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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9792
CAVALIER HOMES, INC.
(Exact name of Registrant as specified in Its Charter)
Delaware 63-0949734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Highway 41 N. and Cavalier Road,
Addison, Alabama 35540
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (205) 747-0044
Securities registered pursuant to Section 12(b) of the Act:
Name of
Each Exchange
Title of Each class on Which Registered
------------------- -------------------
Common Stock, par value $.10 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant ( 1 ) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on the New
York Stock Exchange as of March 23, 1998, was $202,128,797.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 23, 1998.
19,944,670
Common, $0.10 par value
Documents Incorporated by Reference
Part III of this report incorporates by reference certain portions of the
Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held
May 20, 1998.
CAVALIER HOMES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS
General
Cavalier Homes, Inc., incorporated in 1984, is a Delaware corporation with its
executive offices located at Highway 41 North and Cavalier Road, Addison,
Alabama 35540. The Company also maintains administrative offices at 719 Scott
Avenue, Suite 600, Wichita Falls, Texas 76301. Unless otherwise indicated by the
context, references in this report to the "Company" or to "Cavalier" include the
Company, its subsidiaries, divisions of its subsidiaries and their respective
predecessors, if any.
Effective December 31, 1997, the Company completed a merger (the "Merger")
involving Belmont Homes, Inc. ("Belmont"), whose shares were traded on The
Nasdaq National Market under the symbol "BHIX". In the Merger, Belmont became a
wholly owned subsidiary of the Company, and each Belmont share issued and
outstanding immediately prior to the effective time of the Merger was converted
into the right to receive 0.80 shares of the common stock of Cavalier. The
Company issued 7,555,121 shares of its common stock in the Merger in exchange
for the outstanding shares of Belmont common stock. The Merger was accounted for
as a pooling of interests and, accordingly, the Company's financial statements
have been restated to include the financial position, results of operations and
cash flows of Belmont for all periods presented. The information herein is
presented on a combined basis.
The Company designs and manufactures a wide range of high quality manufactured
homes and markets its homes primarily in the southeast, southwest and midwest
regions of the United States, with a focus on serving the low- to medium-priced
manufactured housing market. During 1997, approximately 80% of the Company's
revenues were generated from sales in its core markets of Alabama, Texas, North
Carolina, South Carolina, Georgia, Arkansas, Louisiana, Missouri and
Mississippi. At December 31, 1997, the Company operated twenty-two home
manufacturing facilities. Seven are located in Alabama, four in Mississippi,
three each in Texas and Georgia, two each in North Carolina and Arkansas and one
in Pennsylvania.
The Company's homes are sold under 68 brand names. As of December 31, 1997, the
Company markets its homes through approximately 800 independent dealers located
in 30 states, with over 1,000 sales centers. In addition, the Company has an
independent Exclusive Dealer Program and currently has 132 participating dealer
locations selling only the Company's homes. The Company's homes are normally
fully furnished, including appliances, and are comprised of one or more floor
sections.
Through its financial services segment, the Company purchases qualifying retail
installment sales contracts for manufactured homes sold through the Company's
independent exclusive dealer network and sells various commissioned insurance
products to certain retail and wholesale purchasers of its homes including both
personal and commercial lines of insurance.
Revenues, operating profits and other financial data of the Company's industry
segments for the three year ended December 31, 1997 are set forth in Note II of
Notes to Consolidated Financial Statements in Part II.
Home Manufacturing Operations
At December 31, 1997, the Company, through five wholly owned subsidiaries,
operated twenty-two manufacturing facilities engaged in the production of
manufactured homes. At the beginning of 1997, the Company reorganized its
operating subsidiaries and merged them into and combined them with two new
operating subsidiaries, Cavalier Industries, Inc. ("CII"), a Delaware
corporation (formerly Brigadier Homes of North Carolina, Inc., Astro Mfg. Co.,
Inc., Mansion Homes, Inc. and Homestead Homes, Inc.), and Cavalier
Manufacturing, Inc. ("CMI"), a Delaware corporation (formerly Cavalier Homes of
Alabama, Inc., Buccaneer Homes of Alabama, Inc., Riverchase Homes, Inc. and
Cavalier Town & Country of Texas, Inc.). The former operating subsidiaries
continue their operations as divisions of CII and CMI. The divisions of CII are
Brigadier Homes of North Carolina (one facility), Astro Homes (one facility),
Mansion Homes (one facility) and Homestead Homes (one facility). The divisions
of CMI are Cavalier Homes of Alabama (three facilities), Buccaneer Homes (three
facilities), Riverchase Homes (one facility) and Town & Country Homes (three
facilities). At the end of 1997, in conjunction with the Belmont Merger, the
Company acquired three subsidiaries operating eight plants: Belmont Homes, Inc.
(four facilities), Spirit Homes, Inc. (two facilities) and Bellcrest Homes, Inc.
(two facilities). The management of each of the Company's manufacturing units
typically consists of a president or general manager, a production manager, a
2
general sales manager, a controller, a service manager, a purchasing manager and
a quality control manager. These mid-level management personnel manage the
Company's manufacturing facilities, and typically participate in an incentive
compensation system based upon their respective operation's profitability.
The Company has experienced significant growth in manufacturing capacity during
the past six years, expanding from four manufactured housing production
facilities in 1992 to twenty-two facilities at the end of 1997. The Company's
facilities normally operate on a single-shift, five-day week basis. The
approximate current annual capacity of the respective manufacturing units is
shown below:
Approximate
Number of Annual Capacity
Manufacturing Unit Facilities in Floors (1)
Belmont Homes, Inc. 4 10,000
Cavalier Homes of Alabama 3 6,000
Buccaneer Homes 3 5,500
Town & Country Homes 3 5,000
Spirit Homes, Inc. 2 6,500
Bellcrest Homes, Inc. 2 3,500
Brigadier Homes of North Carolina 1 3,000
Homestead Homes 1 2,500
Mansion Homes 1 1,500
Riverchase Homes 1 1,500
Astro Homes 1 1,500
------------- -------------
22 46,500
============= =============
(1) Estimated capacity is based on one shift per day, five days per week,
48 weeks per year.
Additionally, the following table sets forth certain production information for
1997, 1996 and 1995:
For the Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- ----------------------
Number of Homes Sold:
Single-Section Homes 13,576 58% 16,738 65% 13,627 69%
Multi-Section Homes 10,026 42% 8,914 35% 6,040 31%
---------- ---------- --------- --------- --------- --------
Total Homes 23,602 100% 25,652 100% 19,667 100%
Number of Floors Sold 33,646 34,581 25,717
Construction of a home begins by welding steel frame members together. The frame
is then moved through the plant, stopping at a number of work stations where
various components and sub-assemblies are attached. Certain sub-assemblies, such
as plumbing, cabinets, ceilings and wall systems, are assembled at off-line work
stations. The completed home is usually sold fully furnished and is ready for
connection to customer-supplied water, sewage and electrical systems.
The principal raw materials purchased by the Company are steel, lumber, plywood,
sheetrock, aluminum, galvanized pipe, insulating materials, electrical supplies
and plastics. The Company purchases axles, wheels, tires, kitchen appliances,
laminated wallboard, roof trusses, plumbing fixtures, furniture, carpet, vinyl
floor covering, windows and decorator accessories. Currently, the Company
maintains approximately two to three weeks' inventory of raw materials. The
Company is not dependent on any single source of supply and believes that the
materials and parts necessary for the construction and assembly of its homes are
readily available from other sources.
The Company's component manufacturing subsidiaries provide laminated wallboards,
exterior doors, cabinet doors and certain other supply products for some of its
manufacturing facilities. Additionally, certain of the Company's manufacturing
facilities currently purchase roof trusses from a joint venture in which the
Company owns an interest. The Company believes prices obtained by the Company
for these products from this joint venture are competitive with the Company's
other sources of supply.
Because the cost of transporting a manufactured home is significant, there is a
limit to the distance between a manufacturing facility and the dealers it can
service. The Company believes that the location of its manufacturing facilities
in multiple states allows it to serve more dealers in more markets. The Company
generally arranges, at the dealer's expense, for the transportation of finished
homes to dealers using independent trucking companies. One of the Company's
subsidiaries employs drivers who own their own trucks to deliver its homes.
3
Dealers or other independent installers are responsible for placing the home on
site, making utility connections and providing and installing certain accessory
items and appurtenances, such as decks, carports and foundations.
Products
The Company's homes include both single-section and multi-section models, with
the substantial majority of such products being "HUD Code Homes" which are
manufactured homes that meet the specifications of the National Manufactured
Home Construction and Safety Act of 1974, as amended, and administered by the
U.S. Department of Housing and Urban Development ("HUD"). Single-section homes
are 14 to 16 feet wide, vary in length from 40 to 80 feet and contain between
560 and 1,280 square feet. The multi-section models consist of two or more floor
sections that are joined at the home site, vary in length from 40 to 80 feet and
contain between 960 and 2,432 square feet.
The Company currently produces over 600 different models of manufactured homes
with a variety of decors that are marketed under 68 brand names. The homes
typically include a living room, dining area, kitchen, one to four bedrooms and
one or more bathrooms. Each home contains a cooking range and oven,
refrigerator, water heater and central heating. Depending on the customer's
preferences, most homes are sold fully furnished. Customers may also choose many
available options including fireplaces, ceiling fans, dishwashers, garbage
disposals, microwave ovens, stereos, bay windows, composition shingle roofs,
vinyl siding and sliding glass patio doors.
During 1995, the Company began manufacturing a series of homes intended to be
located in subdivisions or residential communities and marketed by real estate
developers. These "Developer" homes differ from the Company's traditional
manufactured homes as they have sheetrock walls that have been taped and
textured and residential style roof-lines. These upscale homes can be set on a
permanent foundation and may include garages, porches, decks and other
site-built amenities not found in traditional manufactured homes.
Modular homes are homes designed to meet building codes administered by states
and local authorities, as opposed to the national HUD guidelines. Four of the
Company's manufacturing facilities currently manufacture a limited number of
modular homes meeting applicable regulatory standards.
The Company's product development and engineering personnel design homes in
consultation with operating management, sales representatives and dealers. They
also evaluate new materials and construction techniques and use computer-aided
and other design methods in a continuous program of product development, design
and enhancement. The Company's product development activities do not require
significant capital investments or expenditures.
Independent Dealer Network, Sales and Marketing
As of December 31, 1997, the Company markets its homes through approximately
800 independent dealers located in 30 states, with over 1,000 sales centers. In
addition, the Company has an independent Exclusive Dealer Program and currently
has 132 participating dealer locations selling only the Company's homes.
Approximately 80% of the Company's sales in 1997 were to dealers operating sales
centers in the Company's core markets as follows: Alabama - 13%, Texas - 13%,
North Carolina - 10%, South Carolina - 9%, Georgia - 8%, Arkansas - 8%,
Louisiana - 7%, Missouri - 6% and Mississippi - 6%.
The Company has written agreements with most of its independent dealers
requiring each dealer to maintain qualified service staff to perform day-to-day
repair work on the Company's homes sold by the dealer and requiring prompt
payment by the dealer for homes purchased. These agreements generally may be
terminated at any time by either party, with or without cause, after a short
notice period. The Company does not have any control over the operations of, or
financial interests in, any of its independent dealers, including any of its
independent exclusive dealers. The Company is not dependent on any single
dealer, and in 1997, the Company's largest dealer accounted for approximately
2.5% of sales.
The Company believes that its independent dealer network enables the Company to
avoid the substantial investment in management, capital and overhead associated
with company owned sales centers. To enable dealers to maximize retail market
penetration and enhance customer service, typically only one dealer within a
given market area distributes a particular product line of the Company. The
Company believes its strategy of selling its homes through independent dealers
helps to ensure that the Company's homes are competitive with those of other
manufacturers in terms of consumer acceptability, product design, quality and
price. Accordingly, a component of the Company's business strategy is to
continually strengthen its dealer relations. The Company believes its relations
with its independent dealers, including its independent exclusive dealers, are
good. *
Since 1991, the Company has been developing an independent exclusive dealer
network. The Company's independent exclusive dealers market and sell only homes
4
manufactured by the Company, while the Company's independent non-exclusive
dealers typically will choose to offer the products of other manufacturers in
addition to those of the Company. The growth in the Company's number of
exclusive dealers and percentage of total Company sales represented by them is
summarized in the following table:
For the Year Ended December 31,
--------------------------------------
1997 1996 1995
----------- ------------ -----------
Number of Exclusive Dealers 132 115 93
Percentage of Manufactured Home Sales 30% 27% 26%
The industry has recently been experiencing a trend of increasing competition
for quality independent dealers, and many manufacturers, which had previously
not owned their own retail sales centers, have begun purchasing independent
dealers and/or establishing their own retail outlets. Although the Company
intends to continue to focus on distribution through independent dealers, it may
broaden its programs in response to these trends to allow for other methods of
retail distribution or to purchase and/or establish its own retail sales centers
as a complement to its independent dealer network. *
Through its finance subsidiary Cavalier Acceptance Corporation ("CAC"), the
Company purchases qualifying retail installment sales contracts for manufactured
homes sold through the Company's independent exclusive dealer network and
provides its exclusive dealers with other services and support.
Each of the Company's manufacturing divisions typically employs a general sales
manager and its own respective sales representatives who are compensated on a
commission basis. The plant-level sales representatives are charged with the
day-to-day servicing of the needs of the Company's independent dealers,
including its independent exclusive dealers. The Company markets its homes
through product promotions, participation in regional manufactured housing shows
and advertisements in local media. As of December 31, 1997, the Company
maintained a sales force of 76 full-time salesmen and 11 full-time general sales
managers.
Retail Financing Activities
A significant factor affecting sales of manufactured homes is the availability
and terms of financing. CAC purchases qualifying retail installment sales
contracts for manufactured homes sold through the Company's independent
exclusive dealer network. In addition, the Company's goal is for CAC's
activities to provide the Company with a source of consistent earnings which
may, to a certain extent, be insulated from fluctuating manufactured home sales
volumes. *
CAC seeks to provide highly competitive financing terms to customers of the
Company's independent exclusive dealers. CAC currently offers various
conventional loan programs which require a down-payment ranging from 0% to 20%
of the purchase price, in cash, trade-in value of a previously-owned
manufactured home and/or appraised value of equity in any real property pledged
as collateral. Repayment terms generally range from 84 to 240 months, depending
upon the type of home and amount financed, the amount of the down payment and
the customer's creditworthiness. CAC's loans are secured by a purchase money
security interest in the manufactured home and, in certain instances, a mortgage
on real property pledged as additional collateral. As of December 31, 1997, all
of CAC's outstanding loans were secured. Loans purchased by CAC normally provide
a fixed rate of interest with equal monthly payments and are non-recourse to the
dealer. All of CAC's loans outstanding at December 31, 1997 provided for a
predetermined fixed rate of interest. The interest rates applicable to CAC's
loans as of such date generally ranged from 9.25% to 14.00%, and the approximate
weighted average annual percentage interest rate was 10.9%. Currently, CAC
operates in each of the 15 states in which the Company has independent exclusive
dealers.
For those retail customers who meet CAC's lending standards, CAC provides prompt
credit approvals and funding of loans. CAC has established a standardized credit
scoring system to facilitate such prompt decision-making on loan applications.
The most important criteria in the scoring system are the income, employment
stability and credit worthiness of the borrower. The system requires a minimum
score before CAC will consider funding the installment sale contract.
In the event an installment sale contract becomes delinquent, CAC normally
contacts the customer within 10 to 25 days thereafter in an effort to cure the
delinquency. CAC generally repossesses the home after payments have become 60 to
90 days delinquent. After repossession, CAC normally has the home delivered to
one of the Company's independent dealer's sales center where CAC attempts to
resell the home or contracts with an independent party to remarket the home. To
a limited extent, CAC sells repossessed homes at wholesale.
5
The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CAC to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. * Amounts credited to the reserve were $1.3, $0.8 and $0.3 million
in 1997, 1996 and 1995, respectively. Additionally, as a result of defaults and
repossessions the reserve was charged $1.0, $0.3 and $0.1 million in 1997, 1996
and 1995, respectively. The reserve for credit losses at December 31, 1997 was
$1.3 million as compared to $0.9 million at December 31, 1996, and $0.6 million
at December 31, 1995.
In fiscal 1997, 1996 and 1995, CAC repossessed 92, 41 and 13 homes,
respectively. The Company's inventory of repossessed homes was 50 homes at
December 31, 1997, as compared to 6 homes at December 31, 1996, and 6 homes at
December 31, 1995. The Company's net losses resulting from repossessions on CAC
purchased loans as a percentage of the average principal amount of such loans
outstanding for fiscal 1997, 1996 and 1995 was 2.24%, 1.40% and .76%,
respectively.
At December 31, 1997 and December 31, 1996, delinquencies expressed as a
percentage of the total number of installment sale contracts which CAC owned
were as follows:
Delinquency Percentage
Total Number December 31,1997
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
1,712 1.46% 0.93% 0.12% 2.51%
Delinquency Percentage
Total Number December 31,1996
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
1,292 1.16% 0.08% 0.00% 1.24%
At December 31, 1997 and December 31, 1996, delinquencies expressed as a
percentage of the total outstanding principal balance of installment sale
contracts which CAC owned were as follows:
Delinquency Percentage
Total Value December 31,1997
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
$ 49,146,000 1.59% 0.95% 0.05% 2.59%
Delinquency Percentage
Total Value December 31,1996
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
$ 36,425,000 1.13% 0.09% 0.00% 1.22%
There can be no assurance that the Company's future results with respect to
delinquencies and repossessions will be consistent with its past experience as
reflected above.
