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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 September 28, 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 1-9
Cavalier Homes, Inc.
--------------------
(Exact name of Registrant as specified in its charter)
Delaware 63-0949734
- ------------------------------- ----------
(State or other jurisdiction of (IRS Employer
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)
(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 November 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)
September 28, December 31,
ASSETS 2002 2001
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 28,342 $ 43,256
Accounts receivable, less allowance for losses of $226 (2002) and $625 (2001) 17,806 7,293
Notes and installment contracts receivable - current 7,057 1,708
Inventories 24,258 20,672
Deferred income taxes 12,198 8,075
Income tax receivable 75 -
Other current assets 1,524 2,011
---------------- ----------------
Total current assets 91,260 83,015
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT (Net) 55,561 59,692
---------------- ----------------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $808 (2002) and $829 (2001) 3,441 3,232
---------------- ----------------
GOODWILL, less accumulated amortization of $6,968 (2001) - 15,468
---------------- ----------------
DEFERRED INCOME TAXES 2,858 7,787
---------------- ----------------
OTHER ASSETS 5,325 4,922
---------------- ----------------
TOTAL $ 158,445 $ 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 1,958 2,364
Accounts payable 12,901 8,059
Amounts payable under dealer incentive programs 11,323 17,542
Accrued compensation and related withholdings 5,941 4,260
Estimated warranties 12,500 11,700
Estimated repurchase commitments 3,350 3,200
Accrued insurance 7,647 7,083
Other accrued expenses 8,261 9,330
---------------- ----------------
Total current liabilities 65,185 64,832
---------------- ----------------
LONG-TERM DEBT 22,946 23,999
---------------- ----------------
OTHER LONG-TERM LIABILITIES 3,796 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 12,825 26,507
---------------- ----------------
Total stockholders' equity 66,518 80,192
---------------- ----------------
TOTAL $ 158,445 $ 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 Thirty-nine Weeks Ended
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
REVENUE $ 98,693 $ 100,945 $ 300,249 $ 254,460
COST OF SALES 82,898 84,378 256,245 220,826
SELLING, GENERAL AND ADMINISTRATIVE 16,892 16,677 46,950 48,374
-------------- -------------- -------------- --------------
OPERATING LOSS (1,097) (110) (2,946) (14,740)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (363) (469) (1,122) (1,564)
Other, net 287 182 925 436
-------------- -------------- -------------- --------------
(76) (287) (197) (1,128)
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAX BENEFIT (1,173) (397) (3,143) (15,868)
INCOME TAX BENEFIT (411) - (3,623) (600)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (762) (397) 480 (15,268)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT OF $1,306 - - (14,162) -
-------------- -------------- -------------- --------------
NET LOSS $ (762) $ (397) $ (13,682) $ (15,268)
============== ============== ============== ==============
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ (0.04) $ (0.02) $ 0.03 $ (0.87)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ - $ - $ (0.80) $ -
-------------- -------------- -------------- --------------
NET LOSS $ (0.04) $ (0.02) $ (0.77) $ (0.87)
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,665,644 17,636,780 17,664,643 17,553,350
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING,
ASSUMING DILUTION 17,665,644 17,636,780 17,705,762 17,553,350
============== ============== ============== ==============
See notes to condensed consolidated financial statements.
.
