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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, 1998
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: (256) 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 22, 1999, was $152,298,431.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 22, 1999.
17,974,137
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 19, 1999.
1
CAVALIER HOMES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I
ITEM 1. BUSINESS
General
Cavalier Homes, Inc. (the "Company"), incorporated in 1984, is a Delaware
corporation with its executive offices located at Highway 41 North and Cavalier
Road, Addison, Alabama 35540. Effective December 31, 1997, the Company completed
a merger (the "Merger") involving Belmont Homes, Inc. ("Belmont"), pursuant to
which the Company issued 7,555,121 shares of its common stock in exchange for
Belmont's common stock and Belmont became a wholly owned subsidiary of the
Company. The Merger was accounted for as a pooling of interests and,
accordingly, the Company's 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.
Unless otherwise indicated by the context, references in this report to the
"Company" or to "Cavalier" include the Company, its subsidiaries, divisions of
these subsidiaries and their respective predecessors, if any.
Cavalier is a vertically integrated manufactured housing company, serving all
phases of the home buying transaction from design and manufacturing to home
financing and insurance. The Company has chosen to build its distribution system
around exclusive independent dealers, which the Company believes gives it
virtually the same efficiencies and market presence that captive retail centers
provide to other companies. At December 31, 1998, Cavalier had a total of 237
dealer locations participating in its Exclusive Dealer Program, including five
Company-owned retail locations. In addition, the Company markets its homes
through approximately 1,000 non-exclusive independent dealer locations in 30
states.
The Company designs and manufactures a wide range of high quality homes with a
focus on serving the low- to medium-priced manufactured housing market in the
South Central and South Atlantic regions of the United States. The Company's
homes are sold under 68 brand names, are normally fully furnished, including
appliances, and are comprised of one or more floor sections. At December 31,
1998, the Company operated 23 home manufacturing facilities, one plant that
manufactures laminated wall board, and a material and supply distribution
location. Cavalier also participates in joint ventures with other manufactured
housing companies for lumber distribution and the manufacture of roof trusses
and cabinet doors.
Through its financial services segment, the Company purchases qualifying retail
installment sales contracts for manufactured homes sold through its exclusive
dealer network and sells various commissioned insurance products to exclusive
dealers and their retail customers. During 1998, the business focus of Cavalier
Acceptance Corporation, the Company's finance subsidiary ("CAC"), changed from
building, holding and servicing a portfolio of loans to purchasing loans from
its dealers that are subsequently resold to another financial institution
without CAC retaining the servicing function.
In October 1998, the Board of Directors increased the Company's cash dividend
amount 33% to an indicated annual rate of $0.16 per share.
Revenue, operating profit, identifiable assets and other financial data of the
Company's industry segments for the three years ended December 31, 1998 are
contained in Note 10 of Notes to Consolidated Financial Statements in Part II.
Home Manufacturing Operations
At December 31, 1998, the Company, through six wholly owned subsidiaries, owned
or leased twenty-three manufacturing facilities engaged in the production of
manufactured homes. See "Item 2. Properties". The management of each of the
Company's home manufacturing units typically consists of a president or general
manager, a production manager, a general sales manager, a controller, a service
manager, a purchasing manager and a quality control manager. These mid-level
management personnel manage the Company's home manufacturing operations, and
typically participate in an incentive compensation system based upon their
respective operation's profitability.
The Company has experienced significant growth in manufacturing capacity during
the past seven years, expanding from four manufactured housing production
facilities in 1992 to twenty-three facilities at the end of 1998. The Company's
facilities normally operate on a single-shift, five-day week basis with the
approximate annual capacity to produce 48,000 floors.
2
The following table sets forth certain sales information for 1998, 1997 and
1996:
For the Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
Number of homes sold:
Single-section homes 12,430 51% 13,576 58% 16,738 65%
Multi-section homes 11,957 49% 10,026 42% 8,914 35%
---------- ------- ---------- ------- ---------- -------
Total homes 24,387 100% 23,602 100% 25,652 100%
========== ======= ========== ======= ========== =======
Number of floors sold 36,517 33,646 34,581
========== ========== ==========
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 furnished and is ready for
connection to customer-supplied utilities.