Certain operating data relating to CAC are set forth in the following table:
December 31,
---------------------------------------------------
1997 1996 1995
---------------- --------------- ----------------
Total loans receivable $ 49,146,000 $ 36,425,000 $ 19,209,000
Allowance for credit losses $ 1,272,000 $ 941,000 $ 551,000
Number of loans outstanding 1,712 1,292 758
Number of delinquencies 43 16 5
Net loss ratio on average
outstanding principal balance 2.24% 1.40% 0.76%
Weighted average annual
percentage rate 10.9% 10.9% 11.3%
CAC presently has 6 part-time and 30 full-time employees.
Although the level of CAC's future activities cannot presently be determined,
the Company expects to utilize internally generated working capital, borrowings
under the Company's revolving, warehouse and term loan agreement with its
primary lender (described below under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources") and amounts generated from sales of loans under the Retail
Finance Agreement discussed in the following paragraph to fund the purchase of
retail installment sale contracts on homes sold by the Company's independent
exclusive dealers and to develop a portfolio of such installment sale contracts.
* The Company believes that its relationships with its exclusive dealers will
assist the development of this portfolio. *
6
Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on conservative underwriting standards, the availability of
working capital and funds borrowed under its credit line with its primary
lender. In February 1998, CAC entered into an agreement (the "Retail Finance
Agreement") with another lender providing for the periodic resale of a portion
of CAC's loans that meet established criteria. On March 13, 1998, CAC sold loans
to this lender having an outstanding principal amount of approximately $25
million for cash in the approximate amount of $26 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations/Financial Services." The Company believes the periodic
sale of installment contracts receivable under the Retail Finance Agreement will
reduce requirements for both working capital and borrowings, increase the
Company's liquidity, reduce the Company's exposure to interest rate fluctuations
and enhance the ability of CAC to increase its volume of loan purchases. * There
can be no assurance, however, that additional sales will be made under this
agreement, or that CAC and the Company will be able to realize the expected
benefits from such agreement. *
Retail Insurance Activities
Through its wholly-owned insurance agency, Quality Certified Insurance Services,
Inc. ("QCIS"), the Company sells commissioned insurance products to retail
purchasers of the Company's homes including physical damage and extended home
warranties. QCIS also sells commercial lines of insurance products, including
general liability and property insurance, to the Company's independent exclusive
dealers and others. At December 31, 1997, QCIS had 13 full-time employees and 2
part-time employees.
Wholesale Dealer Financing and Repurchase Obligations
In accordance with manufactured housing industry practice, substantially all of
the Company's dealers finance their purchases of manufactured homes through
wholesale "floor plan" financing arrangements. Under a typical floor plan
financing arrangement, a financial institution provides the dealer with a loan
for the purchase price of the home and maintains a security interest in the home
as collateral. The financial institution which provides financing to the dealer
customarily requires the Company to enter into a separate repurchase agreement
with the financial institution under which the Company is obligated, upon
default by the dealer, to repurchase the financed homes at a declining price
based upon the Company's original invoice price plus, in specific cases, certain
administrative expenses. A portion of purchases by dealers are pre-sold to
retail customers and are paid through retail financing commitments.
The risk of loss under such repurchase agreements is mitigated by the fact that
(i) sales of the Company's manufactured homes are spread over a relatively large
number of independent dealers, the largest of which accounted for approximately
2.5% of sales in 1997, (ii) the repurchase obligation expires on individual
homes after a reasonable period of time (generally 12 to 18 months from invoice
date) and also declines during such period based on predetermined amounts and
(iii) the Company is in many cases able to sell homes repurchased from credit
sources in the ordinary course of business without incurring significant losses.
As of December 31, 1997, the Company's contingent liability under these
repurchase and other similar recourse agreements was an amount estimated to be
approximately $158 million. The Company has provided an allowance for possible
repurchase losses of $1.2 million as of December 3l, 1997, based on prior
experience and current market conditions. Management currently expects no
material loss in excess of the allowance. *
Quality Control, Warranties and Service
The Company believes the quality in materials and workmanship, continuous
refinement in design and production procedures as well as price and other market
factors, are important elements in the market acceptance of manufactured homes.
The Company maintains a rigorous quality control inspection program at all
production stages. The Company's manufacturing facilities and the plans and
specifications of its manufactured homes have been approved by a HUD-designated
inspection agency. An independent, HUD-approved third-party inspector checks
each of the Company's manufactured homes for compliance during construction.
The Company provides the initial home buyer with a one-year limited warranty
against manufacturing defects in the home's construction. Warranty services
after sale are performed, at the expense of the Company, by local plant
personnel, by independent dealers or, in certain cases, local independent
contractors. In addition to the warranty by the Company, direct warranties often
are provided by the manufacturers of specific components and appliances.
The Company maintains a full-time service manager at most of its manufacturing
facilities. In addition, the Company has 186 full-time service personnel to
provide on-site service and correct production deficiencies that are
attributable to the manufacturing process. Warranty service constitutes a
significant cost to the Company, and management of the Company has placed
7
emphasis on diagnosing potential problem areas to help minimize costly field
repairs. The Company also has focused on reducing response time to customer
service requests. At December 31, 1997, the Company had established a reserve
for future warranty claims of $11.7 million relating to homes sold, based upon
management's assessment of historical experience factors and current industry
trends. *
Competition
The manufactured housing industry is highly competitive, characterized by low
barriers to entry and severe price competition. Competition is based on price,
product features and quality, reputation for service quality, depth of field
inventory, delivery capabilities, warranty repair service, dealer promotions,
merchandising and terms of dealer and retail consumer financing. The Company
also competes with other manufacturers, some of which maintain their own retail
sales centers, for quality independent dealers. In addition, the Company's
manufactured homes compete with other forms of low-cost housing, including
site-built, prefabricated, modular homes, apartments, townhouses and
condominiums. The selection by retail buyers of a manufactured home rather than
an apartment or other alternative forms of housing is significantly affected by
their ability to obtain satisfactory financing. The Company faces direct
competition from numerous manufacturers, many of which possess greater
financial, manufacturing, distribution and marketing resources.
The Company's growth strategy currently includes the continued expansion of
financial services provided through CAC. * The Company believes that operations
of CAC will have a positive impact on the Company's efforts to sell its products
and enhance its competitive ability within the industry. * However, due to
strong competition in the retail finance segment of the industry from companies
much larger than CAC, combined with the limited operating history of CAC, there
can be no assurance that CAC will be able to expand its operations or that it
will have a positive impact on the Company's ability to compete.
Regulation
The Company's business is subject to a number of federal, state and local laws,
regulations and codes. Construction of manufactured housing is governed by the
National Manufactured Home Construction and Safety Standards Act of 1974, as
amended, and regulations issued thereunder by HUD, which have established
comprehensive national construction standards. The HUD regulations cover all
aspects of manufactured home construction, including structural integrity, fire
safety, wind loads, thermal protection and ventilation. Such regulations preempt
state and local regulations on such matters. The Company cannot presently
determine what, if any, legislation may be adopted by Congress or the effect any
such legislation may have on the Company or the manufactured housing industry as
a whole.
The Company's manufacturing facilities and the plans and specifications of its
manufactured homes have been approved by a HUD-designated inspection agency.
Furthermore, an independent, HUD-approved third-party inspector regularly checks
the Company's manufactured homes for compliance during construction. Failure to
comply with the HUD regulations could expose the Company to a wide variety of
sanctions, including closing the Company's manufacturing facilities. The Company
believes its manufactured homes meet or surpass all present HUD requirements. *
HUD has promulgated regulations with respect to structural design, wind loads
and energy conservation. The Company's operations were not materially affected
by the regulations; however, HUD has these matters under continuous review and
the Company cannot predict what effect (if any) additional regulations
promulgated by HUD would have on the Company or the manufactured industry as a
whole.
Certain components of manufactured and modular homes are subject to regulation
by the U.S. Consumer Product Safety Commission ("CPSC"), which is empowered to
ban the use of component materials believed to be hazardous to health and to
require the repair of defective components. The CPSC, the Environmental
Protection Agency and other governmental agencies are evaluating the effects of
formaldehyde. Regulations of the Federal Trade Commission also require
disclosure of a manufactured home's insulation specifications. Manufactured,
modular and site-built homes are all built with particle board, paneling and
other products that contain formaldehyde resins. Since February 1985, HUD has
regulated the allowable concentration of formaldehyde in certain products used
in manufactured homes and required manufacturers to warn purchasers concerning
formaldehyde associated risks. The Company currently uses materials in its
manufactured homes that it believes meet HUD standards for formaldehyde
emissions and otherwise comply with HUD regulations in this regard. *
The transportation of manufactured homes on highways is subject to regulation by
various federal, state and local authorities. Such regulation may prescribe size
and road use limitations and impose lower than normal speed limits and various
other requirements.
8
The Company's manufactured homes are subject to local zoning and housing
regulations. A number of states require manufactured home producers to post
bonds to ensure the satisfaction of consumer warranty claims. A number of states
have adopted procedures governing the installation of manufactured homes.
Utility connections are subject to state and local regulation.
The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission
Improvement Act, which regulates the descriptions of warranties on products. The
description and substance of the Company's warranties are also subject to a
variety of state laws and regulations.
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. The Company
currently does not believe it will be required under existing environmental laws
and enforcement policies to expend amounts which will have a material adverse
effect on its results of operations or financial condition.* However, the
requirements of such laws and enforcement policies have generally become more
strict in recent years. Accordingly, the Company is unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.
A variety of federal laws affect the financing of manufactured homes, including
the financing activities conducted by CAC. The Consumer Credit Protection Act
(Truth-in-Lending) and Regulation Z promulgated thereunder require substantial
disclosures to be made in writing to a consumer with regard to various aspects
of the particular transaction, including the amount financed, the annual
percentage rate, the total finance charge, itemization of the amount financed
and other matters and also set forth certain substantive limitations on
permissible contract terms. The Equal Credit Opportunity Act and Regulation B
promulgated thereunder prohibit credit discrimination against any credit
applicant based on certain prohibited bases, and also require that certain
specified notices be sent to credit applicants whose applications are denied.
The Federal Trade Commission has adopted or proposed various trade regulation
rules to specify and prohibit certain unfair credit and collection practices and
also to preserve consumers' claims and defenses. The Government National
Mortgage Association ("GNMA") specifies certain credit underwriting requirements
in order for installment manufactured home sale contracts to be eligible for
inclusion in a GNMA program. HUD also has promulgated substantial disclosure and
substantive regulations and requirements in order for a manufactured home
installment sale contract to qualify for insurance under the Federal Housing
Authority ("FHA") program, and the failure to comply with such requirements and
procedures can result in loss of the FHA guaranty protection. In addition, the
financing activities of CAC may also become subject to the disclosure
requirements of the Home Mortgage Disclosure Act. In addition to the extensive
federal regulation of consumer credit matters, many states have also adopted
consumer credit protection requirements that may impose significant requirements
for consumer credit lenders. For example, many states require that a consumer
credit finance company such as CAC obtain certain regulatory licenses or permits
in order to engage in such business in that state, and many states also set
forth a number of substantive contractual limitations regarding provisions that
permissibly may be included in a consumer contract, as well as limitations upon
the permissible interest rates, fees and other charges that may be imposed upon
a consumer. Failure by the Company or CAC to comply with the requirements of
federal or state law pertaining to consumer credit could result in the
unenforceability of the particular contract for the affected consumer, civil
liability to the affected customers, criminal liability and other adverse
results.
Employees
As of December 31, 1997, the Company had 5,051 employees, of whom 4,396 were
engaged in home manufacturing, 97 in sales, 186 in warranty and service, 279 in
general administration, 42 in delivery and 51 in retail finance and insurance
services. At year end, only Astro Homes' employees engaged in manufacturing (100
employees) were covered by a collective bargaining agreement. Management
considers its relations with its employees to be good. *
Risk Factors
In addition to the other information contained herein, persons interested in
making an investment in the Company should carefully consider the following
factors concerning the Company and its business:
Uncertainties in Integrating Business Operations and Achieving Benefits of
the Belmont Merger
On December 31, 1997, Crimson Acquisition Corp., a Mississippi corporation and a
wholly owned subsidiary of the Company, merged with and into Belmont Homes,
Inc., a Mississippi corporation and also a producer of manufactured housing
("Belmont"), and Belmont became a wholly owned subsidiary of the Company. For a
more detailed description of Belmont and this transaction, reference is made to
9
the Company's Current Reports on Form 8-K dated August 20, 1997, December 11,
1997 and January 15, 1998 (as amended by Form 8-K/A dated March 16, 1998 and
Form 8-K/A dated March 17, 1998), and the Company's Registration Statement on
Form S-4 filed with the Commission on December 2, 1997 (Reg. No. 333-41319). The
acquisition of Belmont will require the consolidation of functions and the
integration of departments, systems and procedures, which will present
significant management challenges. There can be no assurance that such actions
will be successfully accomplished as rapidly as currently expected, if at all.
Moreover, although the primary purpose of such actions will be to realize direct
cost savings and other operating efficiencies, synergies and benefits, there can
be no assurance of the extent to which or whether such cost savings,
efficiencies, synergies or benefits will be achieved.
Cyclical and Seasonal Nature of the Manufactured Housing Industry
The manufactured housing industry is highly cyclical and seasonal and has
experienced wide fluctuations in aggregate sales in the past, resulting in the
failure of many manufacturing concerns. The market for manufactured homes is
affected by many of the same national and regional economic and demographic
factors that affect the broader housing industry. Historically, most sectors of
the home building industry, including the manufactured housing industry, have
been affected by, among other things, changes in general economic conditions,
inflation, levels of consumer confidence, employment and income levels, housing
demand, availability of alternative forms of housing, availability of financing
and the level and stability of interest rates. The Manufactured Housing
Institute ("MHI") reported that during the period from 1983 to 1991, aggregate
domestic shipments of manufactured homes declined 42.1% from 295,079 homes to
170,713 homes. According to industry statistics, after a ten-year low in
shipments of homes in 1991, the industry recovered significantly, posting
increases in shipments of 24%, 21%, 20%, 12% and 7% for 1992, 1993, 1994, 1995
and 1996, respectively. However, industry statistics reflect a decrease in home
shipments of approximately 2.8% for 1997 when compared to 1996. The manufactured
housing industry has, over the past several years, also experienced increases in
both the number of retail dealers and manufacturing capacity, which the Company
believes is currently resulting in slower retail turnover, higher dealer
inventories, lower order backlogs and increased price competition.
Sales in the manufactured housing industry are also seasonal in nature, with
sales of homes traditionally being stronger in April through October and weaker
during the first and last part of the calendar year. While seasonality was not a
significant factor in the Company's business during the period of 1992 through
1996 when industry shipments were steadily increasing, the recent decline in
shipments may signal a return to the industry's traditional seasonal patterns.
The duration and extent of the recent decrease in home shipments and the
tightening of competitive conditions, and their corresponding impact on the
future results of operations and financial condition of the combined companies,
is uncertain at this time. Furthermore, because of the cyclical and seasonal
nature of the manufactured housing industry and the recent increase in
competitive conditions, the Company can give no assurance that the industry is
not entering a change in its cycle or returning to traditional seasonal
patterns, either of which could have a material adverse effect on the Company's
results of operations or financial condition. *
Limitations on Ability to Pursue Growth Strategy
The Company's growth strategies are to (i) expand the financing activities of
its finance subsidiary, CAC, (ii) develop its independent exclusive dealer
network, (iii) expand its geographic presence and manufacturing capacity, (iv)
develop the production and distribution of component parts for manufactured
housing and (v) pursue additional acquisitions. Since 1991, the Company has
expanded manufacturing capacity to meet the increase in demand for its
manufactured homes. Downturns in shipments in the manufactured housing industry,
or a decline in the demand or growth in demand for the Company's homes, could
have a material adverse effect on the Company. The Company's ability to execute
its strategy will depend on a number of factors, including general economic and
industry conditions, its ability to sell to additional independent dealers, the
availability of semi-skilled workers in the areas in which the Company's
manufacturing facilities are located, the ability of CAC to be competitive and
other factors, many of which are beyond the control of the Company. There can be
no assurance that the Company's growth strategy will be successful. Further, if
the Company's growth strategy is unsuccessful, there can be no assurance that
such lack of success will not have a material adverse effect upon the Company's
results of operations or financial condition. *
Uncertainties Regarding Retail Financing Activities
The Company engages in the business of purchasing retail installment finance
loans that have been originated by the Company's independent exclusive dealers.