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Thirty-nine Weeks Ended
September 28, September 29,
2002 2001
-------------------- -------------------
OPERATING ACTIVITIES:
Net loss $ (13,682) $ (15,268)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle, net of tax 14,162 -
Depreciation and amortization 4,828 6,187
Change in provision for credit and accounts receivable losses (420) 29
Gain on sale of installment contracts (1,012) (1,118)
(Gain) loss on sale of property, plant and equipment 199 (306)
Other, net (1,703) 105
Changes in assets and liabilities:
Accounts receivable (10,114) (21,447)
Inventories (3,586) (2,783)
Income tax receivable (75) 15,052
Accounts payable 4,842 5,247
Other assets and liabilities (1,176) 5,224
-------------------- -------------------
Net cash used in operating activities (7,737) (9,078)
-------------------- -------------------
INVESTING ACTIVITIES:
Proceeds from disposition of property, plant and equipment 848 681
Capital expenditures (1,744) (2,973)
Proceeds from sale of installment contracts 27,881 25,026
Net change in notes and installment contracts (32,464) (27,419)
Other investing activities (257) 137
-------------------- -------------------
Net cash used in investing activities (5,736) (4,548)
-------------------- -------------------
FINANCING ACTIVITIES:
Net payments on notes payable (406) (680)
Payments on long-term debt (1,043) (919)
Proceeds from long-term borrowings - 1,250
Proceeds from exercise of stock options 8 1
Net proceeds from sales of common stock - 498
Purchase of treasury stock - (608)
-------------------- -------------------
Net cash used in financing activities (1,441) (458)
-------------------- -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (14,914) (14,084)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,256 35,394
-------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,342 $ 21,310
==================== ===================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (received) for:
Interest $ 1,101 $ 1,472
Income taxes (4,760) (16,959)
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 amounts)
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 September 28, 2002, and the results of its operations
and its cash flows for the thirty-nine week periods ended September 28,
2002 and September 29, 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 thirty-nine weeks ended
September 28, 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 Thirty-nine Weeks Ended
---------------------------------- ----------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
----------------- ---------------- ---------------- -----------------
Weighted average common shares
outstanding (basic) 17,665,644 17,636,780 17,664,643 17,553,350
Dilutive effect if stock options and warrants were exercised - - 41,119 -
----------------- ---------------- ---------------- -----------------
Weighted average common shares
outstanding,assuming dilution (diluted) 17,665,644 17,636,780 17,705,762 17,553,350
================= ================ ================ =================
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. The maximum antidilutive
options and warrants for the thirty-nine weeks ended September 28, 2002
and September 29, 2001, were 2,908,489 and 2,693,093, respectively.
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. 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 Thirteen Weeks Ended For the Thirty-nine Weeks Ended
--------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Pro Forma Information:
Net loss as reported $ (762) $ (397) $ (13,682) $ (15,268)
Amortization of goodwill - 245 - 734
-------------- -------------- -------------- --------------
Adjusted net loss (762) (152) (13,682) (14,534)
Cumulative effect of change in accounting principle, net of tax - - 14,162 -
-------------- -------------- -------------- --------------
Pro forma net income (loss) $ (762) $ (152) $ 480 $ (14,534)
============== ============== ============== ==============
Basic and diluted income (loss) per share:
Net loss as reported $ (0.04) $ (0.02) $ (0.77) $ (0.87)
Amortization of goodwill - 0.01 - 0.04
-------------- -------------- -------------- --------------
Adjusted net loss (0.04) (0.01) (0.77) (0.83)
Cumulative effect of change in accounting principle - - 0.80 -
-------------- -------------- -------------- --------------
Pro forma net income (loss) $ (0.04) $ (0.01) $ 0.03 $ (0.83)
============== ============== ============== ==============
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.
In June 2001, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for any exit or
disposal activities initiated after December 31, 2002. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred rather than at the
time a company commits to an exit plan. SFAS No. 146 also establishes that
the liability initially should be measured and recorded at fair value.
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 September 28, 2002
and December 31, 2001 were as follows:
September 28, December 31,
2002 2001
--------------- --------------
Raw materials $ 14,067 $ 13,917
Work-in-process 1,788 2,086
Finished goods 8,403 4,669
--------------- --------------
Total inventory $ 24,258 $ 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 September 28, 2002 were $564 for 93
terminated employees.
5. INCOME TAX BENEFIT
The Company recorded an income tax benefit of $3,623 in the first nine
months 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 nine months 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 $148,000 at September 28, 2002. The Company has a reserve for
estimated repurchase commitments of $3,350 and $3,200 at September 28, 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 September 28, 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 September 28, 2002, $4,631 of debt was outstanding, of which
the Company had guaranteed $1,501.
7. SEGMENT INFORMATION
The Company's reportable segments are organized around products and
services. Through its Home manufacturing segment, the Company's 9
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 dealer network. 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 primarily supply
companies who principally sell their products to the manufacturing segment
of the Company. 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 (benefit).
