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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 April 2, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------
Commission File Number 1-9792
Cavalier Homes, Inc.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0949734
- ------------------------------ -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act).
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 May 11, 2005
- ----------------------------- ---------------------------
Common Stock, $0.10 Par Value 18,034,929 Shares
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------
April 2, December 31,
ASSETS 2005 2004
----------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 19,542 $ 31,674
Accounts receivable, less allowance for losses of
$39 (2005) and $85 (2004) 11,745 4,279
Notes and installment contracts receivable - current, including
held for resale $2,105 (2005) and $2,011 (2004) 2,186 2,086
Inventories 22,046 14,909
Deferred income taxes 415 415
Other - including facilities held for sale $2,639 (2005) and $0 (2004) 3,089 852
----------- --------------
Total current assets 59,023 54,215
----------- --------------
PROPERTY, PLANT AND EQUIPMENT (Net) 30,442 33,745
----------- --------------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $836 (2005) and $953 (2004) 5,963 5,801
----------- --------------
OTHER ASSETS 4,526 4,469
----------- --------------
TOTAL $ 99,954 $ 98,230
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,955 $ 1,705
Note payable under retail floor plan agreement 1,841 1,071
Accounts payable 6,682 4,295
Amounts payable under dealer incentive programs 4,127 4,252
Accrued compensation and related withholdings 3,672 3,754
Accrued insurance 7,291 6,609
Estimated warranties 13,352 13,255
Reserve for repurchase commitments 1,677 2,052
Other 5,013 4,255
----------- --------------
Total current liabilities 47,610 41,248
----------- --------------
DEFERRED INCOME TAXES 415 415
----------- --------------
LONG-TERM DEBT 8,651 11,400
----------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Series A Junior Participating Preferred Stock, $0.01 par value;
200,000 shares authorized, none issued - -
Preferred Stock, $0.01 par value; 300,000 shares authorized,
none issued - -
Common stock, $0.10 par value; 50,000,000 shares authorized,
19,052,229 (2005) and 18,992,574 (2004) shares issued 1,905 1,899
Additional paid-in capital 57,120 56,861
Accumulated deficit (11,646) (9,492)
Treasury stock, at cost; 1,017,300 (2005 and 2004) shares (4,101) (4,101)
----------- --------------
Total stockholders' equity 43,278 45,167
----------- --------------
TOTAL $ 99,954 $ 98,230
=========== ==============
See notes to condensed consolidated financial statements.
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------
Quarter Ended
-----------------------------------
(Unaudited)
April 2, March 27,
2005 2004
--------------- ---------------
REVENUE $ 57,678 $ 44,254
--------------- ---------------
COST OF SALES 49,355 36,662
SELLING, GENERAL AND ADMINISTRATIVE 9,849 9,377
IMPAIRMENT AND OTHER RELATED
CHARGES 923 -
--------------- ---------------
60,127 46,039
--------------- ---------------
(2,449) (1,785)
--------------- ---------------
OPERATING LOSS
OTHER INCOME (EXPENSE):
Interest expense (266) (278)
Other, net 171 59
--------------- ---------------
(95) (219)
--------------- ---------------
LOSS BEFORE INCOME TAXES (2,544) (2,004)
INCOME TAX BENEFIT (141) -
EQUITY IN EARNINGS OF EQUITY-METHOD
INVESTEES 249 122
--------------- ---------------
NET LOSS $ (2,154) $ (1,882)
=============== ===============
BASIC AND DILUTED LOSS PER SHARE:
NET LOSS $ (0.12) $ (0.11)
=============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 18,030,629 17,701,299
=============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING -
DILUTED 18,030,629 17,701,299
=============== ===============
See notes to condensed consolidated financial statements.
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Quarter Ended
----------------------------
April 2, March 27,
2005 2004
------------ ------------
OPERATING ACTIVITIES: (Unaudited)
Net loss $ (2,154) $ (1,882)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 667 912
Provision for (recovery of) credit and accounts receivable losses (184) 8
Loss (gain) on sale of property, plant and equipment (5) 16
Impairment and other related charges 923 -
Other, net (249) (122)
Changes in assets and liabilities:
Accounts receivable (7,469) (8,423)
Inventories (7,137) (4,091)
Income taxes - (82)
Accounts payable 2,387 2,496
Other assets and liabilities 1,048 502
------------ ------------
Cash used in operations (12,173) (10,666)
Installment contracts purchased for resale (6,213) (7,119)
Sale of installment contracts 5,731 6,672
Principal collected on installment contracts purchased for resale 201 364
------------ ------------
Net cash used in operating activities (12,454) (10,749)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from disposition of property, plant and equipment 5 3
Capital expenditures (146) (88)
Notes and installment contracts purchased for investment (293) (126)
Principal collected on notes and installment contracts purchased for investment 147 115
Other investing activities 73 192
------------ ------------
Net cash provided by (used in) investing activities (214) 96
------------ ------------
FINANCING ACTIVITIES:
Net borrowings on notes payable 770 -
Payments on long-term debt (499) (1,966)
Proceeds from exercise of stock options 265 603
------------ ------------
Net cash provided by (used in) financing activities 536 (1,363)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,132) (12,016)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,674 32,393
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,542 $ 20,377
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (received) for:
Interest $ 198 $ 184
Income taxes $ (45) $ 82
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 April 2, 2005, and the results of its operations for the
quarters ended April 2, 2005 and March 27, 2004, and the results of its
cash flows for the quarters ended April 2, 2005 and March 27, 2004. All
such adjustments are of a normal, recurring nature.
o The results of operations for the quarter ended April 2, 2005 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 2004 Annual
Report on Form 10-K and Form 10-K/A ("collectively the 2004 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 -diluted as detailed below:
Quarter Ended
-----------------------------------
April 2, March 27,
2005 2004
---------------- ----------------
Weighted average common shares outstanding - basic 18,030,629 17,701,299
Dilutive effect if stock options were exercised - -
---------------- ----------------
Weighted average common shares outstanding - diluted 18,030,629 17,701,299
================ ================
All options that would have an antidilutive effect on net income (loss)
per share were excluded in the computation of diluted net income (loss)
per share. All options were excluded in the first quarters of 2005 and
2004 due to their antidilutive effect as a result of the Company's net
losses. The maximum antidilutive options for the quarter ended April 2,
2005 and March 27, 2004 were 2,052,369 and 2,461,529, respectively.
o The Company applied Accounting Principles Board Opinion ("APB") 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for its employee and director plans. Accordingly, no
compensation expense has been recognized for these plans except where
the exercise price was less than fair value on the date of grant. The
Company has granted no such options. Had compensation cost been
determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, the Company's net loss and net loss per share
would approximate the pro forma amounts below.