The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CAC to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. The establishment of appropriate reserves is an inherently
uncertain process, and there can be no assurance that the ultimate losses
10
realized by CAC will not exceed the Company's loss reserves and have a material
adverse effect on the Company's results of operations and financial condition. *
There also can be no assurance that volatility or a significant change in
interest rates will not materially affect CAC's and the Company's business,
results of operations or financial condition. *
The Company's strategy currently includes the continued expansion of the
financial services segment of its business. Accordingly, the Company may incur
additional debt, or other forms of financing, in order to continue to fund such
growth. The Company may also engage in other transactions, such as selling or
securitizing portions of its installment loan portfolio, that are designed to
facilitate the ability of CAC to purchase and/or originate an increased volume
of loans and to reduce the Company's exposure to interest rate fluctuations and
installment loan losses. The Company has recently entered into such a
transaction pursuant to the Retail Finance Agreement discussed above under
"Retail Financing Activities" and on March 13, 1998, sold approximately $25
million of its loans. No assurance can be given that additional sales will
indeed be made under this agreement, however, or that CAC and the Company will
be able to realize the expected benefits from such agreement. Further, there can
be no assurance that possible additional financing, or the aforementioned
transactions involving the Company's installment loan portfolio, will be
available on terms acceptable to the Company. * If they are not, the Company may
be forced to curtail the expansion of its financial services business and to
alter its strategies. *
Limitations on Availability of Consumer and Dealer Financing
Consumer financing for manufactured home purchases is generally provided by
third-party lenders. The availability and cost of financing for manufactured
home purchasers and dealers is important to the Company's sales and is dependent
on financial institutions' lending practices, the strength of the credit markets
generally, governmental policies and other conditions, all of which are beyond
the Company's control. In addition, in most states, manufactured homes are
classified legally and by taxing authorities 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 may have a material adverse
effect on the Company's results of operations or financial condition. *
Potential Unavailability and Increases in Prices of Raw Materials
The Company's operating costs may be significantly affected by the availability
and pricing of certain raw materials, particularly lumber, gypsum, particle
board and insulation. Sudden increases in demand for these construction
materials caused by natural disasters or other market forces can greatly
increase the costs of materials or limit the availability of such materials.
Increases in costs cannot always be reflected immediately in prices and,
consequently, may adversely impact profitability. Further, a reduction in the
availability of raw materials also may affect a company's ability to meet or
maintain production requirements.
Contingent Repurchase and Guaranty Obligations
It is a customary practice in the manufactured housing industry to enter into
repurchase and other recourse agreements with lending institutions which have
provided wholesale floor plan financing to dealers. Substantially all of the
Company's sales are made to dealers located primarily in the southeast,
southwest and midwest regions of the United States pursuant to repurchase
agreements with lending institutions. These agreements generally provide for
repurchase of the Company's products from the lending institutions for the
balance due them in the event of repossession upon a dealer's default. The risk
of loss under repurchase agreements is mitigated by the fact that (i) sales of
manufactured homes are spread over a relatively large number of independent
dealers; (ii) the price the Company is obligated to pay under such repurchase
agreements generally declines over the period of the agreement and also declines
during such period based on predetermined amounts; and (iii) the Company has
been in many cases able to resell homes repurchased from credit sources in the
ordinary course of business without incurring significant losses. While the
Company has established a reserve for possible repurchase losses, there can be
no assurance that the Company will not incur material losses in excess of such
reserves in the future. *
Competitive Nature of the Industry
The production and sale of manufactured homes is a highly competitive industry,
characterized by low barriers to entry and severe price competition. Competition
is based primarily on price, product features and quality, reputation for
service and quality, depth of field inventory, delivery capabilities, warranty
repair service, dealer promotions, merchandising and terms of dealer and retail
consumer financing. In addition, the Company competes with other manufacturers,
11
some of which maintain their own retail sales centers, for quality independent
dealers. In addition, manufactured homes compete with other forms of low-cost
housing, including site-built, prefabricated and modular homes, apartments,
townhouses and condominiums. The Company faces direct competition from numerous
manufacturers, many of which possess greater financial, manufacturing,
distribution and marketing resources. As a result of these competitive
conditions, the Company may not be able to sustain past levels of sales or to
continue its sales growth or profitability. *
Reliance on Executive Officers
The success of the Company's business is highly dependent upon the personal
efforts and abilities of the current executive officers of the Company.
Specifically, the success of the Company is highly dependent on the efforts of
its Chairman of the Board, Barry B. Donnell, its President and Chief Executive
Officer, David A. Roberson, and its Vice President, Chief Financial Officer and
Secretary-Treasurer, Michael R. Murphy. The loss of the services of one or more
of these individuals could have a material adverse effect upon the Company's
business. The Company does not have employment or non-competition agreements
with any of its executive officers. The Company's continued growth, including
the expansion of CAC's business, will depend upon its ability to attract and
retain additional experienced management personnel.
Dependence on Independent Dealers
The Company depends on independent dealers for substantially all retail sales of
its manufactured homes. Typically only one dealer within a given market area
distributes a particular product line of the Company. The Company's
relationships with its dealers are cancelable on short notice by either party.
The industry has recently been experiencing a trend of increasing competition
for quality independent dealers, and many manufacturers, some of which had
previously not owned their own retail sales centers, have begun aggressive
programs to purchase independent dealers, including some of the Company's
independent dealers, and/or establishing their own retail sales centers. While
the Company believes that its relations with its independent dealers are
generally good, there can be no assurance that the Company will be able to
maintain these relations, that these dealers will continue to sell the Company's
homes or that the Company will be able to attract and retain quality independent
dealers. *
Potential Adverse Effects of Regulations
The Company is subject to a variety of federal, state and local laws and
regulations affecting the production, sale and financing of manufactured
housing. The National Manufactured Home Construction and Safety Standards Act of
1974, as amended, and regulations promulgated by the U.S. Department of Housing
and Urban Development ("HUD") thereunder, impose comprehensive national
construction standards for manufactured homes and preempt conflicting state and
local regulations. Failure to comply with such regulations could expose the
Company to a wide variety of sanctions, including closing one or more
manufacturing facilities. HUD has promulgated regulations with respect to
structural design, wind loads and energy conservation. The Company's operations
were not materially affected by the regulations; however, HUD has these matters
under continuous review and it cannot be predicted what effect (if any)
additional regulations promulgated by HUD would have on the Company or the
manufactured housing industry as a whole. In addition, certain components of
manufactured homes are subject to regulation by the U.S. Consumer Product Safety
Commission. The Company's manufactured homes are also subject to local zoning
and housing regulations. A number of states require manufactured home producers
to post bonds to ensure the satisfaction of consumer warranty claims. A number
of states have adopted procedures governing the installation of manufactured
homes. Utility connections are subject to state and local regulation.
The Company is also subject to the Magnuson-Moss Warranty Federal Trade
Commission Improvement Act, which regulates the descriptions of warranties on
products. The description and substance of the Company's warranties are also
subject to a variety of state laws and regulations.
A variety of federal laws affect the financing of manufactured homes, including
the financing activities conducted by CAC. For a discussion of these regulations
and certain risks associated with them, see discussion above under the heading
"Regulation."
There can be no assurance that the Company will not be adversely affected by a
failure to comply with any laws or regulations applicable to or affecting the
Company. *
Compliance with Environmental Laws
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
12
transportation and discharge of materials into the environment. In addition,
third parties and governmental agencies in some cases have the power under such
laws and regulations to require remediation of environmental conditions and, in
the case of governmental agencies and entities, to impose fines and penalties.
The requirements of such laws and enforcement policies have generally become
more strict in recent years. Accordingly, the Company can give no assurance that
it will not be required to incur response costs, remediation expenses, fines,
penalties or other similar damages, expenses or liabilities, or to incur
operational shut-downs, business interruptions or similar losses, associated
with compliance with environmental laws and enforcement policies that either
individually or in the aggregate would have a material adverse effect on the
Company's results of operations or financial condition.
Litigation
For description of certain risk factors associated with litigation, see "Legal
Proceedings", below.
Volatility of Stock Price
The Company's Common Stock is traded on the NYSE. The market price of the
Company's Common Stock may be subject to significant fluctuations in response to
variations in the Company's operating results and other factors affecting the
Company specifically and the stock market and the manufactured housing industry
generally.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 2. PROPERTIES
The following table sets forth the location and approximate square footage for
each principal facility of the Company, separated by segment, as of December 31,
1997. Except as indicated in footnotes to the table, all the facilities are
owned by the Company.
Approximate
Location Use (Number of Facilities) Square Footage
Belmont Homes, Inc.
Belmont Mississippi Manufacturing facilities (3) 354,000
Clarksdale, Mississippi Manufacturing facility (1) 91,000
Cavalier Homes of Alabama
Addison, Alabama Manufacturing facilities (3) 329,000 (1)
Buccaneer Homes
Hamiliton, Alabama Manufacturing facility (1) 195,000
Winfield, Alabama Manufacturing facilities (2) 205,000 (5)
Town & Country Homes
Fort Worth, Texas Manufacturing facility (1) 101,000 (2)
Mineral Wells, Texas Manufacturing facility (1) 81,000 (4)
Graham, Texas Manufacturing facility (1) 103,000 (6)
13
(continued) Approximate
Location Use (Number of Facilities) Square Footage
Manufacturing
Spirit Homes, Inc.
Conway, Arkansas Manufacturing facilities (2) 220,000
Bigelow, Arkansas Manufacturing facility (1) 80,000
Bellcrest Homes, Inc.
Millen, Georgia Manufacturing facilities (2) 164,000
Brigadier Homes of North Carolina
Nashville, North Carolina Manufacturing facility (1) 130,000
Homestead Homes
Cordele, Georgia Manufacturing facility (1) 110,000
Mansion Homes
Robbins, North Carolina Manufacturing facility (1) 99,000 (4)
Riverchase Homes
Haleyville, Alabama Manufacturing facility (1) 78,000
Astro Homes
Shippenville, Pennsylvania Manufacturing facility (1) 134,000
Quality Housing Supply, LLC
Hamiliton, Alabama Manufacturing facility (1) 50,000 (7)
Winfield, Alabama Manufacturing facility (1) 30,000 (2)
Winfield, Alabama Distribution facility (1) 48,000 (7)
Financial Services
Hamilton, Alabama Administrative Office 7,000
Haleyville, Alabama Administrative Office 1,000
General Corporate
Addison, Alabama Administrative Office 8,000 (8)
Wichita Falls, Texas Administrative Office 1,000 (3)
(1) Lease expires on one facility in 1998 and one in 2001.
(2) Lease expires in 1999.
(3) Lease expires in 1998.
(4) Lease expires in 2006.
(5) Lease expires on one facility in 1999.
(6) Lease expires in 2017.
(7) Lease expires in 2000.
(8) Lease expires in 2001.
In general, the manufacturing facilities are in good condition and are operated
at capacities which range from approximately 57% to 95%, excluding the idle
facility in Bigelow, Arkansas.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are engaged in various legal proceedings that
are incidental to and arise in the course of its business. Certain of the cases
filed against the Company and its subsidiaries and companies engaged in
businesses similar to it allege, among other things, breach of contract and
warranty, product liability, personal injury and fraudulent, deceptive or
collusive practices in connection with their businesses. These kinds of suits
are typical of suits that have been filed in recent years, and they sometimes
seek certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. Courts have certified
several of these types of cases as class actions recently, and many of these
types of cases have resulted in large damage awards, especially large punitive
damage awards. The outcome of many of the cases in which the Company is involved
or may in the future become involved cannot be predicted with any degree of
reliability, and the potential exists for unanticipated material adverse
judgments against the Company and its respective subsidiaries.
In addition, a suit has been filed by three former shareholders (the
"Plaintiffs") of Belmont Homes, Inc., an Alabama corporation which originally
owned the initial Belmont manufacturing facility ("BHIA"), in the Circuit Court
of Madison County, Alabama (Case Number CV 97-2297) against BHIA, Belmont (as a
successor in interest of BHIA), certain other corporate entities (collectively,
the "Other Corporations"), the Estate of Jerold Kennedy (the former President
and Chief Executive Officer of Belmont), J. M. Page, and certain other unnamed
and unidentified individual officers, employees, agents and directors of BHIA,
Belmont and the Other Corporations, alleging breach of fiduciary duties,
misrepresentation, deceit, suppression and civil conspiracy. The Plaintiffs
state that they owned a majority of the stock in BHIA and sold such stock in
February of 1989. In addition to certain other allegations, the Plaintiffs claim
that Mr. Kennedy, along with others who allegedly conspired with him,
misrepresented and omitted certain facts to them regarding his attempts to hire
a production manager, that Belmont later hired the production manager, and that
the Plaintiffs would not have sold their stock in BHIA in the absence of these
alleged misrepresentations and omissions. In their complaint, the Plaintiffs
request an unspecified amount of compensatory and punitive damages and/or
equitable relief, including a constructive trust. The Company is aware that
these same plaintiffs have also filed a separate claim against the Estate of Mr.
Kennedy in the probate court of Franklin County, Alabama (Case Number 97-051),
alleging essentially the same facts and seeking substantial compensatory damages
and punitive damages and a constructive trust over the stock in the various
Belmont entities owned by Mr. Kennedy's estate. The Company believes that the
Plaintiffs' claims against Belmont are without merit and intends to vigorously
contest such claims. The outcome of this litigation and its effect on the
Company cannot presently be determined, however, and the possibility exists for
an adverse resolution of the litigation which could have a material adverse
effect on the results of operations and financial condition of the Company in
the quarter and year in which any such adverse resolution occurs. *
________________________________________
* See Safe Harbor Statement on page 49.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 31, 1997, the Company held a Special Meeting of Stockholders to vote
on a proposal for the share issuance of Cavalier common stock pursuant to the
Agreement and Plan of Merger, dated as of August 14, 1997, as amended, by and
among Cavalier Homes, Inc., Belmont Homes, Inc. and Crimson Acquisition Corp., a
wholly-owned subsidiary of Cavalier. The results of the vote were as follows:
Votes Number
Votes For 7,233,696
Votes Against 153,490
Votes Withheld / Abstentions 51,076
Nonvotes 0
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK
HOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CAV". The following table sets forth, for each of the periods
indicated, the reported high and low closing sale prices per share on the NYSE
for the Company's common stock and the cash dividends paid per share in such
periods. The amounts have been adjusted for all stock splits through November of
1996. All adjusted prices of the Company's common stock have been rounded to the
nearest one-eighth of one dollar.
Closing Sales Price
----------------------------
High Low Dividends
------------ ------------- -------------
Year ended December 31, 1997
Fourth Quarter 10 7/8 9 1/4 $ 0.018
Third Quarter 11 1/2 9 1/2 0.019
Second Quarter 11 7/8 9 3/8 0.019
First Quarter 12 1/4 9 3/4 0.018
Year ended December 31, 1996
Fourth Quarter 17 3/8 10 1/2 $ 0.018
Third Quarter 19 1/8 12 7/8 0.015
Second Quarter 18 3/4 12 1/8 0.014
First Quarter 12 3/8 9 3/8 0.014
As of March 23, 1998, the Company had approximately 360 shareholders of record
and 8,400 beneficial holders of its common stock, based upon information in
securities position listings by registered clearing agencies upon request of the
Company's transfer agent.
The Company intends to continue to pay regular quarterly dividends. * However,
the payment of dividends on the Company's common stock is determined by the
Board of Directors of the Company in light of conditions then existing,
including the earnings of the Company and its subsidiaries, their funding
requirements and financial conditions, certain loan restrictions and applicable
laws and governmental regulations. The Company's present loan agreement contains
restrictive covenants which, among other things, limit the aggregate dividend
payments and purchases of treasury stock to 50% of the Company's aggregate net
income for the two most recent fiscal years.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data regarding
the Company for the periods indicated. The statement of income data, the balance
sheet data, and other data of the Company for each of the five years ended
December 31, 1997, have been derived from the consolidated financial statements
of the Company. The Company's audited financial statements as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, including the notes thereto and the related report of Deloitte &
Touche LLP, independent auditors, are included elsewhere in this report. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements (including the Notes thereto) and the other
financial information contained elsewhere in this report, and with the Company's
consolidated financial statements and the notes thereto appearing in the
Company's previously filed Annual Reports on Form 10-K.
15
Year Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- ------------- -------------- -------------
(in thousands, except per share amounts)
Statement of Income Data
Revenues:
Net sales $ 555,842 $ 573,838 $ 420,790 $ 312,268 $ 225,700
Financial services 5,346 3,333 1,764 703 230
------------- -------------- ------------- -------------- -------------
Total revenues 561,188 577,171 422,554 312,971 225,930
Cost of sales 466,749 482,302 354,811 265,943 193,411
Selling, general and administrative 69,999 54,022 39,035 28,109 20,847
Non-recurring merger and related
costs 7,359
------------- -------------- ------------- -------------- -------------
Operating profit 17,081 40,847 28,708 18,919 11,672
Life insurance proceeds 1,500 1,750
Other income (expense) - net (242) 1,589 90 (612) (813)
------------- -------------- ------------- -------------- -------------
Income before taxes $ 18,339 $ 44,186 $ 28,798 $ 18,307 $ 10,859
============= ============== ============= ============== =============
Net income $ 10,247 $ 27,479 $ 17,630 $ 11,458 $ 6,642
============= ============== ============= ============== =============
Basic net income per share 1 $ .52 $ 1.42 $ 1.06 $ .83 $ .55
============= ============== ============= ============== =============
Diluted net income per share 1 $ .51 $ 1.39 $ 1.03 $ .82 $ .54
============= ============== ============= ============== =============
Cash dividend per share 1 $ .073 $ .061 $ .036 $ .021 $ .018
============= ============== ============= ============== =============
Weighted average number of shares
outstanding 1 19,835 19,363 16,630 13,824 12,084
============= ============== ============= ============== =============
Weighted average number of shares
outstanding, assuming 20,028 19,799 17,057 14,036 12,292
dilution 1 ============= ============== ============= ============== =============
Other Data
Capital expenditures $ 10,186 $ 16,106 $ 13,482 $ 7,665 $ 4,747
============= ============== ============= ============== =============
December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- ------------- -------------- -------------
Balance Sheet Data
Working capital $ 28,484 $ 24,746 $ 22,157 $ 18,095 $ 6,217
Total assets $ 211,554 $ 196,387 $ 132,694 $ 86,859 $ 48,222
Long-term debt $ 15,808 $ 6,227 $ 11,233 $ 13,057 $ 10,878
Stockholders' equity $ 133,551 $ 122,652 $ 75,119 $ 41,767 $ 15,560
1 All per share data has been adjusted for all stock splits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The principal business of the Company since its inception in 1984 has been the
design, production and sale of manufactured homes. In the first quarter of 1992,
the Company, through its wholly owned subsidiary, CAC, commenced retail
installment sale financing operations, and by the end of 1993, these operations
had become significant enough to require segment reporting by the Company.