* See Safe Harbor Statement on page 17.
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------------ ------------------------------------------
September 28, 2002 September 29, 2001 September 28, 2002 September 29, 2001
-------------------- ------------------- -------------------- -------------------
Gross revenue:
Home manufacturing $ 96,373 $ 98,633 $ 294,353 $ 246,080
Financial services 755 724 1,902 2,204
Retail 2,335 1,790 5,954 5,183
Other 11,670 8,099 32,510 19,683
-------------------- ------------------- -------------------- -------------------
Gross revenue $ 111,133 $ 109,246 $ 334,719 $ 273,150
==================== =================== ==================== ===================
Intersegment revenue:
Home manufacturing $ 1,265 $ 1,515 $ 4,134 $ 3,067
Financial services - - - -
Retail - - - -
Other 11,175 6,786 30,336 15,623
-------------------- ------------------- -------------------- -------------------
Intersegment revenue $ 12,440 $ 8,301 $ 34,470 $ 18,690
==================== =================== ==================== ===================
Revenue from external customers:
Home manufacturing $ 95,108 $ 97,118 $ 290,219 $ 243,013
Financial services 755 724 1,902 2,204
Retail 2,335 1,790 5,954 5,183
Other 495 1,313 2,174 4,060
-------------------- ------------------- -------------------- -------------------
Total revenue $ 98,693 $ 100,945 $ 300,249 $ 254,460
==================== =================== ==================== ===================
Operating profit (loss):
Home manufacturing $ (1,038) $ 626 $ (1,565) $ (10,571)
Financial services 24 16 (115) 33
Retail (59) (9) (140) 65
Other 1,551 1,087 3,403 1,535
Elimination 55 (110) (35) (57)
-------------------- ------------------- -------------------- -------------------
Segment operating profit (loss) 533 1,610 1,548 (8,995)
General corporate (1,630) (1,720) (4,494) (5,745)
-------------------- ------------------- -------------------- -------------------
Operating loss $ (1,097) $ (110) $ (2,946) $ (14,740)
==================== =================== ==================== ===================
September 28, 2002 December 31, 2001
-------------------- -------------------
Identifiable assets:
Home manufacturing $ 99,705 $ 109,429
Financial services 12,792 12,387
Retail 5,951 5,566
Other 16,208 11,709
-------------------- -------------------
Segment assets 134,656 139,091
General corporate 23,789 35,025
-------------------- -------------------
Total assets $ 158,445 $ 174,116
==================== ===================
8. SUBSEQUENT EVENT
The Company recently announced its decision to close its manufacturing
plant in Conway, Arkansas during the fourth quarter of 2002. The Conway
plant has two production lines, and primarily produces multi-section units.
The Company expects to maintain the sales base previously provided by the
Conway facility by consolidating production within other Company plants.
The Company will record a charge of between $700,000 and $800,000 in the
fourth quarter of 2002 related to severance and benefits for the
approximately 250 employees at the Conway plant.
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 down 7.3% through
September 2002 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 announced plans to discontinue
wholesale (dealer) financing of manufactured homes, which may 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.* This announcement
follows another major lender's recent withdrawal from wholesale financing which
did not 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. In addition, a major industry lender recently announced plans to
discontinue chattel (home only) financing of manufactured homes sold at retail.
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 transactions 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.
The Company recently announced its decision to close its manufacturing plant in
Conway, Arkansas during the fourth quarter of 2002. The Conway plant has two
production lines, and primarily produces multi-section units. The Company
expects to maintain the sales base previously provided by the Conway facility by
consolidating production within other Company plants. Since the fall of 1999,
Cavalier has reduced the number of operating home manufacturing plants from 24
to 12, reflecting an approximate 40% reduction in manufacturing capacity.
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 of
approximately 42% since December 31, 1998. The Company's workforce consisted of
approximately 3,300 employees at September 28, 2002. 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.