Quarter Ended
------------------------
April 2, March 27,
2005 2004
---------- -----------
Net loss, as reported $ (2,154) $ (1,882)
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 38 20
---------- -----------
Pro forma $ (2,192) $ (1,902)
========== ===========
Basic and diluted loss per share:
As reported $ (0.12) $ (0.11)
Pro forma $ (0.12) $ (0.11)
The fair value of options granted was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Quarter Ended
--------------------------------------
April 2, March 27,
2005 2004
----------------- -----------------
Dividend yield 0.00% 0.00%
Expected volatility 61.77% 62.51%
Risk free interest rate 3.71% 3.52%
Expected lives 5.0 years 5.0 years
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
to Others, an interpretation of FASB Statements No. 5, 57, and 107 and a
rescission of FASB Interpretation No. 34. FIN 45 requires disclosures to
be made by a guarantor in its interim and annual financial statements
about its obligations under guarantees issued. FIN 45 also clarifies that
a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The Company
adopted FIN 45 provisions for new guarantees beginning January 1, 2005,
relating to the Company's guarantees of inventory financing of its
independent dealers (See Note 8).
In December 2004, the FASB issued SFAS No. 123R, Accounting for
Stock-Based Compensation, a revision of SFAS No. 123. SFAS No.123R
supersedes APB 25. SFAS No. 123R requires the cost of employee services
received in exchange for an award of equity instruments be recorded based
on fair value on the grant date. The compensation cost will be recognized
over the vesting period. In April 2005, the effective date of SFAS No.
123R was postponed until fiscal years beginning after June 15, 2005. The
Company is currently assessing the effects of the adoption of this
statement on the Company's consolidated financial statements.
In December 2004, the FASB issued Staff Position No. 109-1, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004 ("FSP FAS 109-1"). FSP
FAS 109-1 states that the qualified production activities deduction should
be accounted for as a special deduction and the special deduction should
be considered in measuring deferred taxes when graduated tax rates are a
significant factor and assessing whether a valuation allowance is
necessary. This deduction is not available to the Company until it has
utilized all of its net operating loss carry forwards. The Company's
deferred tax assets are currently fully reserved.
In November 2004, the FASB issued Statement No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires that abnormal
amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) be recognized as current period charges. SFAS 151 also
requires that the "allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production
facilities." Normal capacity is defined as "the production expected to be
achieved over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned
maintenance." This statement becomes effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company is
currently assessing the effects of the adoption of this statement on the
Company's consolidated financial statements.
In December 2004, the FASB issued Statement No. 153, Exchanges of
Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No. 153
requires that exchange transactions that lack commercial substance be
measured based on the recorded amount less impairment and not on the fair
values of the exchanged assets. Exchange transactions that lack commercial
substance are transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. This statement becomes
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not expect the adoption of
this statement to have a material effect 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 April 2, 2005 and
December 31, 2004 were as follows:
April 2, December 31,
2005 2004
-------------- --------------
Raw materials $ 13,951 $ 11,326
Work-in-process 960 1,159
Finished goods 7,135 2,424
-------------- --------------
Total inventory $ 22,046 $ 14,909
============== ==============
4. IMPAIRMENT AND OTHER RELATED CHARGES
For any exit or disposal activities initiated after December 31, 2002, the
Company has adopted SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities, which requires 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. During 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
provides that a long-lived asset or asset group that is to be sold shall be
classified as "held for sale" if certain criteria are met, including the
expectation supported by evidence that the sale will be completed within
one year. The Company has idle assets of $9,532 (2005) and $10,262 (2004)
recorded at lower of carrying value or fair value which are comprised
primarily of closed home manufacturing facilities which the Company is
attempting to sell. With the exception of a home manufacturing facility
expected to be sold during the second quarter of 2005 and an idle retail
location sold in April 2005, management does not have evidence at the
balance sheet date that it is probable that the sale of these assets will
occur within one year, and thus, in accordance with the requirements of
SFAS No. 144, such assets are classified as "held and used" and
depreciation has continued on these assets.
During the first quarter of 2005, the Company recorded impairment and other
related charges of $923 ($923 after tax or $0.05 per basic and diluted
share) related to the closing of a home manufacturing facility. The total
charge consisted of $143 associated with writedowns for property, plant and
equipment and charges for involuntary termination benefits of $780.
5. INCOME TAXES
During the first quarter of 2005, the Company recorded an income tax
benefit of $9 for state income taxes receivable for certain subsidiaries
and recognized an income tax benefit of $132 representing settlement of
prior year state tax matters. The Company did not record any federal income
tax benefit for net operating losses in the first quarter of 2005 and 2004
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 SFAS No. 109 Accounting for
Income Taxes.
6. PRODUCT WARRANTIES
The Company provides the retail home buyer a one-year limited warranty
covering defects in material or workmanship in home structure, plumbing and
electrical systems. The Company has provided a liability of $13,352 (2005)
and $13,000 (2004) for estimated future warranty costs relating to homes
sold, based upon management's assessment of historical experience factors
and current industry trends. Activity in the liability for product warranty
was as follows:
Quarter Ended
-----------------------
April 2, March 27,
2005 2004
--------- -----------
Balance, beginning of year $ 13,255 $ 13,475
Warranty expense, net 3,246 3,357
Payments (3,149) (3,832)
--------- -----------
Balance, end of year $ 13,352 $ 13,000
========= ===========
7. CREDIT ARRANGEMENTS
On October 26, 2004, the Company amended its credit facility (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 2007.