Effective December 31, 1997, the Company completed a merger (the "Merger")
involving Belmont Homes, Inc. ("Belmont"), whose shares were traded on The
Nasdaq National Market under the symbol "BHIX". In the Merger, Belmont became a
wholly owned subsidiary of the Company, and each Belmont share issued and
outstanding immediately prior to the effective time of the Merger was converted
into the right to receive 0.80 shares of the common stock of Cavalier. The
Company issued 7,555,121 shares of its common stock in the Merger in exchange
for the outstanding shares of Belmont common stock. The Merger was accounted for
as a pooling of interests and, accordingly, the Company's financial statements
have been restated to include the financial position, results of operations and
cash flows of Belmont for all periods presented. The information herein is
presented on a combined basis.
The Company's business is cyclical and seasonal and is influenced by many of the
same economic and demographic factors that affect the housing market as a whole.
According to the Manufactured Housing Institute ("MHI"), the manufactured
housing industry posted gains in shipments from 1992 through 1996, with
approximate total annual shipments of 211,000 (1992) increasing to 363,000
(1996), and with the greatest gains occurring in the southeastern United States.
16
The Company conducts a substantial portion of its business in the southeastern
United States and attributes past years' strong shipment growth to a reduction
of alternative housing, increased availability of retail financing, increased
consumer confidence and continuing strength in the national economy. However,
the manufactured housing industry has, over the past several years, also
experienced increases in both the number of retail dealers and manufacturing
capacity, which the Company believes is currently resulting in slower retail
turnover, higher dealer inventories, lower order backlogs and increased price
competition. According to MHI, industry statistics reflect a decrease in home
shipments of 2.8% in 1997 as compared to 1996, with approximate shipments of
353,000 (1997) compared to 363,000 (1996), and with large declines occurring in
Alabama, Mississippi and South Carolina, all substantial markets for the
Company. It is possible that these developments may signal a return to
seasonality in the Company's manufacturing business, which was not a significant
factor during the period from 1992 through 1996, with sales of homes being
stronger in April through October and weaker during the first and last part of
the calendar year. * It is also possible that these developments could mean that
the industry is entering a downturn in its cycle. * The Company is uncertain at
this time as to the extent and duration of these developments and as to what
effect these factors will have on the Company's future sales and earnings. *
Over the last several years, the Company has increased its production capacity
to take advantage of the growth being experienced in the industry until
recently, increasing the number of operating manufacturing facilities from four
at the end of 1992 to twenty-two at December 31, 1997. The fourteenth
manufacturing facility was acquired in June 1997, when the Company purchased
substantially all of the assets and assumed certain existing liabilities of
Pacer Homes, Inc., a manufacturer in Texas. Eight operating home manufacturing
facilities (two in Georgia, four in Mississippi and two in Arkansas) were added
with the Belmont Merger.
Results of Operations
The following tables summarize, for the periods and dates indicated, certain
financial, operating and balance sheet data including, as applicable, the
percentage of net sales or total revenue:
STATEMENT OF INCOME SUMMARY For the Year Ended December 31,
-------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
---------------------------- ----------------------------- ---------------------------
Net Sales $ 555,842 100.0% $ 573,838 100.0% $ 420,790 100.0%
Cost of Sales 466,749 84.0% 482,302 84.0% 354,811 84.3%
------------ ------------ ------------- ------------- ------------ ------------
Gross Profit on Sales $ 89,093 16.0% $ 91,536 16.0% $ 65,979 15.7%
============ ============= ============
Net Sales $ 555,842 $ 573,838 $ 420,790
Financial Services 5,346 3,333 1,764
------------ ------------- ------------
Total Revenue $ 561,188 100.0% $ 577,171 100.0% $ 422,554 100.0%
============ ============= ============
Selling, General and Administrative $ 69,999 12.5% $ 54,022 9.4% $ 39,035 9.2%
Non-recurring Merger and Related Costs $ 7,359 1.3%
Operating Profit $ 17,081 3.0% $ 40,847 7.1% $ 28,708 6.8%
Other Income (Expense) $ 1,258 0.2% $ 3,339 0.6% $ 90 0.0%
Net Income $ 10,247 1.8% $ 27,479 4.8% $ 17,630 4.2%
OPERATING DATA SUMMARY For the Year Ended December 31,
---------------------------------------------
(Dollars in Thousands) 1997 1996 1995
------------- -------------- ------------
Installment Loan Purchases $ 18,013 $ 19,932 $ 10,721
Capital Expenditures $ 10,186 $ 16,106 $ 13,482
Home Shipments 23,602 25,652 19,667
Floor Shipments 33,646 34,581 25,717
Independent Exclusive Dealers 132 115 93
Home Manufacturing Facilities 22 24 16
BALANCE SHEET SUMMARY Balances as of December 31,
---------------------------------------------
(Dollars in Thousands) 1997 1996 1995
------------- ------------- ------------
Cash and Cash Equivalents $ 37,276 $ 29,751 $ 23,060
Working Capital $ 28,484 $ 24,746 $ 22,157
Current Ratio 1.5 to 1 1.4 to 1 1.5 to 1
Long-Term Debt $ 15,808 $ 6,227 $ 11,233
Ratio of Long-Term Debt to Equity 1 to 8 1 to 20 1 to 7
Installment Loan Portfolio $ 49,146 $ 36,425 $ 19,209
Net Sales. Net sales for 1997 as compared to 1996 decreased by 3%, or $18
million, with home shipments declining by 8%. However, sales of multi-section
homes increased during the year, resulting in only a 3% decline in the number of
floors sold. The Company believes the decline in net sales is primarily
17
attributable to increased competition in the industry related to an increase in
manufacturing capacity, higher dealer inventories and slower retail inventory
turnover. Net sales for 1997 included approximately $51 million from Bellcrest
Homes, Inc. ("Bellcrest"), which was acquired by Belmont in October 1996.
Net sales for 1996 increased $153 million, or 36%, as compared to 1995, while
shipments of homes rose 30% and shipments of floors increased by 34%. The
Company believes that the increase in net sales for the period primarily
resulted from continuing improvement in industry conditions, combined with the
increase in manufacturing facilities and a shift in product mix toward
multi-section homes. Net sales for 1996 included approximately $65 million from
Spirit Homes, Inc., which was acquired by Belmont in October 1995.
Actual shipments of homes during the three years ended December 31, 1997, 1996
and 1995 were 23,602, 25,652 and 19,667, respectively. During the three-year
period ended December 31, 1997, the average price of homes sold rose to $23,600
in 1997 from $22,400 (1996) and $21,400 (1995). The increase in the average
selling price was primarily due to price increases instituted by the Company
during all three years associated with rising prices in raw materials and an
increase in the shipment of multi-section homes. During the three-year period,
the percentage of multi-section homes sold was 42%, 35% and 31% of total homes
sold in 1997, 1996 and 1995, respectively.
Gross Profit on Sales. Gross profit on sales is derived by deducting cost of
sales from net sales. Gross profit on sales for the three years ended December
31, 1997, 1996 and 1995 was $89.1, $91.5 and $66.0 million, respectively. Gross
profit for 1997 was negatively impacted by a reduction in net sales and $0.8
million charged to warranty expense in connection with conforming Belmont's
contractual warranty arrangements to Cavalier's. The increase in gross profit on
sales from 1995 to 1996 was primarily attributable to increased sales volume due
to industry growth and the Company's increased number of manufacturing
facilities. Gross profit as a percentage of net sales has remained relatively
stable at 16.0%, 16.0% and 15.7% for the years ended December 31, 1997, 1996 and
1995, respectively
Financial Services Revenue. Financial services revenue is derived primarily from
interest on installment sale contracts held by CAC and the sale of commissioned
insurance products by the Company's wholly owned insurance agency, Quality
Certified Insurance Services, Inc. ("QCIS"). Financial services revenue for the
years ended December 31, 1997, 1996 and 1995 was approximately $5.3, $3.3 and
$1.8 million, respectively. The increase in financial services revenue was due
to the continued growth in the Company's loan portfolio to $49, $36 and $19
million at the end of 1997, 1996 and 1995, respectively.
Selling, General and Administrative. Selling, general and administrative
expenses during the three years ended December 31, 1997, 1996 and 1995 were $70,
$54 and $39 million, respectively, and as a percentage of total revenue was
12.5%, 9.4% and 9.2% for the years ended December 31, 1997, 1996 and 1995,
respectively. During 1997, selling, general and administrative expense increased
$16 million as compared to 1996 due primarily to the costs related to new or
expanded manufacturing facilities of $9.1 million, a $1.9 million increase in
selling and administrative salaries and commissions, a $1.1 million increase in
CAC's administrative costs consistent with its growth and expenses related to
the Company's expanded marketing programs of $0.9 million, partially offset by a
reduction in executive incentive compensation of $1.5 million. Additionally, the
Company charged to selling, general and administrative expense $0.3 million in
connection with conforming Belmont's contractual repurchase arrangements to its
own. Selling, general and administrative expense increased $15 million from 1995
to 1996 due in part to the costs related to new or expanded manufacturing
facilities of $10.5 million and a $1 million increase in CAC's administrative
costs consistent with its growth.
Non-recurring Merger and Related Costs. In connection with the Belmont Merger,
the Company recorded charges of $7.4 million in the quarter ended December 31,
1997. These charges were non-recurring and included $2.5 million from the
earn-out provision contained in the Stock Purchase Agreement between Belmont and
the shareholders of Bellcrest, $0.9 million for severance costs associated with
the consolidation of certain administrative functions, $3.1 million for
printing, investment banking, legal, accounting and other fees and $0.9 million
for other costs associated with combining and realigning the operations of the
two companies.
Operating Profit. Operating profit is derived by deducting cost of sales,
selling, general and administrative expense and non-recurring merger and related
costs from total revenue. Operating profit declined from 1996 to 1997 primarily
due to the reduction in net sales, the increase in costs associated with new or
expanded manufacturing facilities of $9.1 million and the non-recurring merger
and related costs associated with the Belmont Merger of $7.4 million, offset by
a $2.2 million increase in operating profit of the financial services business.
The increase in operating profit from 1995 to 1996 is consistent with the
increase in net sales during the period.
18
Other Income (Expense):
Interest Expense. Manufacturing interest expense for 1997 increased by $0.3
million as compared to 1996 due primarily to additional borrowings to support
the purchase of Bellcrest, which debt was paid in full in September 1997, and
interest on two new industrial development bond issues. Manufacturing interest
expense for 1996 declined by $0.5 million as compared to 1995 due primarily to
the effect of debt reduction from the use of proceeds of Belmont's public
offering of stock in January 1996. The increase in financial services interest
expense for 1997 of $0.3 million as compared to 1996 reflects the additional
borrowings incurred to support the level of purchases of retail installment
sales contracts by CAC.
Life Insurance Proceeds. The Company experienced non-recurring gains on life
insurance proceeds during 1996 of $1.75 million as a result of the death of
Cavalier's President and Chief Executive Officer, Jerry F. Wilson, and during
1997 of $1.5 million as a result of the death of Belmont's President and Chief
Executive Officer, Jerold Kennedy.
Other, Net. Other, net, during the years ended December 31, 1997, 1996 and 1995
was $1.3, $2.4 and $1.4 million, respectively. Other, net, is primarily
comprised of interest income (unrelated to financial services), gains or losses
on sales of assets, equity earnings in investments accounted for on the equity
basis of accounting and applicable allocation of minority interest. The decline
of $1.2 million in 1997 as compared to 1996 was primarily due to a $0.3 million
loss on property disposals recorded in 1997 in connection with the closing of a
leased facility and a $0.4 million decline in equity earnings. The increase in
other, net, of $1.0 million in 1996 as compared to 1995 was mainly due to a $0.5
million increase in gain on sales of investments.
Net Income. Net income declined from 1996 to 1997 primarily due to the reduction
in net sales, the increase in certain selling, general and administrative
expenses and the non-recurring charges associated with the Belmont Merger of
$1.1 million recorded in connection with conforming Belmont's contractual
warranty and repurchase arrangements to Cavalier's and $7.4 million of
non-recurring merger and related costs (a total of $6.5 million net of taxes).
The increase in net income from 1995 to 1996 is consistent with the increase in
net sales during the period.
Financial Services. The Company purchases qualifying retail installment sales
contracts for manufactured homes sold through the Company's independent
exclusive dealer network and sells various commissioned insurance products
through CAC and QCIS, respectively. The following table summarizes the
operations of CAC and QCIS:
For the Year Ended December 31,
---------------------------------------------
(Dollars in Thousands) 1997 1996 1995
---------------------------------------------
Installment Loan Portfolio $ 49,146 $ 36,425 $ 19,209
Installment Loan Purchases $ 18,013 $ 19,932 $ 10,721
Financial Services Revenues - CAC $ 4,849 $ 2,991 $ 1,682
Financial Services Revenues - QCIS $ 497 $ 342 $ 82
Principal Collections $ 5,293 $ 2,716 $ 1,337
Number of Loans Outstanding 1,712 1,292 758
Weighted Average Interest Rate 10.9% 10.9% 11.3%
During the three years ended December 31, 1997, 1996 and 1995, CAC purchased
contracts totaling $18.0, $19.9 and $10.7 million, respectively, and collected
principal amounts under such installment contracts of $5.3, $2.7 and $1.3
million, respectively. At the end of 1997, 1996 and 1995, CAC held $49.1, $36.4
and $19.2 million of installment contracts receivable, respectively, and had
established allowances for credit losses of $1.3, $0.9 and $0.6 million,
respectively.
Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on restricted underwriting standards, the availability of working
capital and funds borrowed under its credit line with its primary lender. In
February 1998, CAC entered into an agreement (the "Retail Finance Agreement"),
with another lender providing for the periodic resale of a portion of CAC's
loans that meet established criteria. On March 13, 1998, CAC sold loans to this
lender having an outstanding principal amount of approximately $25 million for
cash in the approximate amount of $26 million, of which $14 million was used to
retire debt. The effect of this transaction on net income would be to reduce the
amount of financial services revenue for interest income on this portion of the
portfolio, offset by reduced interest expense on retired debt and earnings on
the remaining proceeds. The Company believes the periodic sale of installment
contracts receivable under the Retail Finance Agreement will reduce requirements
for both working capital and borrowings, increase the Company's liquidity,
reduce the Company's exposure to interest rate fluctuations and enhance the
ability of CAC to increase its volume of loan purchases. * There can be no
assurance, however, that additional sales will be made under this agreement, or
that CAC and the Company will be able to realize the expected benefits from such
agreement. *
19
Liquidity and Capital Resources
As of December 31, 1997, 1996 and 1995, the Company had working capital of
$28.5, $24.7 and $22.2 million, respectively. The 1997 working capital increase
of $3.8 million was due primarily to net long-term borrowings of $2.8 million,
$2.1 million proceeds from the sale of common stock, installment loan
collections of $5.3 million and net cash provided by operating activities of
$23.2 million for the year, reduced by $10.2 million in capital expenditures and
$18.0 million in installment loan purchases. Working capital during 1996
increased $2.5 million due primarily to net cash provided by operating
activities of $33.7 million, $2.7 million in installment loan collections, $12.0
million of proceeds from the sale of common stock and $4.5 million from the
exercise of stock options, reduced by capital expenditures of $16.1 million,
installment loan purchases of $19.9 million, net long-term debt repayments of
$3.0 million and $8.5 million for the purchase of Bellcrest. Capital
expenditures included normal property, plant and equipment additions and
replacements. In addition to the Bellcrest purchase, the Company opened four
additional facilities in 1996, one each located in Mineral Wells, Texas and
Hamilton, Alabama, and two in Conway, Arkansas. During 1997, the Company
acquired a facility in Graham, Texas.
The ratio of current assets to current liabilities for the three years ended
December 31, 1997, 1996, and 1995 was 1.5 to 1, 1.4 to 1 and 1.5 to 1,
respectively.