As industry conditions remained challenging, the Company's floor shipments
decreased 7.7% during the thirteen weeks ended September 28, 2002 as compared to
the same period in 2001, but remained improved on a year-to-date basis at a 14%
increase over 2001. During the industry downturn, the Company's market share
improved from a low of 4.6% for 2000 to 7.2% through September 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 losses from
operations for the fourth quarter of 2002 and the first quarter of 2003, 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.*
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:
* See Safe Harbor Statement on page 17.
STATEMENT OF OPERATIONS DATA For the Thirteen Weeks Ended
--------------------------------------------------------------------------------------
September 28, 2002 September 29, 2001 Difference
--------------------- --------------------- -----------
Revenue:
Home manufacturing net sales $ 95,108 $ 97,118 $ (2,010)
Financial services 755 724 31
Retail 2,335 1,790 545
Other 495 1,313 (818)
----------------- ----------------- -----------
Total revenue $ 98,693 100.0% $ 100,945 100.0% $ (2,252) -2.2%
Cost of sales 82,898 84.0% 84,378 83.6% (1,480) -1.8%
----------------- -------- ----------------- -------- ----------- ---------
Gross profit $ 15,795 16.0% $ 16,567 16.4% $ (772) -4.7%
================= ======== ================= ======== =========== =========
Selling, general and administrative $ 16,892 17.1% $ 16,677 16.5% $ 215 1.3%
----------------- -------- ----------------- -------- ----------- ---------
Operating loss $ (1,097) -1.1% $ (110) -0.1% $ 987 897.3%
----------------- -------- ----------------- -------- ----------- ---------
Other income (expense):
Interest expense $ (363) -0.4% $ (469) -0.5% $ (106) -22.6%
Other, net 287 0.3% 182 0.2% 105 57.7%
----------------- ----------------- ----------- ---------
$ (76) $ (287) (211) 73.5%
================= ================= =========== =========
Loss before income tax benefit $ (1,173) -1.2% $ (397) -0.4% $ 776 195.5%
Income tax benefit $ (411) -0.4% $ - 0.0% $ 411 0.0%
----------------- ----------------- ----------- ---------
Net loss $ (762) -0.8% $ (397) -0.4% $ 365 91.9%
================= ======== ================= ======== =========== =========
STATEMENT OF OPERATIONS DATA For the Thirty-nine Weeks Ended
--------------------------------------------------------------------------------------
September 28, 2002 September 29, 2001 Difference
--------------------- --------------------- -----------
Revenue:
Home manufacturing net sales $ 290,219 $ 243,013 $ 47,206
Financial services 1,902 2,204 (302)
Retail 5,954 5,183 771
Other 2,174 4,060 (1,886)
----------------- ----------------- -----------
Total revenue $ 300,249 100.0% $ 254,460 100.0% $ 45,789 18.0%
Cost of sales 256,245 85.3% 220,826 86.8% 35,419 16.0%
----------------- -------- ----------------- -------- ----------- ---------
Gross profit $ 44,004 14.7% $ 33,634 13.2% $ 10,370 30.8%
================= ======== ================= ======== =========== =========
Selling, general and administrative $ 46,950 15.6% $ 48,374 19.0% $ (1,424) -2.9%
- -
----------------- -------- ----------------- -------- ----------- ---------
Operating loss $ (2,946) -1.0% $ (14,740) -5.8% $ (11,794) -80.0%
----------------- -------- ----------------- -------- ----------- ---------
Other income (expense):
Interest expense $ (1,122) -0.4% $ (1,564) -0.6% $ (442) -28.2%
Other, net 925 0.3% 436 0.2% 489 112.2%
----------------- ----------------- ----------- ---------
$ (197) $ (1,128) (931) 82.5%
================= ================= =========== =========
Loss before income tax benefit $ (3,143) -1.0% $ (15,868) -6.2% $ (12,725) -80.2%
- -
Income tax benefit $ (3,623) -1.2% $ (600) -0.2% $ 3,023 503.8%
----------------- ----------------- ----------- ---------
Income (loss) before cumulative effect of
change in accounting principle $ 480 0.2% $ (15,268) -6.0% $ (15,748) -103.1%
Cumulative effect of change in accounting