The Credit Facility is comprised of a revolving line of credit which
provides for borrowings (including letters of credit) up to $25,000 and a
real estate term loan (14 year) component of $10,000, which are
cross-secured and cross-defaulted. The amount available under the revolving
line of credit, up to $25,000, is equal to the lesser of an amount based on
defined percentages of accounts and notes receivable and inventories or
certain levels of tangible net worth plus all treasury stock purchases
after December 31, 2003, as noted in the following table.
Tangible Net Worth Credit Facility
("TNW") Available
------------------------- -----------------------------
Above $50,000 30% of TNW
$50,000 - $38,000 $15,000
$38,000 - $23,000 $15,000 to zero (dollar
for dollar reduction)
At April 2, 2005, $8,891 under the revolving line of credit was available
after deducting letters of credit of $6,109. The Company did not have any
amounts outstanding under the revolving line of credit at April 2, 2005,
and December 31, 2004. The applicable interest rates under the revolving
line of credit are based on certain levels of tangible net worth as noted
in the following table.
Tangible Net Worth
("TNW") Interest Rate
------------------------- ---------------------------
Above $77,000 Prime less 0.50%
$77,000 - $65,000 Prime
$65,000 - $58,000 Prime plus 0.25%
$58,000 - $38,000 Prime plus 1.00%
Below $38,000 Prime plus 2.00%
The real estate term loan agreement contained in the Credit Facility
provides for borrowings of $10,000, of which $6,765 and $6,857 was
outstanding at April 2, 2005 and December 31, 2004, respectively. Interest
on the term note is fixed for a period of five years from issuance at 6.5%
and may be adjusted at 5 and 10 years. Amounts outstanding under the real
estate term loan are collateralized by certain plant facilities and
equipment.
The Credit Facility, as amended, contains certain restrictive and financial
covenants which, among other things, limit 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 $1,000,
excluding floor plan notes payable which cannot exceed $3,000 and (iv) make
annual capital expenditures in excess of $1,000. In addition, the Credit
Facility contains certain financial covenants requiring the Company to
maintain on a consolidated basis certain defined levels of debt to tangible
net worth ratio (not to exceed 2.5 to 1) and cash flow to debt service
ratio of not less than 1.35 to 1 commencing with the year ending December
31, 2005 and 1.5 to 1 for the years ending December 31, 2006 and
thereafter, and to maintain a current ratio, as defined, of at least 1.0 to
1 and consolidated tangible net worth of at least $23,000. The Credit
Facility also requires CIS Financial Services, Inc. ("CIS"), the Company's
wholly-owned finance subsidiary to comply with certain specified
restrictions and financial covenants. At April 2, 2005, the Company was in
compliance with its debt covenants.
The Company has $1,841 and $1,071 of notes payable under retail floor plan
agreements at April 2, 2005 and December 31, 2004, respectively. The notes
are collateralized by certain Company-owned retail stores' inventories and
bear interest rates ranging from prime to prime plus 2.5% based on the age
of the home.
8. COMMITMENTS AND 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 (generally
18 - 24 months) and the risk of loss is further reduced by the sale
value of repurchased homes. The maximum amount for which the
Company is contingently liable under such agreements approximated
$75,000 at April 2, 2005. Pursuant to SFAS No. 5, Accounting for
Contingencies, the Company has a reserve for repurchase commitments
of $1,677 (2005) and $2,900 (2004) based on prior experience and an
evaluation of certain dealers' financial conditions for which
default is deemed to be probable and reasonably estimable. Activity
in the reserve for repurchase commitments was as follows:
Quarter Ended
------------------------
April 2, March 27,
2005 2004
--------- -------------
Balance, beginning of period $ 2,052 $ 3,070
Provision for losses (recoveries) on inventory repurchases (352) (16)
Recoveries (payments), net (23) (154)
--------- -------------
Balance, end of period $ 1,677 $ 2,900
========= =============
In addition, the Company has recorded a liability equal to the
estimated fair value of the repurchase guarantees pursuant to FIN 45
totaling $638 as of April 2, 2005. Given that the guarantees were
issued in connection with the sale of the Company's product, revenue
was reduced by the fair value of the guarantees.
o The Company's workers' compensation (prior to February 1, 1999 and
after April 1, 2001), product liability and general liability
insurance coverages were provided under incurred loss, retrospectively
rated premium plans. Under these plans, the Company incurs insurance
expense based upon various rates applied to current payroll costs
and sales. Annually, such insurance expense is adjusted by the
carrier for loss experience factors subject to minimum and
maximum premium calculations. Refunds or additional premiums are
estimated and recorded when sufficiently reliable data is available.
The Company's workers' 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 a fully
insured, large deductible policy. At April 2, 2005, the Company
was contingently liable for future retrospective premium
adjustments up to a maximum of approximately $21,460 in the event that
additional losses are reported related to prior periods.
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. Anticipated legal fees
associated with these lawsuits are accrued at the time such cases are
identified. 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, for
which no accrual is made because the losses are not assumed to be
probable or reasonably estimable.
o The Company and certain of its equity partners have guaranteed certain
debt for two companies in which the Company owns a one-third interest.
The guarantees are limited to 40% of the outstanding debt. At April 2,
2005, $2,632 of debt was outstanding, of which the Company had
guaranteed $1,053.
o The Company has provided letters of credit totaling $6,109 as of April
2, 2005 to providers of certain of its surety bonds and insurance
policies. While the current letters of credit have a finite life, they
are subject to renewal at different amounts based on the requirements
of the insurance carriers. The Company has recorded insurance expense
based on anticipated losses related to these policies.