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
generally available from other sources. However, the Company is currently
experiencing tightened supply from its traditional vendors of certain types of
raw materials, including sheetrock and insulation, required for the production
of its manufactured homes. The Company is attempting to obtain these products
from other vendors and to purchase substitute products, which may result in
higher than normal costs. The possibility exists that the Company may be unable
to recover these additional costs through price increases or that these and
substitute products may become scarce or unavailable. The Company is uncertain
at this time as to the extent and duration of these developments and as to what
effect these factors may have on the Company's future sales and earnings.*
The Company's component manufacturing and distribution subsidiaries provide
laminated wallboards, cabinet doors and certain other supply products for some
of its home manufacturing facilities. Additionally, certain of the Company's
home 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.
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 84 feet and contain between
656 and 1,280 square feet. The multi-section models consist of two or more floor
sections that are joined at the home site, vary in length from 36 to 82 feet and
contain between 792 and 3,016 square feet.
The Company currently produces over 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.
- --------
* See Safe Harbor Statement on page 53.
3
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, 1998, the Company had, under its Exclusive Dealer Program,
237 participating dealer locations selling only the Company's homes, which
included five Company-owned retail locations. In addition, the Company markets
its homes through approximately 1,000 independent dealer locations in 30 states.
Since 1991, the Company has been developing the independent exclusive dealer
network. The Company's independent exclusive dealers market and sell only homes
manufactured by the Company, while the Company's independent non-exclusive
dealers typically will choose to offer the products of other manufacturers in
addition to those of the Company. The growth in the Company's number of
exclusive dealers and percentage of total Company sales represented by them is
summarized in the following table:
For the Year Ended December 31, 1998 1997 1996
- ------------------------------------------------ ------ ------ ------
Number of exclusive dealers 237 132 115
Percentage of manufactured home sales 40% 30% 27%
Through its finance subsidiary, CAC, the Company purchases qualifying retail
installment sales contracts for manufactured homes sold through the Company's
exclusive dealer network and provides its exclusive dealers with other services
and support.
Approximately 89% of the Company's sales in 1998 were to dealers operating sales
centers in the Company's core states as follows: Texas - 14%, Alabama - 14%,
Georgia - 10%, North Carolina - 9%, Arkansas - 8%, South Carolina - 8%,
Mississippi - 7%, Louisiana - 7%, Oklahoma - 5%, Tennessee - 4% and
Missouri - 3%.
The Company has written agreements with most of its independent dealers. These
agreements generally may be terminated at any time by either party, with or
without cause, after a short notice period. The Company does not have any
control over the operations of, or financial interests in, any of its
independent dealers, including any of its independent exclusive dealers. The
Company is not dependent on any single dealer, and in 1998, the Company's
largest dealer accounted for approximately 3.2% of sales.
The Company believes that its independent dealer network enables the Company to
avoid the substantial investment in management, capital and overhead associated
with company owned sales centers. To enable dealers to maximize retail market
penetration and enhance customer service, typically only one dealer within a
given market area distributes a particular product line of the Company. The
Company believes its strategy of selling its homes through independent dealers
helps to ensure that the Company's homes are competitive with those of other
manufacturers in terms of consumer acceptability, product design, quality and
price. Accordingly, a component of the Company's business strategy is to
continually strengthen its dealer relations. The Company believes its relations
with its independent dealers, including its independent exclusive dealers, are
good. *
The industry has recently been experiencing a trend of increasing competition
for independent dealers, and many manufacturers, which had previously not owned
their own retail sales centers, have begun purchasing independent dealers and/or
establishing their own retail outlets. While the focus will continue to be on
exclusive independent dealers, the Company has begun the process of diversifying
its channels of distribution with Company-owned retail locations. Cavalier
purchased its first three retail locations in 1998, and opened two other sites
during the year. The Company intends to open and acquire other locations in the
future at a conservative pace, and also plans to offer a franchise program in
1999.*
- --------
* See Safe Harbor Statement on page 53.