principle, net of tax (14,162) -4.7% - 0.0% 14,162 100.0%
----------------- ----------------- -----------
Net loss $ (13,682) -4.6% $ (15,268) -6.0% $ (1,586) -10.4%
================= ======== ================= ======== =========== =========
OPERATING DATA For the Thirteen Weeks Ended
-----------------------------------------
September 28, 2002 September 29, 2001
-------------------- ------------------
Home manufacturing sales:
Floor shipments 5,388 5,837
Home shipments:
Single section 482 16.4% 1,323 37.0%
Multi-section 2,453 83.6% 2,257 63.0%
--------- -------- -------- --------
Total shipments 2,935 100.0% 3,580 100.0%
Shipments to company-owned retail locations (38) 1.3% (55) 1.5%
--------- -------- -------- --------
Wholesale shipments to independent dealers 2,897 98.7% 3,525 98.5%
========= ======== ======== ========
Retail sales:
Single section 19 28.4% 27 47.4%
Multi-section 48 71.6% 30 52.6%
--------- -------- -------- --------
Total sales 67 100.0% 57 100.0%
========= ======== ======== ========
Cavalier-produced homes sold 58 86.6% 48 84.2%
========= ======== ======== ========
Used homes sold 9 13.4% 9 15.8%
========= ======== ======== ========
Other Operating Data:
Installment loan purchases $ 11,957 $ 9,509
Capital expenditures $ 432 $ 378
Home manufacturing facilities - operating 12 15
Independent exclusive dealer locations 255 221
Company-owned retail locations 5 5
OPERATING DATA For the Thirty-nine Weeks Ended
-------------------------------------------
September 28, 2002 September 29, 2001
-------------------- --------------------
Home manufacturing sales:
Floor shipments 17,059 14,963
Home shipments:
Single section 1,842 19.5% 3,045 33.8%
Multi-section 7,609 80.5% 5,960 66.2%
--------- -------- --------- ---------
Total shipments 9,451 100.0% 9,005 100.0%
Shipments to company-owned retail locations (132) 1.4% (113) 1.3%
--------- -------- --------- ---------
Wholesale shipments to independent dealers 9,319 98.6% 8,892 98.7%
========= ======== ========= =========
Retail sales:
Single section 53 32.3% 57 38.0%
Multi-section 111 67.7% 93 62.0%
--------- -------- --------- ---------
Total sales 164 100.0% 150 100.0%
========= ======== ========= =========
Cavalier-produced homes sold 142 86.6% 127 84.7%
========= ======== ========= =========
Used homes sold 22 13.4% 22 14.7%
========= ======== ========= =========
Other Operating Data:
Installment loan purchases $ 33,836 $ 28,099
Capital expenditures $ 1,744 $ 2,973
Home manufacturing facilities - operating 12 15
Independent exclusive dealer locations 255 221
Company-owned retail locations 5 5
Thirteen weeks ended September 28, 2002 and September 29, 2001
Revenue
Revenue for the third quarter of 2002 totaled $98,693, a decrease of 2.2% from
2001's third quarter revenue of $100,945.
Home manufacturing net sales accounted for virtually the entire decrease against
the comparable 2001 period, decreasing 2.1% to $95,108, net of intercompany
eliminations of $1,265. Home manufacturing net sales for the third quarter of
2001 were $97,118, net of intercompany eliminations of $1,515. Home shipments
decreased 18.0% against the comparable 2001 period, with floor shipments
decreasing by 7.7%. Multi-section home shipments, as a percentage of total
shipments, continued to increase, from 63.0% of shipments in the third quarter
of 2001 to 83.6% 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
third quarter were 2,935 versus 3,580 in 2001. Shipments to exclusive dealers
were approximately 56% for the third quarter of 2002, compared to 52% for the
same period in 2001.
Cavalier attributes the decrease in sales and shipments primarily to continuing
challenging industry conditions.* Approximately 84% of Cavalier's shipments were
to its core market of 11 states, where the Company's floor shipments decreased
9.2% versus the third quarter of 2001, which compares to a 21.4% decrease in
industry shipments to the same states during the third quarter of 2002 according
to the MHI.