9. SEGMENT INFORMATION
The Company's reportable segments are organized around products and
services. The Home manufacturing segment is comprised of the Company's four
divisions (six home manufacturing plants), which are aggregated for
reporting purposes, and its supply companies who sell their products
primarily to the manufacturing divisions. Through its Home manufacturing
segment, the Company designs and manufactures 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 primarily
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. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in the Company's Annual Report on Form 10-K 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), equity in earnings of equity-method investees, or
income tax provision (benefit).
Quarter Ended
--------------------------------------------
April 2, 2005 March 27, 2004
-------------------- --------------------
Gross revenue:
Home manufacturing $ 57,316 $ 43,634
Financial services 513 542
Retail 1,811 1,530
------------------- --------------------
Gross revenue $ 59,640 $ 45,706
==================== ====================
Intersegment revenue:
Home manufacturing $ 1,962 $ 1,452
Financial services - -
Retail - -
-------------------- --------------------
Intersegment revenue $ 1,962 $ 1,452
==================== ====================
Revenue from external customers:
Home manufacturing $ 55,354 $ 42,182
Financial services 513 542
Retail 1,811 1,530
-------------------- --------------------
Total revenue $ 57,678 $ 44,254
==================== ====================
Operating profit (loss):
Home manufacturing $ (664) $ (606)
Financial services (215) 82
Retail 28 (14)
Elimination (244) (48)
-------------------- --------------------
Segment operating loss (1,095) (586)
General corporate (1,354) (1,199)
-------------------- --------------------
Operating loss $ (2,449) $ (1,785)
==================== ====================
April 2, 2005 December 31, 2004
-------------------- --------------------
Identifiable assets:
Home manufacturing $ 71,758 $ 60,297
Financial services 13,515 13,755
Retail 3,928 3,296
-------------------- --------------------
Segment assets 89,201 77,348
General corporate 10,753 20,882
-------------------- --------------------
Total assets $ 99,954 $ 98,230
==================== ====================
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (See pages 2 through 11)
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands)
Overview
Cavalier Homes, Inc. and its subsidiaries produce, sell and finance 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.
The industry also has been impacted by an increase in dealer failures, a severe
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, each of which have
contributed to a reduction in wholesale industry shipments to a 42 year low in
2004.
Industry/Company Shipments and Market Share
The Manufactured Housing Institute ("MHI") reported that wholesale floor
shipments were down 60% cumulatively from January 1, 1999 through December 31,
2004 as noted in the following table:
Floor Shipments
- -------------------------------------------------------------------------------------------------------------------------------
Nationwide Cavalier's Core 11 States
- --------------------------------------------------------- --------------------------------------------------------------------
Increase Increase Increase Increase
(decrease) (decrease) Market (decrease) (decrease) Market
Year Industry from prior year Cavalier from prior year Share Industry from prior year Cavalier from prior year Share
- ------ -------- ------------- -------- ------------- ------- -------- ------------- -------- ------------- ------
1999 582,498 34,294 5.9% 284,705 30,070 10.6%
2000 431,787 -25.9% 18,590 -45.8% 4.3% 199,276 -30.0% 15,941 -47.0% 8.0%
2001 342,321 -20.7% 21,324 14.7% 6.2% 149,162 -25.1% 17,884 12.2% 12.0%
2002 304,370 -11.1% 21,703 1.8% 7.1% 124,127 -16.8% 18,039 0.9% 14.5%
2003 240,180 -21.1% 12,411 -42.8% 5.2% 87,265 -29.7% 10,584 -41.3% 12.1%
2004 232,824 -3.1% 10,772 -13.2% 4.6% 78,297 -10.3% 8,722 -17.6% 11.1%
During this industry downturn, the Company's shipments fell in 1999 and 2000
disproportionately to the industry decline which the Company believes was due to
its strategy, early in the downturn, of working closely with its dealers to
assist them in reducing retail inventories, thereby reducing the risk of failure
of dealers distributing Company homes. The years 2001 and 2002 resulted in
significant market share gains for the Company due mainly to the Company's
aggressive marketing strategies, especially product offerings, which are core to
its plan for returning to profitability. In 2003 and 2004, the Company believes
its reduction in market share was due to several factors. External causes
include an intensely competitive marketplace and a lack of chattel (home only)
financing for all homes, especially single-section homes, in the industry, and,
internally, the Company's momentum was negatively impacted by the consolidation
of its sales force and the closing of seven home manufacturing facilities in
2003. During the first quarter of 2005, the Company's shipments increased 33.2%
from the same period in 2004, while industry wide shipments increased 7.8%, with
the Company's market share being 5.0%. In the Company's core states, its market
share was 9.8% with shipments increasing 37.5% compared to the industry increase
of 15.8% in those states. Because the Company has increased shipments into
Florida, the Company determined to redefine the composition of its core states
calculation to include Florida for the first quarter of 2005. As a result of the
revision of the Company's definition of core states to include Florida, the
Company's market share declined due to its relative size in the industry
compared to Cavalier's other core states. The Company believes it is
well-positioned to strengthen its competitive position in the marketplace going
forward with a value-packed product line, including broader product offerings on
price points as well as enhanced features and a line of modular homes.
Industry Finance Environment
A major factor contributing to the manufactured housing industry growth in the
1990s was relaxed credit standards, which ultimately resulted in a change in the
financing approach in the industry due to underperforming manufactured housing
loans. Throughout the past six years, the industry has been impacted
significantly by reduced financing available at both the wholesale and retail
levels, with several lenders exiting the marketplace or limiting their
participation in the industry, coupled with more restrictive credit standards
and increased home repossessions which re-enter home distribution channels and
limit wholesale shipments of new homes. While the current industry trend is
toward more land/home (real estate) financing rather than chattel or home only
loans, additional chattel lending availability could result in renewed demand
for single-section products. 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. The anticipated
infusion of new and competitive lending capacity, which the Company believes is
essential to support demand at higher levels has not materialized. Until there
is substantial entry of finance resources to the manufactured housing market,
the Company believes a meaningful expansion for the industry will be delayed. In
April 2005, General Electric's commercial finance unit announced it had agreed
to purchase the majority of Bombardier Capital Inc.'s inventory financing unit,
which includes manufactured housing floor plan lending. The Bombardier floor
plan financing represents about 20% of financing for Cavalier's product on
dealer's lots.