4
Each of the Company's manufacturing units typically employs a general sales
manager and its own respective sales representatives who are compensated on a
commission basis. The plant-level sales representatives are charged with the
day-to-day servicing of the needs of the Company's independent dealers,
including its exclusive dealers. The Company markets its homes through product
promotions, participation in regional manufactured housing shows, advertisements
in local media and trade publications. As of December 31, 1998, the Company
maintained a sales force of 88 full-time salesmen and 11 full-time general sales
managers.
Retail Financing Activities
A significant factor affecting sales of manufactured homes is the availability
and terms of financing. CAC purchases qualifying retail installment sales
contracts for manufactured homes sold through the Company's exclusive dealer
network.
CAC seeks to provide competitive financing terms to customers of the Company's
exclusive dealers. CAC currently offers various conventional loan programs which
require a down-payment ranging from 0% to 15% of the purchase price, in cash,
trade-in value of a previously-owned manufactured home and/or appraised value of
equity in any real property pledged as collateral. Repayment terms generally
range from 84 to 360 months, depending upon the type of home and amount
financed, the amount of the down payment and the customer's creditworthiness.
CAC's loans are secured by a purchase money security interest in the
manufactured home and, in certain instances, a mortgage on real property pledged
as additional collateral. As of December 31, 1998, all of CAC's outstanding
loans were secured. Loans purchased by CAC normally provide a fixed rate of
interest with equal monthly payments and are non-recourse to the dealer. The
interest rates applicable to CAC's loans as of such date generally ranged from
8% to 13%, and the approximate weighted average annual percentage interest rate
was 10.9%. Currently, CAC operates in most of the 23 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 creditworthiness of the borrower. The system requires a minimum
score before CAC will consider funding the installment sale contract.
In the event an installment sale contract becomes delinquent, CAC normally
contacts the customer within 10 to 25 days thereafter in an effort to cure the
delinquency. CAC generally repossesses the home after payments have become 60 to
90 days delinquent. After repossession, CAC normally has the home delivered to a
dealer's sales center where CAC attempts to resell the home or contracts with an
independent party to resell the home. To a limited extent, CAC sells repossessed
homes at wholesale.
The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CAC to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. Amounts credited to the reserve were $1.0, $1.3 and $0.8 million in
1998, 1997 and 1996, respectively. Additionally, as a result of defaults and
repossessions the reserve was charged $1.6, $1.0 and $0.4 million in 1998, 1997
and 1996, respectively. The reserve for credit losses at December 31, 1998 was
$0.8 million as compared to $1.3 million at December 31, 1997, and $0.9 million
at December 31, 1996.
In 1998, 1997 and 1996, CAC repossessed 77, 92 and 41 homes, respectively. The
Company's inventory of repossessed homes was 30 homes at December 31, 1998, as
compared to 50 homes at December 31, 1997, and 6 homes at December 31, 1996. 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
1998, 1997 and 1996 was 5.95%, 2.24% and 1.40%, respectively.
