealer) financing;
o changes in level of industry retail inventories;
o the ability to attract and retain quality independent dealers,
executive officers and other key personnel;
o competition;
o contingent repurchase and guaranty obligations;
o uncertainties regarding Cavalier's retail financing activities;
o the potential unavailability and price increases for raw materials;
o the potential unavailability of manufactured housing sites;
o regulatory constraints;
* See Safe Harbor Statement on page 17.
o the potential for additional warranty claims;
o litigation; and
o the potential volatility in our stock price.
Any or all of our forward-looking statements in this report, in the 2001 Annual
Report to Stockholders, in our Annual Report on Form 10-K for the year ended
December 31, 2001 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, in our Annual Report on Form 10-K for the
period ending December 31, 2001, 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.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Reference is made to the legal proceedings previously reported in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 under the
heading "Item 3 - Legal Proceedings." The description of legal proceedings in
the Company's Form 10-K remains unchanged.
Item 5: Other Matters
None.
Item 6: Exhibits and Reports on form 8-K
The exhibits required to be filed with this report are listed below.
(10) Material Contracts
(a) Third Amendment to Amended and Restated Revolving Term
Loan Agreement, dated as of June 21, 2002, between the
Company and First Commercial Bank.
(b) Second Modification to Amended and Restated Revolving
Term Loan Agreement, dated as of June 21, 2002, between
the Company and First Commercial Bank.
* (c) Form of Stock Option Agreement between Cavalier Homes,
Inc. and Thomas A. Broughton, III dated January 29,
2002 filed as Exhibit 4(e) to the Company's
Registration Statement on Form S-8, Registration No.
333-90652, dated June 17, 2002.
* (d) Form of Stock Option Agreement between Cavalier Homes,
Inc. and Lee Roy Jordan dated January 29, 2002 filed as
Exhibit 4(f) to the Company's Registration Statement on
Form S-8, Registration No. 333-90652, dated June 17,
2002.
* (e) Form of Stock Option Agreement between Cavalier Homes,
Inc. and John W Lowe dated January 29, 2002 filed as
Exhibit 4(g) to the Company's Registration Statement on
Form S-8, Registration No. 333-90652, dated June 17,
2002.
(11) Statement re: Computation of Net Income (Loss) per Common Share.
(b) Current Report on Form 8-K.
None
- -----------
* Incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cavalier Homes, Inc.
--------------------------------------
Registrant
Date: August 12, 2002 /s/ David A. Roberson
--------------------------------------
David A. Roberson - President
and Chief Executive Officer
Date: August 12, 2002 /s/ Michael R. Murphy
--------------------------------------
Michael R. Murphy -
Chief Financial Officer (Principal
Financial and Accounting Officer)
PART II. - EXHIBIT 11
CAVALIER HOMES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Thirteen Weeks Ending Year Ending
--------------------------- ----------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income (loss) before cumulative effect
of change in accounting priciple $ 116,000 $ (4,613,000) $ 1,242,000 $ (14,871,000)
Cumulative effect of change in accounting
principle, net of tax - - (14,162,000) -
------------ ------------- ------------ ------------
Net loss $ 116,000 $ (4,613,000) $ (12,920,000) $ (14,871,000)
============ ============ ============ ============
SHARES:
Weighted average common shares outstanding (basic) 17,665,380 17,487,843 17,664,138 17,511,405
Dilutive effect if stock options and warrants were exercised 94,488 - 77,800 -
------------ ------------ ------------ ------------
Weighted average common shares
outstanding, assuming dilution (diluted) 17,759,868 17,487,843 17,741,938 17,511,405
============ ============ ============ ============
Basic net loss per share
Income (loss) before cumulative effect
of change in accounting priciple $ .01 $ (.26) $ .07 $ (.85)
Cumulative effect of change in accounting priciple - - (0.80) -
============ ============ ============ ============
Net Loss $ .01 $ (.26) $ (.73) $ (.85)
============ ============ ============ ============