The Company entered into a credit agreement (the "Credit Facility") with its
primary lender in February 1994 and later amended it in March of 1996. The
facility presently consists of a $23 million revolving, warehouse and term-loan
agreement. The Credit Facility contains a revolving line of credit which
provides for borrowings (including letters of credit) of up to 80% and 50% of
the Company's eligible (as defined) accounts receivable and inventories,
respectively, up to a maximum of $5 million. Interest is payable under the
revolving line of credit at the bank's prime rate. The warehouse and term-loan
agreements contained in the Credit Facility provide for borrowings of up to 80%
of the Company's eligible (as defined) installment sales contracts, up to a
maximum of $18 million. Interest on the term notes is fixed for a period of five
years from issuance at a rate based on the weekly average yield on five-year
treasury securities averaged over the preceding 13 weeks, plus 2%, with a
floating rate for the remaining two years (subject to certain limits) equal to
the bank's prime rate plus .75%. The warehouse component of the Credit Facility
provides for borrowings of up to $2 million with interest payable at the bank's
prime rate plus 1%. Under the Credit Facility, $12.7 million was outstanding at
December 31, 1997, and $3.9 million was outstanding at December 31, 1996. The
Credit Facility contains certain restrictive covenants which limit, among other
things, the Company's ability to (i) make dividend payments and purchases of
treasury stock in an aggregate amount which exceeds 50% of consolidated net
income for the two most recent years, (ii) mortgage or pledge assets which
exceed, in the aggregate, $1 million without written notice to the lender, (iii)
incur additional indebtedness, including lease obligations, which exceed in the
aggregate $2.5 million and (iv) make capital expenditures in excess of $6
million. In addition, the Credit Facility contains certain financial covenants
requiring the Company to maintain on a consolidated basis certain defined levels
of net working capital (at least $3.5 million), tangible net worth (which must
increase at least $2 million per year, subject to a carryover for increases in
excess of $2 million in the prior year), debt to equity ratio (not to exceed 2
to 1) and cash flow to debt service ratio (not less than 1.5 to 1). The Credit
Facility also requires CAC to comply with certain specified restrictions and
financial covenants.
The Company has received a commitment from its primary lender for a two-year
renewal amendment to the Credit Facility, which currently expires in April 1998,
providing for borrowings of up to $35 million. The renewal provides for a
revolving line of credit with a maximum of $10 million (an increase from $5
million) and a warehouse line of $25 million (an increase from $18 million) and
includes a fixed rate term-loan feature. The Company currently does not expect a
material change to the restrictive and financial covenants included in the
Credit Facility. *
The Company's growth strategy currently includes the continued expansion of
financial services, component supply operations, and its independent dealer
network and the pursuit of additional acquisitions. The Company may also utilize
funds in the acquisition or establishment of retail sales centers. Accordingly,
it is likely that the Company will incur additional debt, or other forms of
financing, in order to continue to fund the pursuit of such growth strategies. *
The Company currently believes existing cash and investment balances (which
include proceeds from the sale of a portion of its installment loan portfolio
described above) and funds available under the Credit Facility, together with
cash provided by operations, will be adequate to fund the Company's operations
and plans for the next twelve months. * In order to provide additional funds for
continued pursuit of the Company's growth strategies and for operations, the
Company may incur, from time to time, additional short and long-term bank
indebtedness and may issue, in public or private transactions, its equity and
debt securities, the availability and terms of which will depend upon market and
other conditions. * The Company may continue to engage in other transactions,
such as selling or securitizing all or portions of its installment loan
portfolio, that are designed to facilitate the ability of the Company to
20
originate an increased volume of loans and to reduce the Company's exposure to
interest rate fluctuations. * The Company has recently entered into such a
transaction pursuant to the Retail Finance Agreement described above under
"Results of Operations--Financial Services." There can be no assurance that such
possible additional financing, or the aforementioned potential transactions
involving the Company's installment loan portfolio, will be available on terms
acceptable to the Company. It is possible that a future lack of financing or a
prolonged downturn in industry conditions could cause the Company to curtail the
expansion of financial services or otherwise alter its growth strategies. *
Impact of Inflation
The Company generally has been able to increase its selling prices to offset
increased costs, including the costs of raw materials. Sudden increases in costs
as well as price competition can affect the ability of the Company to increase
its selling prices. The Company believes that the relatively moderate rate of
inflation over the past several years has not had a significant impact on its
sales or profitability, but can give no assurance that this trend will continue
in the future. *
Impact of Accounting Statements
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
adoption of the provisions of this Statement is expected to result only in
increased disclosures on segment information and will not impact the amounts in
the financial statements.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
Company plans on completing the testing process of all significant applications
by December 31, 1998. In addition, the Company has initiated communcations with
others with whom it does significant business to determine their Year 2000
Compliance readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues.
The total cost to the Company of these Year 2000 Compliance activities is not
expected to exceed $0.3 million in any given year. * These costs and the date on
which the Company plans to complete the Year 2000 modification and testing
processes are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Selected Quarterly Financial Data (Unaudited)
The table contained on the following page sets forth certain unaudited quarterly
financial data for the two years ended December 31, 1997 and 1996. The Company
believes that the following quarterly financial data includes all adjustments
necessary for a fair presentation, in accordance with generally accepted
accounting principles. The following quarterly financial data should be read in
conjunction with the other financial information contained elsewhere in this
report. The operating results for any interim period are not necessarily
indicative of results for a complete year or for any future period.
21
Fourth Quarter Third Quarter Second Quarter First Quarter Total
----------------- -------------- ----------------- ------------------ -------------
(in thousands, except per share amounts)
1997
Revenues:
Net sales $ 131,865 $ 138,276 $ 159,629 $ 126,072 $ 555,842
Financial services 1,526 1,382 1,296 1,142 5,346
--------------- -------------- --------------- --------------- ---------------
Total revenues 133,391 139,658 160,925 127,214 561,188
Gross profit 22,985 23,598 26,662 21,194 94,439
Net income (4,165) b 3,639 6,880 a 3,893 10,247 a,b
Basic net income per share (.21) b .18 .35 a .20 .52 a,b
Diluted net income per share (.21) b .18 .34 a .19 .51 a,b
1996
Revenues:
Net sales $ 152,436 $ 145,264 $ 151,065 $ 125,073 $ 573,838
Financial services 1,074 867 772 620 3,333
--------------- -------------- --------------- --------------- ---------------
Total revenues 153,510 146,131 151,837 125,693 577,171
Gross profit 25,098 24,341 24,980 20,450 94,869
Net income 7,938 c 6,964 7,064 5,513 27,479 c
Basic net income per share d .40 c .35 .37 .30 1.42 c
Diluted net income per share d .40 c .35 .36 .29 1.39 c
The sum of quarterly amounts may not equal the annual amounts due to rounding.
a Includes a non-recurring gain of $1,500 or $.08 per share Basic, and $.07 Diluted from life insurance proceeds.
b Includes non-recurring charges of $8,447, comprised of $1,088 recorded in connection with conforming Belmont's
contractual warranty and repurchase arrangements to Cavalier's and $7,359 of non-recurring merger and related
costs ($6,526 net of taxes, or $.33 per share Basic and Diluted.)
c Includes a non-recurring gain of $1,750 or $.09 per share Basic and Diluted from life insurance proceeds.
d Adjusted for all applicable stock splits.
Prior amounts have been restated due to the December 31, 1997 Belmont Merger,
which was accounted for as a pooling of interests. Previously reported amounts
for the individual companys' net sales, total revenues and gross profit have
been adjusted for the effect of former equity investments in unconsolidated
joint ventures which are now consolidated subsidiaries and for reclassification
of certain Belmont amounts to conform to Cavalier's presentation.
22
CAVALIER HOMES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Consolidated Financial Statements and Schedule
Page Numbers
Independent Auditor's Report 24
Consolidated Balance Sheets 25
Consolidated Statements of Income 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30
Schedule -
II - Valuation and Qualifying Accounts 43
Schedules I, III, IV and V have been omitted because they are either not
required or are inapplicable.
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Cavalier Homes, Inc.:
We have audited the consolidated balance sheets of Cavalier Homes, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the index at Item 8. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. The
consolidated financial statements give retroactive effect to the merger of the
Company and Belmont Homes, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. We
did not audit the consolidated balance sheet of Belmont Homes, Inc. as of
December 31, 1996, or the related consolidated statements of income,
stockholders' equity, and cash flows of Belmont Homes, Inc. for the years
ended December 31, 1996 and 1995, which statements reflect total assets of
$79,355,000 as of December 31, 1996, and total revenues of $227,817,000 and
$148,304,000 for the years ended December 31, 1996 and 1995, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Belmont
Homes, Inc. for 1996 and 1995, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cavalier Homes, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Birmingham, Alabama
February 17, 1998 (March 13, 1998 as to the amendment to the Credit Facility
described in Note 5)
24
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 37,276 $ 29,751
Certificates of deposit, maturing within one year 4,000 8,243
Marketable securities available for sale 1,097
Accounts receivable, less allowance for losses of
$1,175 (1997) and $837 (1996) (Notes 5 and 10) 8,449 11,361
Notes and installment contracts receivable - current
(Notes 4 and 5) 1,561 1,086
Inventories (Note 5) 29,697 28,172
Deferred income taxes (Note 8) 7,240 6,482
Other current assets 1,292 3,390
----------- ----------
Total current assets 89,515 89,582
----------- ----------
PROPERTY, PLANT AND EQUIPMENT (Note 5):
Land 2,159 1,921
Buildings and improvements 37,011 30,726
Machinery and equipment 32,213 29,255
----------- ----------
71,383 61,902
Less accumulated depreciation and amortization 17,949 12,048
----------- ----------
Total property, plant and equipment, net 53,434 49,854
----------- ----------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $1,272 (1997) and
$941 (1996) (Notes 4 and 5) 46,614 34,504
----------- ----------
GOODWILL, less accumulated amortization
of $3,102 (1997) and $1,947 (1996) (Note 3) 19,551 20,706
----------- ----------
OTHER ASSETS 2,440 1,741
----------- ----------
TOTAL $ 211,554 $ 196,387
=========== ==========
See notes to consolidated financial statements.
25
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 3,271 $ 10,046
Accounts payable 9,575 12,063
Amounts payable under dealer incentive programs 14,614 13,853
Accrued compensation and related withholdings 4,294 6,037
Estimated warranties 11,700 10,566
Accrued merger and related costs (Note 1) 5,178
Other accrued expenses 12,399 12,271
--------- --------
Total current liabilities 61,031 64,836
--------- --------
DEFERRED INCOME TAXES (Note 8) 297 1,942
--------- --------
LONG-TERM DEBT (Note 5) 15,808 6,227
--------- --------
OTHER LONG-TERM LIABILITIES 867 730
--------- --------
STOCKHOLDERS' EQUITY (Notes 5, 6 and 7):
Series A Junior Participating Preferred Stock, $.01 par value; 200,000 shares
authorized, none issued
Preferred stock, $.01 par value; 300,000 shares authorized,
none issued
Common stock, $.10 par value; authorized 50,000,000 shares,
issued 19,941,357 (1997) and 19,742,328 (1996) shares 1,994 1,974
Additional paid-in capital 57,228 55,126
Retained earnings 74,329 65,552
---------- ---------
Total stockholders' equity 133,551 122,652
---------- ---------
TOTAL $ 211,554 $ 196,387
========== =========
See notes to consolidated financial statements.
26
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1997 1996 1995
REVENUES:
Net sales $ 555,842 $ 573,838 $ 420,790
Financial services 5,346 3,333 1,764
---------------- ---------------- ----------------
561,188 577,171 422,554
---------------- ---------------- ----------------
COST OF SALES (Note 10) 466,749 482,302 354,811
SELLING, GENERAL AND ADMINISTRATIVE (Notes 7 and 9):
Manufacturing 66,825 51,946 37,909
Financial services 3,174 2,076 1,126
NON-RECURRING MERGER AND RELATED COSTS (Note 1) 7,359
---------------- ---------------- ----------------
544,107 536,324 393,846
---------------- ---------------- ----------------
OPERATING PROFIT 17,081 40,847 28,708
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense:
Manufacturing (699) (353) (832)
Financial services (812) (492) (501)
Life insurance proceeds 1,500 1,750
Other, net 1,269 2,434 1,423
---------------- ---------------- ----------------
1,258 3,339 90
---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 18,339 44,186 28,798
INCOME TAXES (Note 8) 8,092 16,707 11,168
---------------- ---------------- ----------------
NET INCOME $ 10,247 $ 27,479 $ 17,630
================ ================ ================
BASIC NET INCOME PER SHARE (Notes 2 and 6) $ 0.52 $ 1.42 $ 1.06
================ ================ ================
DILUTED NET INCOME PER
SHARE (Notes 2 and 6) $ 0.51 $ 1.39 $ 1.03
================ ================ ================
WEIGHTED AVERAGE SHARES
OUTSTANDING (Notes 2 and 6) 19,834,942 19,362,944 16,629,523
================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING,
ASSUMING DILUTION (Notes 2 and 6) 20,028,181 19,799,492 17,056,945
================ ================ ================
See notes to consolidated financial statements.
27
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Treasury
Additional Stock - At
Common Paid-in Retained Average
Stock Capital Earnings Cost Total
BALANCE, JANUARY 1, 1995 $ 1,663 $ 17,719 $ 22,435 $ (50) $ 41,767
Sale of common stock to public 157 15,126 15,283
Treasury stock reissued and common stock issued
in connection with a purchase option 1 413 50 464
Stock options exercised (Note 7) 9 689 698
Income tax benefits attributable to exercise
of stock options (Note 7) 281 281
Other (215) (215)
Cash dividends paid ($.04 per share) (637) (637)
Dividends on preferred stock (152) (152)
Net income 17,630 17,630
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 1,830 34,013 39,276 $ - 75,119
Sale of common stock to public 64 11,661 =========== 11,725
Stock options exercised (Note 7) 73 4,419 4,492
Income tax benefits attributable to exercise of
stock options (Note 7) 3,692 3,692
Sale of common stock under Employee Stock
Purchase Plan (Note 7) 2 238 240
Common stock issued in connection with
acquisitions 5 887 892
Accrued compensation 216 216
Cash dividends paid ($.06 per share) (1,203) (1,203)
Net income 27,479 27,479
---------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1996 1,974 55,126 65,552 122,652
Stock options exercised (Note 7) 7 7
Sale of common stock under Employee Stock
Purchase Plan (Note 7) 5 425 430
Sale of common stock under Dividend
Reinvestment Plan (Note 7) 17 1,653 1,670
Accrued compensation 172 172
Cash dividends paid ($.07 per share) (1,470) (1,470)
Retirement of common stock (2) (155) (157)
Net income 10,247 10,247
---------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1997 $ 1,994 $ 57,228 $ 74,329 $ 133,551
========== ========== ========== =========
See notes to consolidated financial statements.
28
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES:
Net income $ 10,247 $ 27,479 $ 17,630
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,492 5,760 3,757
Provision for credit losses and repurchase commitments 669 389 301
(Gain) loss on sale of property, plant and equipment 340 (144) 23
Equity in net income of unconsolidated affiliates (98) (289) (237)
Minority interest in net income (loss) of consolidated subsidiaries 137 (20)
Compensation related to issuance of stock options 172 216
Changes in assets and liabilities provided (used) cash, net of
effects of acquisitions:
Accounts receivable 2,574 (672) (1,437)
Inventories (488) (8,021) (1,366)
Accounts payable (3,310) (146) 1,669
Amounts payable under dealer incentive programs 761 4,508 2,174
Accrued compensation and related withholdings (1,743) 1,188 929
Estimated warranties 1,134 1,744 1,897
Other assets and liabilities 5,361 1,695 1,944
---------- ---------- ----------
Net cash provided by operating activities 23,248 33,687 27,284
---------- ---------- ----------
INVESTING ACTIVITIES:
Net cash paid in connection with acquisitions (871) (8,515) (2,592)
Proceeds from sale of property, plant and equipment 122 228 63
Capital expenditures (10,186) (16,106) (13,482)
Purchases of certificates of deposit (8,000) (16,114) (8,717)
Maturities of certificates of deposit 12,243 14,588 2,000
Purchases of marketable securities (1,004)
Proceeds from sale or maturity of marketable securities 1,097 2,479 3,210
Purchases and originations of notes and installment contracts (19,562) (19,932) (10,721)
Principal collected on notes and installment contracts 6,015 2,716 1,337
Cash restricted for construction 521 1,548
Other 133 95 38
---------- ---------- ----------
Net cash used in investing activities (19,009) (40,040) (28,320)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 25,263 9,650 2,000
Payments on long-term debt (22,456) (12,610) (13,562)
Net proceeds from sales of common stock 2,099 11,965 15,283
Proceeds from exercise of stock options 7 4,492 698
Cash dividends paid (1,470) (1,203) (637)
Retirement of preferred stock, including dividends (1,052)
Retirement of common stock (157)
Other 750
---------- ---------- ----------
Net cash provided by financing activities 3,286 13,044 2,730
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,525 6,691 1,694
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,751 23,060 21,366
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 37,276 $ 29,751 $ 23,060
========== ========== ==========
See notes to consolidated financial statements.
29
CAVALIER HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. BUSINESS COMBINATION AND BASIS OF PRESENTATION
On December 31, 1997, Belmont Homes, Inc. ("Belmont") was merged with and
into a subsidiary of Cavalier Homes, Inc. ("Cavalier"), and 7,555,121
shares of Cavalier's common stock were issued in exchange for all of the
outstanding common stock of Belmont. The merger was accounted for as a
pooling of interests, and, accordingly, the accompanying financial
statements have been restated to include the financial position, results
of operations and cash flows of Belmont for all periods presented.