Raw Materials Cost and Gross Margin
The Company's gross margin has been negatively impacted by (1) price increases
in substantially all raw materials (certain prices continue to increase and show
no signs of stabilization) and (2) overall commodity pressures (i.e., global
demand and capacity constraints and rising oil prices). The Company is
experiencing tightened supply from some of its traditional vendors of certain
types of raw materials required for the production of its homes. The Company is
working to obtain these and substitute products from other vendors, which are
likely to result in higher raw material costs. While the Company seeks to offset
rising costs through increasing its selling prices, sudden increases in raw
material costs, coupled with dealers' order backlogs, can affect the timing and
ability of the Company to pass on its cost increases. The Company is uncertain
at this time as to the impact the extent and duration of the increased prices
will have on the Company's future revenue and earnings.
Capacity and Overhead Cost
In response to the continued weakening of the manufactured housing industry
market conditions, the Company announced its decision to close six manufacturing
facilities in the fourth quarter of 2002, one in July 2003, and one in February
2005. These facilities were located in Conway, Arkansas (2), Graham, Texas,
Cordele, Georgia, Belmont, Mississippi, Haleyville, Alabama, Shippenville,
Pennsylvania, and Fort Worth, Texas, and collectively employed approximately
1,250 people. The Company has shifted a substantial part of the production from
these plants (with the exception of the Pennsylvania plant) to one or more of
the Company's current operating plants. The remaining plants also handle dealer
sales and customer service for the Company's homes. In terms of operating costs,
the Company has made cost reductions in virtually all areas of operations,
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 70% since
December 31, 1998. The Company is continuing to evaluate its options regarding
capacity, cost and overhead expense, the need for further plant, retail and
other consolidations, reductions, idling and closings and methods designed to
address the Company's financial performance in light of current and 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.
Outlook
For 2005, the Company expects the market will likely remain sluggish for some
time. The recent industry downturn has reduced excess dealer inventory to the
point that an increase in demand will likely translate more directly into new
orders. Meanwhile, the market for repossessed homes appears to be firming in
both price and quantity. However, the anticipated infusion of new and
competitive lending capacity, which the Company believes is essential to support
demand at higher levels, has not materialized. Until there is substantial entry
of finance resources to the manufactured housing market, the Company believes a
meaningful expansion for the industry will be delayed. The Company believes the
steps taken to reduce its costs and lower its breakeven point will position it
to return to profitable operations in the later half of 2005 and strengthen its
competitive position in the marketplace going forward. However, the Company is
uncertain at this time as to the impact the extent and duration of the general
economic conditions and adverse industry conditions will have on the Company's
future revenue and earnings. While the Company currently expects the results of
operations for the second quarter of 2005 to be a modest profit, changes in
general economic conditions that affect consumer purchases, availability of
adequate financing sources, increases in repossessions or dealer failures and
extended commodity price increases could affect the results of operations of the
Company.
Results of Operations
The following tables summarizes certain financial and operating data, including,
as applicable, the percentage of total revenue:
For the Quarter and Year to Date Ended
------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA April 2, 2005 March 27, 2004 Difference
------------------------ -------------------------- ------------------
Revenue:
Home manufacturing net sales $ 55,354 $ 42,182 $ 13,172 31.2%
Financial services 513 542 (29) -5.4%
Retail 1,811 1,530 281 18.4%
------------ ----------------- --------
Total revenue 57,678 100.0% 44,254 100.0% 13,424 30.3%
Cost of sales 49,355 85.6% 36,662 82.8% 12,693 34.6%
------------ ---------- ----------------- ------- --------
Gross profit 8,323 14.4% 7,592 17.2% 731 9.6%
------------ ---------- ----------------- ------- --------
Selling, general and administrative 9,849 17.1% 9,377 21.2% 472 5.0%
Impairment and other related charges 923 1.6% - 0.0% 923
------------ ---------- ----------------- ------- --------
Operating loss (2,449) -4.2% (1,785) -4.0% (664) -37.2%
------------ ---------- ----------------- ------- --------
Other income (expense):
Interest expense (266) -0.5% (278) -0.6% 12 4.3%
Other, net 171 0.3% 59 0.1% 112 189.8%
------------ ----------------- --------
(95) (219) 124 56.6%
------------ ----------------- --------
Loss before income taxes (2,544) (2,004) (540) -26.9%
Income taxe benefit (141) - (141)
Equity in earnings of equity-method investees 249 122 127 104.1%
------------ ----------------- --------
Net loss $ (2,154) -3.7% $ (1,882) -4.3% $ (272) -14.5%
============ ================= ========
OPERATING DATA April 2, 2005 March 27, 2004
-------------------------- ------------------
Home manufacturing sales:
Floor shipments 2,824 2,120
Home shipments
Single section 266 17.3% 161 14.1%
Multi section 1,274 82.7% 979 85.9%
----------------- ------- -------- -------
Total shipments 1,540 100.0% 1,140 100.0%
Shipments to company owned retail locations (49) -3.2% (41) -3.6%
Wholesale shipments to independent retailers 1,491 96.8% 1,099 96.4%
================= ======= ======== =======
Retail sales:
Single section 10 27.0% 8 22.9%
Multi section 27 73.0% 27 77.1%
----------------- ------- -------- -------
Total sales 37 100.0% 35 100.0%
================= ======= ======== =======
Cavalier produced homes sold 33 89.2% 32 91.4%
================= ======= ======== =======
Used homes sold 4 10.8% 3 8.6%
================= ======= ======== =======
Other operating data:
Installment loan purchases $ 6,506 $ 7,208
Capital expenditures $ 146 $ 88
Home manufacturing facilities (operating) 6 7
Independent exclusive dealer locations 121 122
Company-owned retail locations 4 3
Quarter ended April 2, 2005 and March 27, 2004
Revenue
Revenue for the first quarter of 2005 totaled $57,678, increasing $13,424, or
30.3%, from 2004's first quarter revenue of $44,254.