The Company's inventory at all retail locations, including five company-owned
retail sales centers, decreased 2% to approximately $161,000 at September 28,
2002 from $164,000 at September 29, 2001, despite the significant increase in
sales during the year-to-date. At its peak in June 1999, dealer inventory
approximated $314,000.
Revenue from the financial services segment increased to $755 for the third
quarter of 2002 compared to $724 in 2001. During the third quarter of 2002, CIS
Financial Services, Inc. ("CIS"), the Company's wholly owned finance subsidiary,
purchased contracts of $11,957 and resold installment contracts totaling $9,307.
In the third quarter of 2001, CIS purchased contracts of $9,509 and resold
installment contracts totaling $9,531. CIS does not retain the servicing
function and does not earn the interest income on these resold loans.
Revenue from the retail segment was $2,335 for 2002 compared to $1,790 for 2001,
an increase of 30.4%. 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
third quarter of 2002 to $495 compared to $1,313 for the third quarter of 2001.
The decrease is primarily due to the scaled back operations of a supply company
which was sold during the third quarter of 2002.
* See Safe Harbor Statement on page 17.
Gross Profit
Gross profit was $15,795, or 16.0% of total revenue, for the third quarter of
2002, versus $16,567, or 16.4%, in 2001.
Selling, General and Administrative
Selling, general and administrative expenses during the third quarter of 2002
were $16,892, or 17.1% of total revenue, versus $16,677 or 16.5% in 2001, a
slight increase of $215 or 1.3%. The overall expense includes a $501 increase in
employee benefits cost (primarily health insurance) and a $410 increase in
service warranty costs, offset primarily by a $481 reduction in advertising and
promotion costs, including costs to support the exclusive dealer program, and a
$245 decrease in goodwill amortization expense (see Cumulative Effect of Change
in Accounting Principle discussed below).
Operating Income (Loss)
Operating loss for the quarter was $1,097 compared to an operating loss of $110
in the third quarter of 2001. Segment operating results were as follows: (1)
Home manufacturing operating loss compared to profit in 2001 was primarily due
to reduced sales, slightly lower gross margin and higher selling, general and
administrative expenses as discussed above. (2) Financial services operating
income remained relatively flat. (3) The retail segment's operating loss
increased compared to the same quarter of 2001 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, remained relatively consistent.
Other Income (Expense)
Interest expense decreased $106 due primarily to a reduction in interest rate
paid on the $15,000 outstanding under the Company's line of credit. Other, net
increased $105 primarily due to increased income recognized from equity method
investees, partially offset by lower interest income rates earned during the
third quarter of 2002.
Loss before Income Tax Benefit
Loss before taxes for the third quarter was $1,173, compared to the pre-tax loss
of $397 in the third quarter of 2001. The loss in the third 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").
Income Tax Benefit
The Company recorded an income tax benefit in the third quarter of 2002 of $411,
reflecting the benefit of the current quarter's net loss due to the Jobs
Creation and Workers' Assistance Act that was passed in March 2002, 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 Loss
The net loss for the third quarter of 2002 was $762 or $0.04 per diluted share
compared with a net loss in the prior-year period of $397 or $0.02 per diluted
share. The major components of this income and loss are discussed above under
Revenue, Gross Profit, and Selling, General and Administrative Expenses.
Thirty-nine weeks ended September 28, 2002 and September 29, 2001
Revenue
Revenue for the first nine months of 2002 totaled $300,249, an increase of 18.0%
from 2001's thirty-nine weeks revenue of $254,460.
Home manufacturing net sales accounted for virtually the entire increase against
the comparable 2001 period, increasing 19.4% to $290,219, net of intercompany
eliminations of $4,134. Home manufacturing net sales for the first nine months
of 2001 were $243,013, net of intercompany eliminations of $3,067. Home
shipments increased 5.0% against the comparable 2001 period, with floor
shipments increasing by 14.0%. Multi-section home shipments, as a percentage of
total shipments, continued to increase, from 66.2% of shipments in the first
nine months of 2001 to 80.5% 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 thirty-nine weeks were 9,451 versus 9,005 in
2001. Shipments to exclusive dealers for the first nine months of 2002 were
approximately 57% compared to 50% 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 10.8% compared to the
first nine months of 2001.