Revenues and net income for the separate companies, and the combined
amounts presented in the consolidated financial statements are as follows
(in thousands, excluding non-recurring merger and related costs in 1997):
1997 1996 1995
Revenues:
Cavalier $ 336,343 $ 349,354 $ 274,250
Belmont 224,845 227,817 148,304
-------------- --------------- --------------
Combined $ 561,188 $ 577,171 $ 422,554
============== =============== ==============
Net income:
Cavalier $ 10,428 $ 15,366 $ 9,020
Belmont 5,688 12,113 8,610
-------------- -------------- --------------
Combined $ 16,116 $ 27,479 $ 17,630
============== =============== ==============
Certain amounts from Belmont's prior financial statements have been
reclassified to conform to Cavalier's presentation.
In connection with the merger, Cavalier recorded charges of $7.4 million
in the quarter ended December 31, 1997. These charges are nonrecurring and
include $2.5 million from the earn-out provision contained in the Stock
Purchase Agreement between Belmont and the shareholders of Bellcrest, $0.9
million for severance costs associated with the consolidation of certain
administrative functions, $3.1 million for printing, investment banking,
legal, accounting and other fees, and $0.9 million for other costs
associated with combining and realigning the operations of the two
companies. Of the merger and related costs of $7.4 million, $5.2 million
is recorded as an accrued liability in the consolidated balance sheet at
December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Cavalier Homes, Inc. and its wholly-owned and
majority-owned subsidiaries (hereinafter collectively referred to as the
"Company"). The Company's minority ownership interests in various joint
ventures are accounted for using the equity method and are included in
other assets in the accompanying consolidated balance sheets. Intercompany
profits, transactions and balances have been eliminated in consolidation.
Nature of Operations - The Company designs and manufactures a wide range
of high quality manufactured homes which are sold to a network of
independent dealers located primarily in the southeast, southwest and
midwest regions of the United States. In addition, through its financial
services segment, the Company offers retail installment sale financing and
related insurance products for manufactured homes sold through the
Company's independent exclusive dealer network.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
30
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingencies at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from
those estimates.
Fair Value of Financial Instruments - The carrying value of the Company's
cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short-term maturity of
those instruments. Additional information concerning the fair value of
other financial instruments is disclosed in Notes 4 and 5.
Cash Equivalents - The Company considers all highly liquid investments
with original maturities of 90 days or less to be cash equivalents.
Marketable Securities - Marketable securities have been classified as
available for sale in the consolidated balance sheet according to
management's intent. Marketable securities are stated at fair value of
$1,097 at December 31, 1996. The Company had no amounts invested in
marketable securities at December 31, 1997.
Inventories - Inventories consist primarily of raw materials and are
stated at the lower of cost (first-in, first-out method) or market. During
1997, 1996, and 1995, the Company purchased raw materials of approximately
$10,573, $11,645 and $7,900, respectively, from certain joint ventures
referred to previously.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost and depreciated primarily over the estimated useful lives of the
related assets using the straight-line method. Maintenance and repairs are
expensed as incurred. The Company paid or accrued $270, $73 and $690 in
1997, 1996 and 1995, respectively, for construction of plant facilities to
a company in which a stockholder and director of the Company is also a
stockholder.
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired and is being amortized over 15 to 25
years using the straight-line method.
If facts and circumstances indicate that goodwill may be impaired, an
assessment will be made by the Company to determine if a writedown is
required or if its estimated useful life should be revised. The assessment
will be based primarily on forecasted operating income, including interest
expense, depreciation and amortization other than goodwill; supplemented
if necessary by an independent appraisal of fair value. The Company
believes that no impairment of goodwill has occurred and that no revision
of its estimated useful life is required.
Revenue Recognition - Sales of manufactured homes to independent dealers
are recorded as of the date the home is shipped to the dealer, with the
exception of one of the Company's subsidiaries which employs drivers to
deliver its homes; accordingly, sales are recorded upon delivery (at which
time title passes) by this subsidiary. All sales are final and without
recourse except for the contingency described in Note 10. Interest income
on installment contracts receivable is recognized using the interest
method.
Product Warranties - The Company provides a one-year limited warranty
covering defects in material or workmanship in home structure, plumbing
and electrical systems. A liability is provided for estimated future
warranty costs relating to homes sold, based upon management's assessment
of historical experience factors and current industry trends.
Allowance for Losses on Installment Contracts - The Company has provided
an allowance for estimated future losses resulting from retail financing
activities of Cavalier Acceptance Corporation ("CAC"), a wholly-owned
subsidiary, primarily based upon management's assessment of historical
experience and current industry trends.
Insurance - The Company's workmen's compensation, product liability and
general liability insurance coverages (with the exception of Belmont whose
insurance is provided under fully insured policies) are provided under
incurred loss, retrospectively rated premium plans. Under this plan, 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
when sufficiently reliable data is available in accordance with the
consensus reached in Emerging Issues Task Force Issue No. 93-14,
Accounting for Multiple-Year Retrospectively Rated Insurance Contracts by
Insurance Enterprises and Other Enterprises.
31
Net Income Per Share - During February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings per Share, which is effective for all
financial statements issued for periods ending after December 15, 1997,
including interim periods. In accordance with this Standard, the Company
is now required to report two separate earnings per share numbers, basic
and diluted. Both are computed by dividing net income by the weighted
average common shares outstanding (basic EPS) or weighted average common
shares outstanding assuming dilution (diluted EPS) as detailed below (in
thousands of shares):
1997 1996 1995
Weighted average common shares outstanding 19,835 19,363 16,630
Dilutive effect of stock options and warrants 193 436 427
------------ ----------- -----------
Weighted average common shares outstanding,
assuming dilution 20,028 19,799 17,057
============ =========== ===========
Accounting Standard Not Yet Adopted - In June 1997, the FASB issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 1997. The adoption of the
provisions of this Statement is expected to result only in increased
disclosures on segment information and will not impact the amounts in the
financial statements.
Reclassifications - Certain amounts from the prior periods have been
reclassified to conform to the 1997 presentation.
3. ACQUISITIONS
On October 24, 1996, in a transaction accounted for using the purchase
method of accounting, the Company completed its purchase of 100% of the
stock of Bellcrest Homes, Inc. ("Bellcrest") through the cash payment of
$9,500.
The effects of the acquisition at the purchase date were as follows:
Decrease in cash, net $ 7,145
Increase in other current assets 3,422
Increase in property, plant and equipment 3,525
Increase in goodwill and other assets 6,762
Increase in current liabilities 4,756
Increase in long-term debt and deferred income taxes 1,808
The following unaudited pro forma data is provided for comparative
purposes and are not necessarily indicative of actual results that would
have been achieved had the acquisition of Bellcrest been consummated at
an earlier date and are not necessarily indicative of future results.
Assuming that the acquisition was consummated on January 1, 1995,
unaudited pro forma revenues, net income and diluted net income per
share, after giving effect to certain adjustments, including
amortization of goodwill and other assets, increased interest expense on
debt related to the acquisition, increased depreciation expense, and
related income tax effects, for the years ended December 31, 1996 and
1995 follow:
1996 1995
Revenues $ 607,056 $ 450,718
Net income 27,570 17,756
Diluted net income per share 1.39 1.04
Under the terms of the Bellcrest Stock Purchase Agreement, the Company
was required to pay the former Bellcrest shareholders additional
consideration in an amount not to exceed $3,500 in the aggregate in the
32
event Bellcrest attained certain stated levels of earnings before income
taxes for the three-month period ended December 31, 1996 and for each of
the years ending December 31, 1997 and 1998. During 1997, the Company
paid $1,000, the amount earned and accrued for 1996, to the former
shareholders. In addition, in connection with the merger described in
Note 1, the Company paid the remaining $2,500 to the former
shareholders.
In conjunction with this acquisition, a former Bellcrest shareholder was
issued warrants for the purchase of 75,000 shares of Belmont common
stock. The warrants, which expire in October 2001, are exercisable at
$14.66 per share and their fair value at the issue date was estimated to
be negligible. None of these warrants have been exercised as of December
31, 1997. In connection with the merger, these warrants were converted
to warrants to purchase 60,000 shares of Cavalier common stock at an
exercise price of $18.34 per share.
In October 1995 the Company acquired, in a transaction accounted for
using the purchase method of accounting, all the outstanding common
stock of Spirit Homes, Inc. ("Spirit") for $9,800, consisting of cash of
$2,450 and debt of $7,350.
The following unaudited pro forma data are provided for comparative
purposes and are not necessarily indicative of actual results that would
have been achieved had the acquisition of Spirit been consummated at an
earlier date and are not necessarily indicative of future results.
Assuming that the acquisition was consummated on January 1, 1995,
unaudited pro forma revenues, net income and diluted net income per
share, after giving effect to certain adjustments, including
amortization of goodwill and other assets, increased interest expense on
debt related to the acquisition, increased depreciation expense, and
related income tax effects, for the year ended December 31, 1995 follow:
Revenues $460,378
Net income 18,618
Diluted net income per share 1.09
4. INSTALLMENT CONTRACTS RECEIVABLE
CAC does not exclusively finance sales for any dealer; all dealers have
other financing sources available to offer to their retail customers.
Standard loan programs require minimum down payments, ranging from 0% to
20% of the purchase price of the home, on all installment contracts based
on the creditworthiness of the borrower. In addition, CAC requires the
borrower to maintain adequate insurance on the home throughout the life of
the contract. Contracts are secured by the home which is subject to
repossession by CAC upon default by the borrower.
CAC's portfolio consists of fixed rate contracts with interest rates
generally ranging from 9.25% to 14.0% at December 31, 1997 and 1996. The
average original term of the portfolio was approximately 217 and 208
months at December 31, 1997 and 1996, respectively.
Estimated principal payments under installment contracts receivable are as
follows:
Year Ending December 31,
1998 $ 1,254
1999 1,398
2000 1,559
2001 1,738
2002 1,938
Thereafter 41,259
---------
Total $ 49,146
=========
33
Activity in the allowance for losses on installment contracts was as
follows:
1997 1996 1995
Balance, beginning of year $ 941 $ 551 $ 350
Provision for losses 1,329 778 311
Charge-offs, net (998) (388) (110)
------- ------- -------
Balance, end of year $ 1,272 $ 941 $ 551
======= ======= =======
On February 17, 1998, the Company reached an agreement to sell
approximately $25 million of its existing loan portfolio at a premium.
At December 31, 1997 and 1996, the estimated fair value of installment
contracts receivable was $50,103 and $36,205, respectively. These fair
values were estimated using current market value for the $25,000
previously noted and discounted cash flows and interest rates offered by
CAC on similar contracts at the time for the remaining portfolio.
5. CREDIT ARRANGEMENTS
The Company has a $23,000 revolving, warehouse and term-loan agreement
(the "Credit Facility") with its primary bank, whose president is a
director of the Company. The Credit Facility contains a revolving line of
credit which provides for borrowings (including letters of credit) of up
to 80% and 50% of the Company's eligible (as defined) accounts receivable
and inventories, respectively, up to a maximum of $5,000. Interest is
payable under the revolving line of credit at the bank's prime rate (8.50%
and 8.25% at December 31, 1997 and 1996, respectively). No amounts were
outstanding under the revolving line of credit at December 31, 1997 or
1996.
The warehouse and term-loan agreement contained in the Credit Facility
provide for borrowings of up to 80% of the Company's eligible (as defined)
installment sale contracts, up to a maximum of $18,000. Interest on term
notes is fixed for a period of five years from issuance at a rate based on
the weekly average yield on five-year treasury securities averaged over
the preceding 13 weeks, plus 2%, and floats for the remaining two years at
a rate (subject to certain limits) equal to the bank's prime rate plus
.75%. The warehouse component of the Credit Facility provides for
borrowings of up to $2,000 with interest payable at the bank's prime rate
plus 1%. However, in no event may the aggregate outstanding borrowings
under the warehouse and term-loan agreement exceed $18,000. Under the
Credit Facility, $50 was outstanding under the warehouse component at
December 31, 1997, and $12,694 and $3,866 was outstanding under the term
loan portion at December 31, 1997 and 1996, respectively.
The Credit Facility contains certain restrictive and financial covenants,
which, among other things, limit the aggregate of dividend payments and
purchases of treasury stock to 50% of consolidated net income for the two
most recent years, contain restrictions on the Company's ability to pledge
assets, incur additional indebtedness and make capital expenditures, and
require the Company to maintain certain defined financial ratios. Amounts
outstanding under the Credit Facility are secured by the accounts
receivable and inventories of the Company, loans purchased and originated
by CAC, and the capital stock of certain of the Company's consolidated
subsidiaries. The bank's commitment under the Credit Facility will expire
in April 1998.
On March 13, 1998, the Company reached an agreement with its primary bank
to extend its Credit Facility for an additional two years and to increase
available borrowings to $35,000. The renewal provides for a revolving line
of credit with a maximum of $10,000 (an increase from $5,000) and a
warehouse line of $25,000 (an increase from $18,000) which includes a
fixed rate term-loan feature. Terms and restrictive covenants are
substantially the same as the expiring agreement.
The Company has other lines of credit with banks totaling $9,000 which
expire at various dates through July, 1998. Amounts outstanding under
these facilities totaled $1,000 and $8,600 at December 31, 1997 and 1996,
respectively. Interest rates under these lines range from prime to prime
plus 2%.
The Company has amounts outstanding under three Industrial Development
Revenue Bond issues ("Bonds") of $4,442 and $1,044 at December 31, 1997
and 1996, respectively. Two of the bond issues bear interest at variable
rates ranging from 4.0% to 5.4% and mature at various dates through
November 2007. One of the bond issues is payable in equal monthly
installments and bears interest at 75% of the prime rate. The bonds are
collateralized by certain plant facilities.
34
The Company has a term-loan with a balance of $887 and $960 at December
31, 1997 and 1996, respectively, bearing interest at 7.95%, payable in
equal monthly installments through April, 2006.
At December 31, 1996, the Company's other long-term debt, with an
outstanding balance of $1,796, consisted of various fixed and variable
rate term loans bearing interest at rates ranging from 8.25% to 9.25%.
These notes were paid in 1997.
Principal repayment requirements on long-term debt are as follows:
Year Ending December 31,
1998 $ 3,271
1999 2,452
2000 2,648
2001 2,594
2002 2,332
Thereafter 5,782
-------
Total 19,079
Less current portion 3,271
-------
Long-term debt $ 15,808
========
The estimated fair value of outstanding borrowings was $19,261 and $16,111
at December 31, 1997 and 1996, respectively. These estimates were
determined using rates at which the Company believes it could have
obtained similar borrowings at that time.
Cash paid for interest during the years ended December 31, 1997, 1996 and
1995 was $1,445, $910 and $1,619, respectively.
The Company and certain of its equity partners have jointly and severally
guaranteed revolving notes for two companies and a letter of credit for
one company in which the Company owns various equity interests. The
guarantees are limited to various percentages of the outstanding debt up
to a maximum guaranty of $1,500. At December 31, 1997, $3,000 was
outstanding under the various guarantees, of which the Company had
guaranteed $720.
6. STOCKHOLDERS' EQUITY
During the years ended December 31, 1996 and 1995, the Company's Board of
Directors declared the following stock splits of the Company's common
stock. All applicable share and per share data have been restated to give
effect to all stock splits.
Declaration Stock Record Distribution
Date Split Date Date
July 17, 1995 5 for 4 July 31, 1995 August 15, 1995
January 22, 1996 3 for 2 January 31, 1996 February 15, 1996
October 16, 1996 5 for 4 October 31, 1996 November 15, 1996
The Company has adopted a Stockholder Rights Plan. The terms and
conditions of the plan are set forth in a Rights Agreement dated October
23, 1996 between the Company and its Rights Agent. Pursuant to the plan,
the Board of Directors of the Company declared a dividend of one Right (as
defined in the Rights Agreement) for each share of the Company's
outstanding common stock to stockholders of record on November 6, 1996.
The Rights, when exercisable, entitle the holder to purchase a unit of
0.80 one-hundredth share of Series A Junior Participating Preferred Stock,
par value $.01, at a purchase price of $80 per share. Upon certain events
relating to the acquisition of, or right to acquire, beneficial ownership
of 20% or more of the Company's outstanding common stock by a third party,
or a change in control of the Company, the Rights entitle the holder to
acquire, after the Rights are no longer redeemable by the Company, shares
of common stock of the Company (or, in certain cases, securities of an
acquiring person) for each Right held at a significant discount. The
Rights will expire on November 6, 2006, unless redeemed earlier by the
35
Company at $.01 per Right under certain circumstances. In connection with
the merger, Belmont shareholders received one Right (as defined in the
Rights Agreement) with respect to each Cavalier share received pursuant to
the Merger Agreement.
In June 1995, Belmont completed an initial public offering of
approximately 1,570,000 (before stock split) shares of common stock. The
net proceeds of approximately $15,283 were used to retire debt and
preferred stock and for working capital. In January 1996, Belmont
completed another public offering of approximately 640,000 (before stock
split) shares of common stock. The net proceeds of approximately $11,725
were used to retire debt and for working capital.