Home manufacturing net sales accounted for virtually the entire increase, rising
to $55,354. Home manufacturing net sales for the first quarter of 2004 were
$42,182. Home shipments increased 35%, with floor shipments increasing by 33%.
Cavalier attributes the increase in sales and shipments primarily to customer
purchases in advance of announced price increases and an active Company sales
promotion. In conjunction with the sales promotion, the Company is offering a
rebate for the duration of the promotion that could have as much as a 2% point
effect on gross margin through June 2005. Multi-section home shipments, as a
percentage of total shipments, were 82.7% in the first quarter of 2005 as
compared to 85.9% in 2004. Of these shipments, 72.0% in 2005 and 55.3% in 2004
were to exclusive dealers. Actual shipments of homes for the first quarter of
2005 were 1,540 versus 1,140 in 2004.
Inventory of the Company's product at all retail locations, including
company-owned retail sales centers, increased to approximately $101,000 at April
2, 2005 from $97,000 a year ago. At its peak in June 1999, dealer inventory
approximated $314,000.
Revenue from the financial services segment remained constant at $513 for the
first quarter of 2005 compared to $542 in 2004. During the first quarter of
2005, CIS Financial Services, Inc. ("CIS"), the Company's wholly-owned finance
subsidiary, purchased contracts of $6,890 and sold installment contracts
totaling $5,731. In the same period of 2004, CIS purchased contracts of $7,208
and sold installment contracts totaling $6,672. CIS does not retain the
servicing function and does not earn the interest income on these re-sold loans.
Revenue from the retail segment was $1,811 for the first quarter of 2005
compared to $1,530 for 2004, an increase of $281 due primarily to the sales of
the remaining lots in a South Carolina subdivision in 2005.
Gross Profit
Gross profit was $8,323, or 14.4% of total revenue, for the first quarter of
2005, versus $7,592, or 17.2%, in 2004. The $731 increase in gross profit is
primarily the result of higher sales volume in the first quarter of 2005
compared to 2004. However, gross margin has also been negatively impacted by (1)
price increases in substantially all raw materials (certain prices continue to
increase and show no signs of stabilization), (2) overall commodity pressures
(i.e., global demand and capacity constraints and rising oil prices), and (3)
production inefficiencies associated with the recent closure of the Company's
plant in Fort Worth, Texas.
Selling, General and Administrative
Selling, general and administrative expenses during the first quarter of 2005
were $9,849, or 17.1% of total revenue, compared to $9,377 or 21.2% in 2004.
Selling, general and administrative expenses included a $420 increase in
advertising and promotion costs, including sales, salaries, and commission costs
and a $131 increase in losses on the Company's installment loan portfolio,
including homes repossessed, in the first quarter of 2005 compared to the same
period in 2004, somewhat offset by a $336 decrease in the provision for the
reserve for repurchase commitments.
Impairment and Other Related Charges
During the first quarter of 2005, the Company recorded impairment and other
related charges of $923 ($923 after tax or $0.05 per diluted share) related to
the closing of a home manufacturing facility. The total charge consisted of $143
associated with writedowns for property, plant and equipment and charges for
involuntary termination benefits of $780. There were no such charges in the
comparable 2004 period.
Operating Loss
Operating loss for the quarter was $2,449 compared to a loss of $1,785 in the
first quarter of 2004. Segment operating results were as follows: (1) Home
manufacturing operating loss, before intercompany eliminations, was $664 in the
first quarter of 2005 as compared to a loss of $606 in 2004. The increased home
manufacturing operating loss is primarily due to higher selling, general and
administrative expenses and the impairment and other related charges mentioned
above partially offset by improved gross profit due to higher sales volume. (2)
Financial services operating loss was $215 in the first quarter of 2005 as
compared to income of $82 in 2004 due primarily to an increase in losses on the
Company's installment loan portfolio, including homes repossessed. (3) The
retail segment's operating income was $28 in the first quarter of 2005, an
increase from a loss of $14 in 2004 primarily due to improved sales as discussed
above. (4) General corporate operating expense, which is not identifiable to a
specific segment, increased from $1,199 in the first quarter of 2004 to $1,354
in 2005 primarily due to increases in salary and incentive compensation
expenses.
Other Income (Expense)
Interest expense remained consistent primarily due to interest charges on lower
debt amounts outstanding on Industrial Development Revenue Bonds offset by
interest charges on amounts outstanding under the retail floor plan agreement in
2005 of which no amounts were outstanding in 2004.
Other, net is comprised primarily of interest income (unrelated to financial
services). Other, net increased $112 due to higher interest income rates earned
in 2005 on invested funds.
Loss before Income Taxes
The Company's pre-tax loss for the first quarter was $2,544 compared to a
pre-tax loss of $2,004 in the first quarter of 2004, a decrease of $550 which is
due to the factors discussed above under gross profit, selling, general and
administrative expenses, and impairment and other related charges.
Income Taxes
During the first quarter of 2005, the Company recorded an income tax benefit of
$9 for state income taxes receivable for certain subsidiaries and recognized an
income tax benefit of $132 representing settlement of prior year state tax
matters. The Company did not record any federal income tax benefit for net
operating losses in the first quarter of 2005 and 2004 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 SFAS No. 109 Accounting for Income Taxes.
Equity in Earnings of Equity-Method Investees
The Company's equity in earnings of equity-method investees was $249 for the
first quarter of 2005 compared to $122 in 2004. The overall increase was due
primarily to the improved operations at one of the Company's equity-method
investees.