* See Safe Harbor Statement on page 17.
Revenue from the financial services segment declined to $1,902 for the first
nine months of 2002 compared to $2,204 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 first nine months of 2002, CIS purchased contracts of $33,836
and resold installment contracts totaling $26,869. In the first nine months of
2001, CIS purchased contracts of $28,099 and resold installment contracts
totaling $23,908. CIS does not retain the servicing function and does not earn
the interest income on these resold loans.
Revenue from the retail segment was $5,954 for the first nine months of 2002
compared to $5,183 for 2001, an increase of 14.9% 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
first nine months of 2002 to $2,174 compared to $4,060 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 which was
sold during the third quarter of 2002.
Gross Profit
Gross profit was $44,004, or 14.7% of total revenue, for the first nine months
of 2002, versus $33,634, or 13.2%, in 2001. Of the $10,370 increase,
approximately $6,000 was due to the volume increase and $4,400 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 nine months of
2002 were $46,950, or 15.6% of total revenue, versus $48,374 or 19.0% in 2001, a
decrease of $1,424, or 2.9%. The overall decrease includes a $1,482 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 $734 decrease in goodwill
amortization expense (see Cumulative Effect of Change in Accounting Principle
discussed below), offset by a $710 increase in salaries, wages and incentive
compensation, and a $1,154 increase in employee benefits cost (primarily health
insurance).
Operating Loss
Operating loss for the first nine months of 2002 was $2,946 compared to $14,740
in the comparable period of 2001. Segment operating results were as follows: (1)
Home manufacturing operating loss decreased primarily due to increased sales,
improved gross margin and lower selling, general and administrative expenses as
discussed above. (2) Financial services operating loss compared to a profit in
2001due 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 profitability of another supply company. (5) General corporate
operating expense, which is not identifiable to a specific segment, improved
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 $442 due primarily to a reduction in interest rate
paid on the $15,000 outstanding under the Company's line of credit. Other, net
increased $489 primarily due to increased income recognized from equity method
investees, partially offset by lower interest income rates earned during the
first nine months of 2002.
Loss before Income Tax Benefit
Loss before income tax benefit for the first nine months of 2002 was $3,143,
down 80.2% from the pre-tax loss of $15,868 in the year-earlier period. As noted
earlier, the loss for the first nine months 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 nine months of 2001 included $734 in goodwill
amortization; no goodwill amortization has been recorded in fiscal 2002.
Excluding these items, the loss before income tax benefit for the first nine
months of 2002 was $4,306, down from the comparable pre-tax loss of $15,134
reported in the year-earlier period.
Income Tax Benefit
An income tax benefit of $3,623 was recorded in the first nine months of 2002,
reflecting the taxes and benefit of both the current quarter'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 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 nine months of 2002 was $13,682 or $0.77 per diluted
share compared with a net loss in the prior-year period of $15,268 or $0.87 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
------------------------------------------
September 28, 2002 December 31, 2001
-------------------- ---------------
Cash and cash equivalents $ 28,342 $ 43,256
Working capital $ 26,075 $ 18,183
Current ratio 1.4 to 1 1.3 to 1
Accounts receivable $ 17,806 $ 7,293
Long-term debt $ 22,946 $ 23,999
Ratio of long-term debt to equity 1 to 3 1 to 3
Installment loan portfolio $ 11,175 $ 4,991
Operating activities during the first nine months of 2002 used net cash of
$7,737. 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 September 28, 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
allowance for losses on accounts receivable declined from $625 at December 31,
2001, to $226 at September 28, 2002 primarily due to the sale of a supply
company in the third quarter of 2002.
The Company's capital expenditures were $1,744 for the thirty-nine weeks ended
September 28, 2002, as compared to $2,973 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 nine
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 $6,184 is due primarily to a
timing difference in the sale of loans, some of which were sold subsequent to
September 28, 2002.