At December 31, 1998 and December 31, 1997, 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, of Contracts 30 Days 60 Days 90 Days Total
--------------- ------------ ------------ ----------- -----------
1998 986 1.62% 0.41% 0.10% 2.13%
1997 1,712 1.46% 0.93% 0.12% 2.51%
At December 31, 1998 and December 31, 1997, delinquencies expressed as a
percentage of the total outstanding principal balance of installment sale
contracts which CAC owned were as follows:
Delinquency Percentage
-------------------------------------------------------
Total Value
December 31, of Contracts 30 Days 60 Days 90 Days Total
--------------- ------------ ------------ ----------- -----------
1998 $ 26,117,000 1.89% 0.58% 0.19% 2.66%
1997 $ 49,146,000 1.59% 0.95% 0.05% 2.59%
5
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,
--------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
Total loans receivable $ 26,117,000 $ 49,146,000 $ 36,425,000
Allowance for credit losses $ 760,000 $ 1,272,000 $ 941,000
Number of loans outstanding 986 1,712 1,292
Number of delinquencies 21 43 16
Net loss ratio on average
outstanding principal balance 5.95% 2.24% 1.40%
Weighted average annual
percentage rate 10.9% 10.9% 10.9%
During 1998, the business focus of CAC changed from building, holding and
servicing a portfolio of loans to purchasing loans from its dealers that are
subsequently resold to another financial institution without CAC retaining the
servicing function. Although the level of CAC's future activities cannot
presently be determined, the Company expects to utilize internally generated
working capital and amounts generated from sales of loans under the retail
finance agreement discussed in the following paragraph to fund the purchase of
retail installment sale contracts on homes sold by the Company's exclusive
dealers and may use borrowings under the Company's 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") to develop a portfolio of such
installment sale contracts. * The Company believes that its relationships with
its exclusive dealers will assist the development of this business strategy.*
Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds borrowed under its credit line with its primary lender. In
February 1998, CAC entered into an agreement with another lender providing for
the periodic resale of a portion of CAC's loans that meet established criteria.
In March 1998, CAC sold, under the retail finance agreement, a substantial
portion of its then existing portfolio of loans. The effect of this transaction
on net income was to reduce the amount of financial services revenue from
interest income on this portion of the portfolio, offset by reduced interest
expense on retired debt and earnings on the remaining proceeds. Pursuant to the
retail finance agreement, the Company may sell a substantial portion of its
existing installment loan portfolio in fiscal year 1999, in addition to the
periodic sale of installment contracts purchased by CAC in the future. The
Company believes the periodic sale of installment contracts under the retail
finance agreement will reduce requirements for both working capital and
borrowings, increase the Company's liquidity, reduce the Company's exposure to
interest rate fluctuations and enhance the ability of CAC to increase its volume
of loan purchases. * There can be no assurance, however, that additional sales
will be made under this agreement, or that CAC and the Company will be able to
realize the expected benefits from such agreement.
Retail Insurance Activities
Through its wholly-owned insurance agencies, the Company sells commissioned
insurance products to retail purchasers of the Company's homes, including
physical damage and extended home warranties. The Company also sells commercial
lines of insurance products, including general liability and property insurance,
to the Company's exclusive dealers and others.
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.
- --------
* See Safe Harbor Statement on page 53.
6
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
3.2% of sales in 1998, (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, 1998, the Company's contingent liability under these
repurchase and other similar recourse agreements was an amount estimated to be
approximately $242 million. The Company has provided an allowance for possible
repurchase losses of $1.2 million as of December 3l, 1998, 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 quality control inspection program at all production
stages. The Company's manufacturing facilities and the plans and specifications
of its manufactured homes have been approved by a HUD-designated inspection
agency. An independent, HUD-approved third-party inspector regularly checks the
Company's manufactured homes for compliance during construction.
The Company provides the initial home buyer with a one-year limited warranty
against manufacturing defects in the home's construction. Warranty services
after sale are performed, at the expense of the Company, by plant personnel,
dealers or local independent contractors. Additionally, direct warranties often
are provided by the manufacturers of specific components and appliances.
The Company employs a full-time service manager at each of its home
manufacturing units and 197 full-time service personnel to provide
administrative and on-site service and to correct production deficiencies that
are attributable to the manufacturing process. Warranty service constitutes a
significant cost to the Company, and management of the Company has placed
emphasis on diagnosing potential problem areas to help minimize costly field
repairs. The Company also has focused on reducing response time to customer
service requests. At December 31, 1998, the Company had established a reserve
for future warranty claims of $12.4 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 businesses are subject to a number of federal, state and local
laws, regulations and codes. Construction of manufactured housing is governed by
the National Manufactured Home Construction and Safety Standards Act of 1974, as
amended, and regulations issued thereunder by HUD, which have established
comprehensive national construction standards. The HUD regulations cover all
aspects of manufactured home construction, including structural integrity, fire
safety, wind loads, thermal protection and ventilation. Such regulations preempt
state and local regulations on such matters. The Company cannot presently
determine what, if any, legislation may be adopted by Congress or 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. *
- --------
* See Safe Harbor Statement on page 53.