Net Loss
The net loss for the first quarter of 2005 was $2,154 or $0.12 per diluted share
compared with a net loss in the prior-year period of $1,882 or $0.11 per diluted
share.
Liquidity and Capital Resources
Balances as of
-------------------------------------------
(dollars in thousands) April 2, 2005 December 31, 2004
--------------- ----------------------
Cash, cash equivalents & certificates of deposit $ 19,542 $ 31,674
Working capital $ 11,413 $ 12,967
Current ratio 1.2 to 1 1.3 to 1
Long-term debt $ 8,651 $ 11,400
Ratio of long-term debt to equity 0.2 to 1 0.3 to 1
Installment loan portfolio $ 8,984 $ 8,839
Operating activities used net cash of $12,454 during the first quarter of 2005
due primarily to increased levels of accounts receivable and inventory.
A portion of the increase in accounts receivable and reduction in cash and cash
equivalents from December 31, 2004 to April 2, 2005 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. Additionally, at the end of the first quarter of 2005, the Company had
an outstanding receivable under the FEMA contract of $1,480, of which the
majority was collected in April 2005.
Additionally, the Company's inventory levels, taking into account the number of
operating facilities, are historically lower at year end during the idle period
and return to normal levels at the end of the first quarter of the year.
The Company's capital expenditures were $146 for the quarter ended April 2,
2005, as compared to $88 for the comparable period of 2004. Capital expenditures
during these periods included normal property, plant and equipment additions and
replacements.
In the second quarter of 2005, the Company, based on an executed contract,
expects to complete the sale of certain assets including real property of the
closed Fort Worth, Texas facility for approximately $2,800 and has sold a
previously idled retail location in April 2005 for around $300. In accordance
with the terms of the Company's credit facility, a portion (approximately
$2,400) of the proceeds from these sales will be used to pay down the real
estate term loan.
The decrease in long-term debt was due to scheduled principal payments of $499.
On October 26, 2004, the Company amended its credit facility (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 2007. The
Credit Facility is comprised of a revolving line of credit which provides for
borrowings (including letters of credit) up to $25,000 and a real estate term
loan (14 year) component of $10,000, which are cross-secured and
cross-defaulted. The amount available under the revolving line of credit, up to
$25,000, is equal to the lesser of an amount based on defined percentages of
accounts and notes receivable and inventories or certain levels of tangible net
worth plus all treasury stock purchases after December 31, 2003, as noted in the
following table.
Tangible Net Worth Credit Facility
("TNW") Available
------------------------- ---------------------------
Above $50,000 30% of TNW
$50,000 - $38,000 $15,000
$38,000 - $23,000 $15,000 to zero (dollar
for dollar reduction)
At April 2, 2005, $8,891 under the revolving line of credit was available after
deducting letters of credit of $6,109. The Company did not have any amounts
outstanding under the revolving line of credit at April 2, 2005, and December
31, 2004. The applicable interest rates under the revolving line of credit are
based on certain levels of tangible net worth as noted in the following table.
Tangible Net Worth
("TNW") Interest Rate
------------------------- ---------------------------
Above $77,000 Prime less 0.50%
$77,000 - $65,000 Prime
$65,000 - $58,000 Prime plus 0.25%
$58,000 - $38,000 Prime plus 1.00%
Below $38,000 Prime plus 2.00%
The real estate term loan agreement contained in the Credit Facility provides
for borrowings of $10,000, of which $6,765 and $6,857 was outstanding at April
2, 2005 and December 31, 2004, respectively. Interest on the term note is fixed
for a period of five years from issuance at 6.5% and may be adjusted at 5 and 10
years. Amounts outstanding under the real estate term loan are collateralized by
certain plant facilities and equipment.
The Credit Facility, as amended, contains certain restrictive and financial
covenants which, among other things, limit 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 $1,000, excluding floor plan notes
payable which cannot exceed $3,000 and (iv) make annual capital expenditures in
excess of $1,000. In addition, the Credit Facility contains certain financial
covenants requiring the Company to maintain on a consolidated basis certain
defined levels of debt to tangible net worth ratio (not to exceed 2.5 to 1) and
cash flow to debt service ratio of not less than 1.35 to 1 commencing with the
year ending December 31, 2005 and 1.5 to 1 for the years ending December 31,
2006 and thereafter, and to maintain a current ratio, as defined, of at least
1.0 to 1 and consolidated tangible net worth of at least $23,000. The Credit
Facility also requires CIS to comply with certain specified restrictions and
financial covenants. At April 2, 2005, the Company was in compliance with its
debt covenants.
Since its inception, CIS has been restricted in the amount 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 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. The
Company's 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.
Throughout the past five years the industry has been impacted significantly by
reduced financing available at both the wholesale and retail levels, with
several lenders exiting the marketplace or limiting their participation in the
industry, coupled with more restrictive credit standards and increased home
repossessions which re-enter home distribution channels and limit wholesale
shipments of new homes. Unfavorable changes in these factors and terms of
financing in the industry may have a material adverse effect on Cavalier's
results of operations or financial condition.
Off-Balance Sheet Arrangements
The Company's material off-balance sheet arrangements consist of repurchase
obligations, guarantees and letters of credit. Each of these arrangements is
discussed in Notes 7 and 8 to the Condensed Consolidated Financial Statements.
Critical Accounting Policies
In our Annual Report on Form 10-K for the period ended December 31, 2004, 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 judgments 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 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 7.0% to 15.0% and an
average original term of 270 months at April 2, 2005. The Company estimated the
fair value of its installment contracts receivable at $8,387 using discounted
cash flows and interest rates offered by CIS on similar contracts at April 2,
2005.
The Company has one industrial development revenue bond issue and a revolving
line of credit (of which no amounts were outstanding at April 2, 2005) 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. The Company estimated the fair value of its debt
instruments at $12,353 using rates at which the Company believes it could have
obtained similar borrowings at April 2, 2005.