On October 25, 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 April
2005. 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, 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 September 28, 2002, $15,000 was outstanding
under the revolving line of credit, against a total borrowing capacity of
$19,735 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 September 28, 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 announced plans to discontinue wholesale (dealer) financing of
manufactured homes, which may have a material adverse effect on the Company's
ability to find financing for home purchases by dealers whose floor plan
* See Safe Harbor Statement on page 17.
financing was with that lender. * This announcement follows another major
industry lender's recent withdrawal from wholesale financing of manufactured
homes which did not 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. Additionally, a major industry lender recently announced plans to
discontinue chattel (home only) financing of manufactured homes sold at retail.
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.
The Company recently announced its decision to close its manufacturing plant in
Conway, Arkansas during the fourth quarter of 2002. The Conway plant has two
production lines, and primarily produces multi-section units. The Company
expects to maintain the sales base previously provided by the Conway facility by
consolidating production within other Company plants. The Company will record a
charge of between $700,000 and $800,000 in the fourth quarter of 2002 related to
severance and benefits for the approximately 250 employees at the Conway plant.
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 nine months 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.
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.*
Item 3: Quantitative and Qualitative Disclosures about Market Risk
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 $2,315 at September 28, 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.*
* See Safe Harbor Statement on page 17.
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 consisted of fixed
rate contracts with interest rates generally ranging from 7.5% to 14.5% and an
average original term of 252 months at September 28, 2002. At September 28,
2002, the estimated fair value of installment contracts was $12,020. 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 September 28, 2002, the estimated fair value of
borrowings was $24,733. 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.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's President/Chief Executive Officer and it's Chief Financial Officer
have reviewed the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 (c) and 15d-14 (c)), within 90 days of the filing of
this report, and have determined such disclosure controls and procedures to be
effective in alerting them to material information relating to the Company that
may be required to be included in the Company's periodic filings.
Changes in Internal Controls
Since the date of the review, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.
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;
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) Fourth Amendment to Amended and Restated Revolving and Term
Loan Agreement, dated as of October 25, 2002, between the
Company and First Commercial Bank.
(b) Third Modification to Amended and Restated Revolving Note,
dated as of October 25, 2002, between the Company and First
Commercial Bank.
(11) Statement re: Computation of Net Income (Loss) per Common Share.
(99) Exhibits
(a) Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Current Report on Form 8-K.
The Company filed a Current Report on Form 8-K on August 12, 2002,
with respect to Certification of CEO and CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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: November 12, 2002 /s/ David A. Roberson
---------------------
David A. Roberson - President
and Chief Executive Officer
Date: November 12, 2002 /s/ Michael R. Murphy
---------------------
Michael R. Murphy -
Chief Financial Officer (Principal
Financial and Accounting Officer)
CERTIFICATIONS
I, David A. Roberson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Cavalier Homes, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002 /s/ David A. Roberson
---------------------
David A. Roberson
President and Chief Executive Officer
I, Michael R. Murphy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Cavalier Homes, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
d) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
e) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
c) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002 /s/ Michael R. Murphy
---------------------
Michael R. Murphy
Chief Financial Officer
PART II. - EXHIBIT 11
CAVALIER HOMES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- ---------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
----------- ----------- ----------- ------------
Income (loss) before cumulative effect
of change in accounting principle $ (762,000) $ (397,000) $ 480,000 $(15,268,000)
Cumulative effect of change in accounting
principle, net of tax - - (14,162,000) -
----------- ----------- ----------- ------------
Net loss $ (762,000) $ (397,000) $(13,682,000) $(15,268,000)
=========== =========== =========== ============
SHARES:
Weighted average common shares outstanding (basic) 17,665,644 17,636,780 17,664,643 17,553,350
Dilutive effect if stock options and warrants were exercised - - 41,119 -
----------- ----------- ----------- ------------
Weighted average common shares
outstanding, assuming dilution (diluted) 17,665,644 17,636,780 17,705,762 17,553,350
=========== =========== =========== ============
Basic and diluted income (loss) per share:
Income (loss) before cumulative effect
of change in accounting principle $ (.04) $ (.02) $ .03 $ (.87)
Cumulative effect of change in accounting
principle, net of tax - - (0.80) -
----------- ----------- ----------- ------------
Net loss $ (0.04) $ (0.02) $ (0.77) $ (0.87)
=========== =========== =========== ============