Supplemental diluted net income per share for 1996 and 1995, based on net
income after adjustment for dividends on preferred stock and the after tax
effect of interest expense on debt repaid with proceeds of the above
offerings, and on the weighted average shares of common stock outstanding
for 1996 and 1995, giving effect to the number of shares sold in the
offerings, the proceeds of which were used to repay such preferred stock
and debt, is as follows assuming the transactions were effective on
January 1, 1995:
1996 1995
Net income, as adjusted $ 27,526 $ 18,072
========== ==========
Diluted net income per share $ 1.39 $ 0.98
========== ==========
Weighted average shares outstanding,
assuming dilution 19,868,292 18,364,945
========== ==========
7. STOCK PLANS
Dealership Stock Option Plan -
- During 1995, the Company's Board of Directors approved the
Dealership Stock Option Plan of Cavalier Homes, Inc. (the "Dealer
Plan"), under which an aggregate of 562,500 shares of the Company's
common stock may be issued to the eligible independent dealerships
(as defined in the Dealer Plan) at a price equal to the fair market
value of the Company's common stock as of a date during the calendar
quarter determined by the plan administrator for which such option is
to be granted. Options granted under the Dealer Plan are immediately
exercisable and expire three years from the grant date. Since these
options have been granted to persons other than employees, the
Company adopted the recognition and measurement provisions of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), for Dealer Plan options
granted after December 15, 1995.
Employee and Director Plans:
- The Company adopted and the shareholders approved the 1996 Key
Employee Stock Incentive Plan (the "1996 Plan") which provides for
both incentive stock options and non-qualified stock options.
Additionally, the 1996 Plan provides for stock appreciation rights
and awards of both restricted stock and performance shares. Options
are granted at prices and terms determined by the compensation
committee (or, in certain circumstances, a separate sub-committee) of
the Board of Directors. As of December 31, 1997, the aggregate number
of shares available under the 1996 Plan was 1,461,701 (including
57,965 shares canceled from the Company's 1993 Non-qualified Stock
Option Plan and 471,200 shares made available in connection with the
Belmont merger). On January 1 of each year, an additional 1.5% of the
then outstanding common stock becomes available for grant. Options
granted under the 1996 Plan generally expire ten years from the date
of grant.
- During 1996, the Company further amended the 1993 Amended and
Restated Non-employee Directors Plan (the "1993 Non-employee
Directors Plan") to provide for the issuance of stock options, at
fair market value on the date of grant, to non-employee directors to
acquire up to 625,000 shares of common stock. Options are generally
granted upon a directors initial election to the Board and
automatically on an annual basis thereafter. Options granted under
this plan are generally exercisable after six months from the date of
grant and must be exercised within ten years from such date, except
under certain conditions.
- During 1996, the Company adopted the Cavalier Homes, Inc. Employee
Stock Purchase Plan under which an aggregate of 625,000 shares of the
36
Company's common stock may be issued to eligible employees (as
defined) at a price equal to the lesser of 85% of the market price of
the stock as of the first day (January 1 or July 1) or last day (June
30 or December 31) of the Payment Periods (as defined). Employees may
elect to have a portion of their compensation withheld, subject to
certain limits, to purchase the Company's common stock.
Compensation expense recorded in connection with these plans for the years
ended December 31, 1997 and 1996 was not material.
On July 25, 1996, substantially all employee stock options granted in 1996
at prices between $15.40 and $16.60 were repriced to an exercise price of
$13.60. On January 17, 1997, substantially all employee stock options then
exerciseable at a price of $12.00 or higher were repriced to an exercise
price of $10.625. In addition, on January 17, 1997, an option issued under
the 1993 Non-employee Director's Plan to purchase 25,000 shares at $15.40
per share was canceled and reissued for 17,250 shares at $10.625 per
share.
The Company has adopted the Cavalier Homes, Inc. Dividend Reinvestment and
Stock Purchase Plan, under which the Company may issue an aggregate of
200,000 shares of the Company's common stock to eligible participants (as
defined). Participants in the Plan may purchase additional shares of the
Company's common stock by reinvesting the cash distributions on all, or
part, of their shares, or by investing both their cash distributions and
optional cash payments. The purchase price of the stock will be the higher
of 95% of the average daily high and low sale prices of the Company's
common stock on the four trading days including and preceding the
Investment Date (as defined) or 95% of the average high and low sales
prices on the Investment Date.
The Company applied Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its employee and director plans. Accordingly, no compensation expense
has been recognized for these plans except where the exercise price was
less than the fair value on the date of grant. Had compensation cost been
determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS 123, the
Company's net income and net income per share would approximate the pro
forma amounts below:
1997 1996 1995
Net income:
As reported $ 10,247 $ 27,479 $ 17,630
Pro forma $ 8,661 $ 24,888 $ 17,515
Basic net income per share:
As reported $ 0.52 $ 1.42 $ 1.06
Pro forma $ 0.44 $ 1.29 $ 1.05
Diluted net income per share:
As reported $ 0.51 $ 1.39 $ 1.03
Pro forma $ 0.43 $ 1.26 $ 1.03
The fair value of options granted were estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
1997 1996 1995
Dividend yield 1.13 % 0.66 % 1.35 %
Expected volatility 0.44 % 0.41 % 0.43 %
Risk free interest rate 6.12 % 5.99 % 6.50 %
Expected lives 3.0 years 3.0 years 3.2 years
SFAS 123 does not apply to awards prior to 1995. The effects of applying
SFAS 123 in this pro forma disclosure may not be indicative of future
amounts, and additional awards in future years are anticipated.
With respect to options exercised, the income tax benefits resulting from
compensation expense allowable under federal income tax regulations in
excess of the expense reflected in the Company's financial statements have
been credited to additional paid-in-capital. These benefits, which totaled
$-0- (1997), $3,692 (1996), and $281 (1995), represent a noncash financing
transaction for purposes of the consolidated statements of cash flows.
37
Information regarding all of the Company's stock option plans is
summarized below:
Weighted
Weighted Average
Average Fair Value
Shares Exercise Price At Grant Date
Shares under option:
Outstanding at January 1, 1995 1,206,854 $ 4.17
Granted:
Price = Fair Value 183,049 6.39 $ 2.24
Price < Fair Value 22,299 8.73 2.77
Exercised (174,804) 3.99
Cancelled (43,941) 7.09
------------
Outstanding at December 31, 1995 1,193,457 $ 4.51
Granted:
Price = Fair Value 1,640,833 14.42 $ 4.73
Price < Fair Value 28,833 13.70 3.75
Exercised (912,083) 4.92
Cancelled (489,431) 15.90
------------
Outstanding at December 31, 1996 1,461,609 $ 11.76
Granted at Fair Value 858,425 10.61 $ 3.52
Exercised (1,000) 4.27
Cancelled (564,420) 13.75
------------
Outstanding at December 31, 1997 1,754,614 $ 10.56
============ =========
Options exercisable as of December 31, 1997 1,536,986 $ 10.37
============ =========
Options exercisable as of December 31, 1996 649,947 $ 10.17
============ =========
Options exercisable as of December 31, 1995 1,076,235 $ 4.25
============ =========
Stock options available for future grants at December 31, 1997 were
1,197,516 under all of the Company's various stock option plans.
38
The following table summarizes information concerning stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$0.55 - $4.27 219,421 6.19 $ 4.00 207,833 $ 4.00
$4.43 - $10.50 218,989 7.27 8.08 173,989 7.95
$10.63 765,249 9.05 10.63 765,249 10.63
$11.25 - $13.33 273,495 7.34 13.05 116,055 12.70
$13.60 - $16.60 277,460 7.92 15.06 273,860 15.06
--------- ---------
$0.55 - $16.60 1,754,614 8.02 $ 10.56 1,536,986 $ 10.37
========= ======== ======== ========= ========
8. INCOME TAXES
Provision for income taxes consist of:
1997 1996 1995
Current:
Federal $ 9,574 $ 15,456 $ 10,904
State 921 2,258 1,223
--------- --------- --------
10,495 17,714 12,127
--------- --------- --------
Deferred:
Federal (2,368) (712) (777)
State (35) (295) (182)
--------- --------- --------
(2,403) (1,007) (959)
--------- --------- ---------
Total $ 8,092 $ 16,707 $ 11,168
========= ========= =========
Total income tax expense for 1997, 1996, and 1995 is different from the
amount that would be computed by applying the expected federal income tax
rate of 35% to income before income taxes. The reasons for this difference
are as follows:
1997 1996 1995
Income tax at expected federal income tax rate $ 6,419 $ 15,465 $ 9,941
State income taxes, net of federal tax effect 651 1,810 1,168
Non-taxable life insurance proceeds (525) (655)
Non-deductible operating expenses 387 107 171
Effect of graduated tax rates (121)
State jobs tax credits (40) (471) (344)
Non-deductible merger related expenses 1,085
Other 115 451 353
------- ------- -------
$ 8,092 $ 16,707 $ 11,168
======= ======= =======
39
Deferred tax assets and liabilities are based on the expected future tax
consequences of temporary differences between the book and tax bases of
assets and liabilities. The approximate tax effects of temporary
differences at December 31, 1997 and 1996 were as follows:
1997 1996
------------------------
Assets (Liabilities)
------------------------
Current differences:
Warranty expense $ 4,058 $ 3,358
Inventory capitalization 512 463
Allowance for losses on receivables 939 666
Accrued expenses 1,132 1,525
Other 599 470
--------- ---------
$ 7,240 $ 6,482
========= =========
Noncurrent differences:
Depreciation and basis differential
of acquired assets $ (1,796) $ (1,815)
Goodwill (726) (534)
Merger related expenses 1,331
Other 894 407
--------- ---------
$ (297) $ (1,942)
========= =========
Cash paid for income taxes for the years ended December 31, 1997, 1996 and
1995 was $10,632, $12,387 and $10,055, respectively.
9. EMPLOYEE BENEFIT PLANS
The Company has self-funded group medical plans which are administered by
third party administrators. The Plans have reinsurance coverage limiting
liability for any individual employee loss to a maximum of $75, with an
aggregate limit of losses in any one year based on the number of covered
employees. Incurred claims identified under the Company's incident
reporting system and incurred but not reported claims are funded or
accrued based on estimates that incorporate the Company's past experience,
as well as other considerations such as the nature of each claim or
incident, relevant trend factors and advice from consulting actuaries. The
Company has established self insurance trust funds for payment of claims
and makes deposits to the trust funds in amounts determined by consulting
actuaries. The cost of these plans to the Company was $5,067, $2,893 and
$2,682 for years ended December 31, 1997, 1996 and 1995, respectively.
The Company sponsors employee 401(k) retirement plans covering all
employees who meet participation requirements. Employee contributions are
limited to a percentage of compensation as defined in the Plans. The
amount of the Company's matching contribution is discretionary as
determined by the Board of Directors. Company contributions amounted to
$545, $420 and $375 for the years ended December 31, 1997, 1996 and 1995,
respectively.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases:
Five of the Company's manufacturing facilities and one component
distribution center are leased under separate operating lease agreements
(the "Related Leases") with partnerships or companies whose owners are
certain officers, directors or stockholders of the Company. The Related
Leases require monthly payments ranging from $4 to $22 and provide for
lease terms ending from July 1998 to March 2001 as well as renewal option
periods. The Related Leases also contain purchase options whereby the
Company can purchase the respective manufacturing facility for amounts
ranging from $875 to $1,900 at any time during the lease terms.
The Company also leases three other manufacturing facilities under
operating leases with unrelated parties. These leases currently require
monthly payments ranging from $3 to $14 and provide for lease terms ending
from March 1999 to June 2017 as well as renewal option periods. The
Company has the option under one of these leases to (i) cancel the lease
at any time after October 2001 with a one year notice and (ii) purchase
the manufacturing facility for $995 at any time during the lease term. The
Company also has the option under two of these leases to cancel the lease
after the first five years with 180 days and twelve months notice,
respectively.
The Company leases delivery trucks from some of its drivers who deliver
homes for dealers. Rentals for these trucks are based on a rate per mile
and the leases are cancelable by either party upon thirty days notice.
Rent expense under these leases was approximately $2,305, $3,140, and
$2,647 for the years ended December 31, 1997, 1996, and 1995,
respectively.
40
Future minimum rents payable under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December
31, 1997 are as follows:
Year Ending December 31,
1998 $ 1,087
1999 754
2000 569
2001 235
2002 149
Thereafter 441
--------
Total $ 3,235
========
Total rent expense was $1,418, $1,242 and $1,044 for the years ended
December 31, 1997, 1996 and 1995, respectively, including rents paid to
related parties of $817 (1997), $765 (1996) and $723 (1995).
Contingent Liabilities and Other:
a. It is customary practice for companies in the manufactured housing
industry to enter into repurchase and other recourse agreements with
lending institutions which have provided wholesale floor plan
financing to dealers. Substantially all of the Company's sales are
made to dealers located primarily in the southeast, southwest and
midwest regions of the United States and are pursuant to repurchase
agreements with lending institutions. These agreements generally
provide for repurchase of the Company's products from the lending
institutions for the balance due them in the event of repossession
upon a dealer's default. Although the Company is contingently
liable for an amount estimated to be $158,000 under these agreements
as of December 31, 1997, such contingency is mitigated by the fact
that (i) sales of manufactured homes are spread over a relatively
large number of dealers; (ii) the price the Company is obligated to
pay under such repurchase agreements generally declines over the
period of the agreement; and (iii) the Company may be able to reduce
its losses by the resale value of the homes which may be required to
be repurchased. The Company has an allowance for losses of $1,175
(1997) and $837 (1996) based on prior experience and current market
conditions. Management expects no material loss in excess of the
allowance.
b. Under the insurance plans described in Note 2, the Company is
contingently liable at December 31, 1997 for future retrospective
premium adjustments up to a maximum of approximately $5,700 in the
event that additional losses are reported related to prior years.
c. The Company is engaged in various legal proceedings that are
incidental to and arise in the course of its business. Certain of
the cases filed against the Company and other companies engaged in
businesses similar to the Company allege, among other things, breach
of contract and warranty, product liability, personal injury and
fraudulent, deceptive or collusive practices in connection with
their businesses. These kinds of suits are typical of suits that
have been filed in recent years, and they sometimes seek
certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. Courts have
certified several of these types of cases as class actions recently,
and many of these types of cases have resulted in large damage
awards, especially large punitive damage awards. 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.
11. INDUSTRY SEGMENT INFORMATION
The Company's primary activities are the design, production and wholesale
sale of manufactured homes to a system of independent dealers. The Company
also offers retail financing of its homes through its exclusive
independent dealer network. For purposes of segment reporting, corporate
41
assets consist primarily of cash, certain property and equipment and other
investments. Operating profit is considered to be income before general
corporate expenses, interest and income taxes.
Financial information for these segments is summarized in the following table:
General
Financial Corporate
Manufacturing Services (Unallocated) Total
Year ended December 31, 1997:
Revenues $ 555,842 $ 5,346 $ 561,188
Operating income (loss) 24,380 2,043 $ (9,342) 17,081
Identifiable assets 149,893 51,843 9,818 211,554
Depreciation and amortization 7,166 208 118 7,492
Capital expenditures 9,515 265 406 10,186
Year ended December 31, 1996:
Revenues $ 573,838 $ 3,333 $ 577,171
Operating income (loss) 41,719 1,257 $ (2,129) 40,847
Identifiable assets 151,594 38,175 6,618 196,387
Depreciation and amortization 5,588 129 43 5,760
Capital expenditures 15,669 196 241 16,106
Year ended December 31, 1995:
Revenues $ 420,790 $ 1,764 $ 422,554
Operating income (loss) 30,404 638 $ (2,334) 28,708
Identifiable assets 106,872 22,388 3,434 132,694
Depreciation and amortization 3,691 59 7 3,757
Capital expenditures 13,209 260 13 13,482
* * * * *
42
CAVALIER HOMES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
Increases Additions
Balance at Attributable Charged to Charged Balance at
Beginning of to Costs and to Other End of
Period Acquisitions Expenses Accounts Deductions Period
------------- ------------- ------------ ----------- -------------- --------------
Allowance for losses on Accounts
Receivable:
Year Ended December 31, 1997 $ 837 527 (189) $ 1,175
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 787 51 225 (226) $ 837
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 675 12 153 (53) $ 787
============== ============ ============ ============ ============== =============
Allowance for credit losses:
Year Ended December 31, 1997 $ 941 1,329 (998) $ 1,272
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 551 778 (388) $ 941
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 350 311 (110) $ 551
============== ============ ============ ============ ============== =============
Accumulated amortization of goodwill:
Year Ended December 31, 1997 $ 1,947 1,068 87 $ 3,102
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 1,165 782 $ 1,947
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 723 442 $ 1,165
============== ============ ============ ============ ============== =============
Accumulated amortization of
non-compete agreement:
Year Ended December 31, 1997 $ 221 56 $ 277
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 189 32 $ 221
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 122 67 $ 189
============== ============ ============ ============ ============== =============
Warranty reserve:
Year Ended December 31, 1997 $ 10,566 24,357 (23,223) $ 11,700
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 7,265 1,176 21,380 (19,255) $ 10,566
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 4,757 540 14,537 (12,569) $ 7,265
============== ============ ============ ============ ============== =============
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For a description of the directors and executive officers of the Company, see
"Executive Officers and Principal Stockholders," and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 20, 1998, which are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For a description of the Company's executive compensation, see "Election of
Directors," "Executive Officers and Principal Stockholders," "Executive
Compensation" (other than the "Report of the Compensation Committee on
Executive Compensation" and the "Performance Graph"), "Compensation Committee
Interlock and Insider Participation," and "Certain Relationships and Related
Transactions" of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1998, which are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
For a description of the security ownership of management and certain beneficial
owners, see "Executive Officers and Principal Stockholders" of the Company's
Proxy Statement and for the Annual Meeting of Stockholders to be held on May 20,
1998, which are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of certain relationships and related transactions of the
Company, see "Compensation Committee Interlocks and Insider Participation," and
"Certain Relationships and Related Transactions" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 20, 1998,
which are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. The financial statements contained in this report and the page on
which they may be found are as follows:
Financial Statement Description Form 10-K Page No.