Item 4: Controls and Procedures
As described in the Explanatory Note preceding Item 9A, "Controls and
Procedures" in the Company's Form 10-K/A (the "Form 10-K/A"), filed by the
Company with the Commission on May 2, 2005, the Company amended its Annual
Report on Form 10-K for the period ended December 31, 2004, filed March 31,
2005, to include Management's Report on Internal Control Over Financial
Reporting and the Report of Independent Registered Public Accounting Firm
required in Item 9A, "Controls and Procedures" on Form 10-K. Based on the
evaluation conducted by management of the Company as set forth in Item 9A of the
Form 10-K/A, the Company's chief executive officer and chief financial officer
concluded that, as of December 31, 2004, the disclosure controls and procedures
of the Company were not effective due to the material weakness discussed in the
Form 10-K/A. As discussed below, management of the Company has concluded that
the material weakness identified in its Form 10-K/A for the period ended
December 31, 2004 also exists as of April 2, 2005 which is the end of the period
covered by this report.
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures in this report, as well as to safeguard assets from unauthorized use
or disposition. Management of the Company, under the supervision of and with the
participation of the chief executive officer and chief financial officer,
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934), as of April 2, 2005. Based on this
evaluation, the Company's chief executive officer and chief financial officer
concluded that, as of April 2, 2005, which is the end of the period covered by
this report, the disclosure controls and procedures of the Company were not
effective due to the material weakness discussed below.
Changes in Internal Controls Over Financial Reporting
Management of the Company assessed the effectiveness of the Company's internal
control over financial reporting as of April 2, 2005, using the criteria issued
by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control-Integrated Framework. In completing its assessment,
management identified the following material weakness in the design of internal
control: the Company had a limited number of personnel within its accounting
function to identify, research, review and conclude on non-routine or complex
accounting matters. As a result of this material weakness, management has
concluded that, as of April 2, 2005, internal control over financial reporting
was not effective based on the COSO Framework.
Specific initiatives with respect to our disclosure controls and procedures have
been and/or will be undertaken to address the material weakness described below
and include the following:
(1) Employ additional staff
(2) Train staff on the application of accounting pronouncements
(3) Engage outside professional accounting services on an as
needed basis to assist in accounting for non-routine or
complex accounting matters
In March 2005, the Company's Nashville manufacturing facility converted from its
legacy system to SAP for its Enterprise Resource Planning ("ERP") software. This
facility was the final home manufacturing location to convert to SAP, the
Company's primary ERP system. In performing the conversion, the Company adopted
the controls and procedures in place at its other facilities had previously
converted to SAP.
Except as described above, there has been no significant change in the Company's
internal control over financial reporting that has occurred since December 31,
2004, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
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 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 the severe and continuing downturn in the manufactured housing
industry;
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;
o the potential volatility in our stock price, and
o the material weakness in the design of internal disclosure controls and
procedures which resulted in the conclusion of the chief executive
officer and the chief financial officer that such controls and
procedures were not effective.
Any or all of our forward-looking statements in this report, in the 2004 Annual
Report to Stockholders, in our Annual Report on Form 10-K for the year ended
December 31, 2004 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, 2004, 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, 2004 under the
heading "Item 3 - Legal Proceedings." The description of legal proceedings in
the Company's Form 10-K remains unchanged.
Item 6: Exhibits
The exhibits required to be filed with this report are listed below.
(11) Statement re: Computation of Net Income (Loss) per Common Share
(31) Rule 13a-15(e) or 15d-15(e) Certifications
(a) Certification of principal executive officer pursuant to
Exchange Act Rule 13a-15(e) or 15d-15(e).
(b) Certification of principal financial officer pursuant to
Exchange Act Rule 13a-15(e) or 15d-15(e).
(32) Section 1350 Certifications
(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.
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: May 12, 2005 /s/ David A. Roberson
-----------------------------
David A. Roberson - President
and Chief Executive Officer
Date: May 12, 2005 /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
Quarter Ended
------------------------------------
April 2, March 27,
2005 2004
-------------- ---------------
Net loss $ (2,154,000) $ (1,882,000)
============== ===============
SHARES:
Weighted average common shares - basic 18,030,629 17,701,299
Dilutive effect if stock options and warrants were exercised - -
-------------- ---------------
Weighted average common shares - diluted 18,030,629 17,701,299
============== ===============
Basic and diluted loss per share:
Basic: Net loss $ (0.12) $ (0.11)
============== ===============
Diluted: Net loss $ (0.12) $ (0.11)
============== ===============
EXHIBIT 31(a)
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-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a -15(f) and
15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be designed under our supervision to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with accounting principles generally
accepted in the United States of America;
c) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this quarterly report any change in the
registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, 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 and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: May 12, 2005 /s/ David A. Roberson
-------------------------------------
David A. Roberson
President and Chief Executive Officer
EXHIBIT 31(b)
CERTIFICATIONS
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-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a -15(f) and
15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be designed under our supervision to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with accounting principles generally
accepted in the United States of America;
c) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this quarterly report any change in the
registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, 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 and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: May 12, 2005 /s/ Michael R. Murphy
---------------------
Michael R. Murphy
Chief Financial Officer
EXHIBIT 32(a)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with Cavalier Homes, Inc. ("Company") Quarterly Report on Form
10-Q for the period ended April 2, 2005 ("Report"), the undersigned certifies
that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: May 12, 2005 By: /s/ David A. Roberson
-------------------------------------
David A. Roberson
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to Cavalier Homes, Inc. and will be retained by Cavalier Homes, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32(b)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with Cavalier Homes, Inc. ("Company") Quarterly Report on Form
10-Q for the period ended April 2, 2005 ("Report"), the undersigned certifies
that:
1. The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: May 12, 2005 By: /s/ Michael R. Murphy
------------------------------
Michael R. Murphy
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Cavalier Homes, Inc. and will be retained by Cavalier Homes, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.