Independent Auditors' Report 24
Consolidated Balance Sheets as of December 31, 1997 25
and 1996
Consolidated Statements of Income for the years ended 27
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for 28
the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the years 29
ended December 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements 30
2. The financial statement schedules required to be filed with this
report and the pages on which they may be found are as follows:
No. Schedule Description Form 10-K Page No.
II Valuation and Qualifying Accounts 43
44
3. The exhibits required to be filed with this report are listed
below. The Company will furnish upon request any of the exhibits listed upon
the receipt of $15.00 per exhibit, plus $.50 per page, to cover the cost to the
Company of providing the exhibit.
(3) Articles of Incorporation and By-laws.
* (a) The Amended and Restated Certificate of Incorporation of
the Company, filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, and the amendment thereto, filed as
Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 27, 1997.
* (b) The Certificate of Designation of Series A Junior
Participating Preferred Stock of Cavalier Homes, Inc. as filed with the Office
of the Delaware Secretary of State on October 24, 1996 and filed as Exhibit A to
Exhibit 4 to the Company's Registration Statement on form 8-A filed on October
30, 1996.
* (c) The Amended and Restated By-laws of the Company, filed as
Exhibit 3(d) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 27, 1997, and the amendment thereto filed as Exhibit 3(e) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 26,
1997.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
* (a) Articles four, six, seven, eight and nine of the Company's
Amended and Restated Certificate of Incorporation, as amended, included in
Exhibit 3(a) above.
* (b) Article II, Sections 2.1 through 2.18; Article III,
Sections 3.1 and 3.2; Article IV, Sections 4.1 and 4.3; Article VI, Sections 6.1
through 6.5; Article VIII, Sections 8.1 and 8.2; and Article IX of the Company's
Amended and Restated By-laws, included in Exhibit 3(c) above.
* (c) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
(10) Material contracts
* (a) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
* (b) Lease Agreement dated October 16, 1996, between Virginia
Cary L. McDonald and Star Industries, Inc. regarding the lease of the
manufacturing facility located in Robbins, North Carolina, filed as Exhibit
10(b) to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
* (c) Assignment and Assumption Agreement between Star
Industries, Inc. and Cavalier Industries, Inc. regarding the lease of the
manufacturing facility located in Robbins, North Carolina, filed as Exhibit
10(c) to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
* (d) Cavalier Homes, Inc. Amended and Restated Dividend
Reinvestment and Stock Purchase Plan, filed as Appendix A to the Company's
Registration Statement on Form S-3 (Registration No. 333-48111).
* ** (e) Cavalier Homes, Inc. Executive Incentive Compensation
Plan, filed as an Appendix to the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders held May 15, 1996.
* ** (f) Amendment to Cavalier Homes, Inc. Executive Incentive
Compensation Plan, filed as Exhibit 10(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 28, 1997.
* ** (g) Cavalier Homes, Inc. Employee Stock Purchase Plan, filed
as an Appendix to the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held May 15, 1996.
* ** (h) Cavalier Homes, Inc. Key Employee Stock Incentive Plan,
filed as an Appendix to the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held May 15, 1996.
45
* ** (i) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, filed as Exhibit 10(i) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 28, 1997.
** (j) Amendment to Cavalier Homes, Inc. Key Employee
Stock Incentive Plan, effective December 30, 1997.
** (k) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, effective January 23, 1998.
* ** (l) Amendments to the Cavalier Homes, Inc. Nonemployee
Directors Stock Option Plan, filed as an Appendix to the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders held May 15, 1996.
* ** (m) Amendment to Cavalier Homes, Inc. Amended and Restated
Nonemployee Directors Plan filed as Exhibit 10(i) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
** (n) Amendment to Cavalier Homes, Inc. Amended and Restated
Nonemployee Directors Plan.
* (o) Option and Stock Exchange Agreement by and among
Wheelhouse Structures, Inc., Shareholders of Wheel House Structures, Inc. and
Cavalier Homes, Inc. dated as of August 28, 1995, filed as Exhibit 2(a) to the
Company's Registration Statement on Form S-3 (Registration No. 333-00607), as
amended.
* (p) Dealership Stock Option Plan of Cavalier Homes, Inc.
filed as Exhibit 4(c) to the Company's Registration Statement on Form S-3 dated
September 11, 1995 (Registration No. 33-62487).
* (q) Lease Agreement between City of Mineral Wells, Texas and
Cavalier Homes of Texas dated February 27, 1996, filed as Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
* (r) Stock Purchase Agreement, as amended, by and among Astro
Mfg. Co., Inc., Shareholders of Astro Mfg. Co., Inc. and Cavalier Homes, Inc.
dated as of October 14, 1994, filed as Exhibit 2(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
* (s) Holdback agreement between Cavalier Homes, Inc. and
Raymond A. Peltcs, dated October 28, 1994, filed as Exhibit 2(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.
* (t) Revolving, Warehouse and Term Loan Agreement among the
Company and First Commercial Bank dated February 17, 1994, filed as Exhibit
10(e) to the Company's Annual Report on Form 10-K for the year ended December
31, 1993.
* (u) Amendments to the Revolving, Warehouse and Term Loan
Agreement among the Company and First Commercial Bank dated March 14, 1996,
filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(v) Commitment Letter from First Commercial Bank regarding a
two-year renewal to the Company's Loan Agreement.
* (w) Assumption Agreement dated as of January 2, 1997, by and
among the Company, First Commercial Bank and certain subsidiaries of the
Company, filed as Exhibit 10(q) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
* (x) Lease Agreement between Leonard Properties and Cavalier
Homes of Texas, Inc. dated February 17, 1994, and amendment No. 1 thereto, filed
as Exhibit 10(f) to the Company's Annual Report on Form 10-K, for the year ended
December 31, 1993, and 10(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended April 1, 1994, respectively.
* ** (y) Cavalier Homes, Inc. 1993 Amended and Restated
Nonqualified Stock Option Plan, filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
* ** (z) Cavalier Homes, Inc. 1988 Nonqualified Stock Option Plan,
as amended, filed as Exhibit 10(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
* (aa) Lease between Cavalier Homes of Alabama, Inc. and Robert
L. Burdick, John W Lowe, and Jerry F. Wilson (now Estate of Jerry F. Wilson), as
tenants in common, dated July 30, 1996, filed as Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
46
* (bb) Assignment and Assumption Agreement between Cavalier Homes
of Alabama, Inc. and Cavalier Homes, Inc. regarding the lease between Cavalier
Homes of Alabama, Inc. and Robert L. Burdick, John W Lowe and Jerry F. Wilson
(now Estate of Jerry F. Wilson), filed as Exhibit 10(v) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
* (cc) Commercial Sub-Lease between Winston County Industrial
Development Association and Cavalier Homes of Alabama, Inc., dated March 5,
1993, filed as Exhibit 10(d) to the Company's Registration Statement on Form S-2
(Registration No. 33-59452).
* (dd) Assignment and Assumption Agreement between Cavalier
Homes of Alabama, Inc. and Cavalier Homes, Inc. regarding the Commercial Sub-
Lease between Cavalier Homes of Alabama, Inc. and Winston County Industrial
Development Association, filed as Exhibit 10(x) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
* (ee) Sub-lease Agreement with Option to Purchase between
Winfield Industrial Development Association, Inc. and Buccaneer Homes of
Alabama, Inc. dated May 9, 1994, filed as Exhibit 10(k) to Amendment No.1 to the
Company's Registration Statement on Form S-2 (Registration No. 33-78644).
* (ff) Lease Agreement with Option to Purchase between Marion
County Industrial Development Corporation, Inc. and Quality Housing Supply, Inc.
dated May 9, 1994, filed as Exhibit 10(l) to Amendment No. 1 to the Company's
Registration Statement on Form S-2 (Registration No. 33-78644).
* (gg) Lease Agreement dated March 1, 1997, between the City of
Winfield and Buccaneer Homes, a division of Cavalier Manufacturing, Inc., filed
as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
* (hh) Lease Agreement dated March 1, 1995, between the
Industrial Development Board of the City of Haleyville, Alabama and Wheel House
Properties, Inc., as assigned to and assumed by Star Industries, Inc. on January
11, 1996, and as further assigned to and assumed by Cavalier Manufacturing, Inc.
in December 1996, filed as Exhibit 10(bb) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
* (ii) Guaranty Agreement between SouthTrust Bank of Alabama and
Cavalier Homes, Inc. dated June 20, 1997, relating to guaranty payments by
Quality Housing Supply, LLC, filed as Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 27, 1997.
* (jj) Guaranty Agreement between AmSouth Bank of Alabama and
Cavalier Homes, Inc. dated June 11, 1997, relating to guaranty payments by Ridge
Point Manufacturing, filed as Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 27, 1997.
* (kk) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Lamraft, LP filed as Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 26, 1997.
* (ll) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Hillsboro Manufacturing, LP filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26, 1997.
* (mm) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Woodperfect of Texas, LP filed as Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26, 1997.
* (nn) The Agreement and Plan of Merger dated August 14, 1997,
by and among the Company, Crimson Acquisition Corp. and Belmont Homes, Inc.,
filed as Exhibit 2 to the Company's Current Report on Form 8-K dated August 19,
1997.
* (oo) Amendment No. 1 to the Agreement and Plan of Merger
referenced in Exhibit 10(nn) above filed as Exhibit 10(e) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1997.
* ** (pp) Belmont Homes, Inc. 1994 Incentive Stock Plan, filed as
an Exhibit to the Belmont Homes, Inc. Registration Statement on Form S-1,
Registration No. 33-87868.
47
* ** (qq) Belmont Homes, Inc. 1994 Non-Qualified Stock Option Plan
for Non-Employee Directors, filed as an Exhibit to the Belmont Homes, Inc.
Registration Statement on Form S-1, Registration No. 33-87868.
* (rr) $2,000,000 Line of Credit, dated January 11, 1995,
between Belmont Homes, Inc. and Colonial Bank, filed as an Exhibit to Belmont
Homes, Inc. Registration Statement on Form S-1, Registration No. 33-87868.
* (ss) $10,000,000 Revolving Credit Note, dated November 10,
1995, between Belmont Homes, Inc. and Bank of Mississippi, filed as an Exhibit
to Belmont Homes, Inc. Registration Statement on Form S-1, Registration
No. 33-80823.
* (tt) $10,000,000 Loan and Security Agreement, dated November
10, 1995, between Belmont Homes, Inc. and Bank of Mississippi, filed as an
Exhibit to Belmont Homes, Inc. Registration Statement on Form S-1, Registration
No. 33-80823.
* (uu) Stock Purchase Agreement dated October 25, 1996, among
Belmont Homes, Inc., Bellcrest Holding Co., Inc., G. Hiller Spann, Joe H. Bell,
James M. Birdwell and Delroy Dailey, Jr., filed as an exhibit to Belmont Homes,
Inc. Current Report on Form 8-K filed November 13, 1996, File No. 0-26142.
* (vv) First Amendment to Stock Purchase Agreement between
Belmont Homes, Inc. and the former shareholders of Bellcrest Homes, Inc. filed
as Exhibit 10.1 to Belmont Homes, Inc. Current Report on Form 8-K filed on
September 8, 1997.
* (ww) Form of Indemnification Agreement between Belmont Homes,
Inc. and the Directors and Executive Officers of Belmont Homes, Inc., filed as
Exhibit 10.2 to Belmont Homes, Inc. Current Report on Form 8-K filed on
September 8, 1997.
(xx) Agreement dated March 10, 1998, by and between Cavalier
Acceptance Corporation and Green Tree Financial Servicing Corporation.
(yy) Lease Agreement between the Industrial Developement Board
of the Town of Addison and Cavalier Homes of Alabama, a division of Cavalier
Manufacturing, Inc., dated November 1, 1997.
(zz) Commercial Sub-Lease and Agreement between Perfect
Panels, Inc. and Quality Housing Supply, Inc., dated July 1, 1996.
(11) Statement re Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23)(a) Consent of Deloitte & Touche LLP.
(23)(b) Consent of KPMG Peat Marwick LLP
(23)(c) Consent of Alday, Tillman, Giles & Wright, P. C.
(27) Amended Financial Data Schedule.
(99)(a) Independent Auditor's Report of KPMG Peat Marwick LLP
(99)(b) Independent Auditor's Report of Alday, Tillman, Giles
& Wright, P. C.
* Incorporated by reference herein.
** Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on December 11, 1997,
reporting as an Other Event a prospectus supplement with respect to the
institution of certain legal proceedings against Belmont Homes, Inc. and other
defendants.
48
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
With the exception of historical factual information, the matters and statements
discussed, made or incorporated by reference in this Annual Report on Form 10-K
(including statements regarding trends in the industry and the business and
growth and financing strategies of the Company), as well as those statements
specifically designated with an asterisk (*), or which contain the words
"estimates," "projects," "intends," "believes," "anticipates," "expects," and
words of similar import, constitute forward-looking statements, are based upon
current expectations and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements and words involve known and unknown assumptions, risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements or words. Such assumptions, risks, uncertainties and factors include
those associated with general economic and business conditions; manufactured
housing and retail consumer financing industry trends, cyclicality and
seasonality; availability of consumer and dealer financing; changes and
volatility and uncertainty in interest rates; the sufficiency of reserves
established for installment contract receivables; warranty, product liability,
workers' compensation and other litigation arising in the course of the
Company's manufacturing and financial services business; contingent repurchase
and guaranty obligations; dependence on key personnel and favorable
relationships with employees; demographic changes; whether the current and
emerging generations of retirees will have the same interest in purchasing
manufactured homes; competition; raw material and labor costs and availability;
import protection and regulation; relationships with and dependence on
customers, distributors and dealers; changes in the business strategy or
development plans of the Company; the availability, terms and deployment of
capital; changes in or the failure to comply with government regulations; and
the inability or failure to identify or consummate successful acquisitions or to
assimilate the operations of any acquired businesses with those of the Company;
and other assumptions, risks, uncertainties and factors reflected from time to
time in the Company's filings with the Securities and Exchange Commission. The
Company expressly disclaims any obligation to update any forward-looking
statements as a result of developments occurring after the filing of this
report.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAVALIER HOMES, INC.
--------------------
Registrant
By:/s/ DAVID A. ROBERSON
------------------------
Its President
Date: March 30, 1998
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Signature Title Date
/s/ DAVID A. ROBERSON Director and Principal March 30, 1998
- --------------------------- Executive Officer
/s/ MICHAEL R. MURPHY Director and Principal March 30, 1998
- ---------------------------- Financial and Accounting Officer
/s/ BARRY DONNELL Chairman of the Board and Director March 30, 1998
- ----------------------------
/s/ THOMAS A. BROUGHTON, III Director March 30, 1998
- ----------------------------
/s/ JOHN W LOWE Director March 30, 1998
---------------------------
/s/ LEE ROY JORDAN Director March 30, 1998
- ----------------------------
/s/ GERALD R. MOORE Director March 30, 1998
- ----------------------------
/s/ A. DOUGLAS JUMPER, SR. Director March 30, 1998
- ----------------------------
/s/ MIKE KENNEDY Director March 30, 1998
- ----------------------------
50
INDEX
Exhibit
Number
- -------
(10) Material Contracts
(j) Amendment to Cavalier Homes, Inc. Key
Employee Stock Incentive Plan, effective December 30, 1997.
(k) Amendment to Cavalier Homes, Inc. Key
Employee Stock Incentive Plan, effective January 23, 1998.
(n) Amendment to Cavalier Homes, Inc. Amended
and Restated Nonemployee Directors Plan.
(v) Commitment Letter from First Commercial Bank
regarding a two-year renewal to the Company's Loan Agreement.
(xx) Agreement dated March 10, 1998, by and
between Cavalier Acceptance Corporation and Green Tree Financial
Servicing Corporation.
(yy) Lease Agreement between the Industrial
Developement Board of the Town of Addison and Cavalier Homes of
Alabama, a division of Cavalier Manufacturing, Inc., dated
November 1, 1997.
(zz) Commercial Sub-Lease and Agreement between
Perfect Panels, Inc. and Quality Housing Supply, Inc., dated
July 1, 1996.
(11) Statement re Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23)(a) Consent of Deloitte & Touche LLP.
(23)(b) Consent of KPMG Peat Marwick LLP
(23)(c) Consent of Alday, Tillman, Giles & Wright, P. C.
(27) Amended Financial Data Schedule. (Filed as an EDGAR
Exhibit only)
(99)(a) Independent Auditor's Report of KPMG Peat Marwick LLP
(99)(b) Independent Auditor's Report of Alday, Tillman, Giles
& Wright, P. C.
51