7
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 may be built with compressed board, wood paneling
and other products that contain formaldehyde resins. Since February 1985, HUD
has regulated the allowable concentration of formaldehyde in certain products
used in manufactured homes and required manufacturers to warn purchasers
concerning formaldehyde associated risks. The Company currently uses materials
in its manufactured homes that it believes meet HUD standards for formaldehyde
emissions and otherwise comply with HUD regulations in this regard.
The transportation of manufactured homes on highways is subject to regulation by
various federal, state and local authorities. Such regulation may prescribe size
and road use limitations and impose lower than normal speed limits and various
other requirements.
The Company's manufactured homes are subject to local zoning and housing
regulations. A number of states require manufactured home producers to post
bonds to ensure the satisfaction of consumer warranty claims. A number of states
have adopted procedures governing the installation of manufactured homes.
Utility connections are subject to state and local regulation.
The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission
Improvement Act, which regulates the descriptions of warranties on products. The
description and substance of the Company's warranties are also subject to a
variety of state laws and regulations.
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. The Company
currently does not believe it will be required under existing environmental laws
and enforcement policies to expend amounts which will have a material adverse
effect on its results of operations or financial condition. * However, the
requirements of such laws and enforcement policies have generally become 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. The Equal Credit Opportunity Act and Regulation B promulgated
thereunder prohibit discrimination against any credit applicant based on certain
prohibited bases, and also require that certain specified notices be sent to
credit applicants whose applications are denied. The Federal Trade Commission
has adopted or proposed various trade regulation rules to specify and prohibit
certain unfair credit and collection practices and also to preserve consumers'
claims and defenses. The Government National Mortgage Association ("GNMA")
specifies certain credit underwriting requirements in order for installment
manufactured home sale contracts to be eligible for inclusion in a GNMA program.
HUD also has promulgated substantial disclosure and substantive regulations and
requirements in order for a manufactured home installment sale contract to
qualify for insurance under the Federal Housing Authority ("FHA") program, and
the failure to comply with such requirements and procedures can result in loss
of the FHA guaranty protection. In addition, the financing activities of CAC may
also become subject to the reporting and disclosure requirements of the Home
Mortgage Disclosure Act. In addition to the extensive federal regulation of
consumer credit matters, many states have also adopted consumer credit
protection requirements that may impose significant requirements for consumer
credit lenders. For example, many states require that a consumer credit finance
company such as CAC obtain certain regulatory licenses or permits in order to
engage in such business in that state, and many states also set forth a number
of substantive contractual limitations regarding provisions that permissibly may
be included in a consumer contract, as well as limitations upon the permissible
interest rates, fees and other charges that may be imposed upon a consumer.
Failure by the Company or CAC to comply with the requirements of federal or
state law pertaining to consumer credit could result in the invalidity of the
particular contract for the affected consumer, civil liability to the affected
customers, criminal liability and other adverse results.
- --------
* See Safe Harbor Statement on page 53.
8
Employees
As of December 31, 1998, the Company had 5,668 employees, of whom 4,845 were
engaged in home manufacturing, 112 in sales, 208 in warranty and service, 379 in
general administration, 39 in delivery, 51 in retail finance and insurance
services and 34 in retail locations. At year end, only one home manufacturing
operation's employees (100 employees) were covered by a collective bargaining
agreement. Management considers its relations with its employees to be good.
Risk Factors
If you are interested in making an investment in Cavalier, you should carefully
consider the following risk factors concerning Cavalier and its business, in
addition to the other information contained in this Report on Form 10-K:
Uncertainties in Integrating Business Operations and Achieving Benefits of the
Belmont Merger
On December 31, 1997, a wholly owned subsidiary of Cavalier merged
with and into Belmont which is also a producer of manufactured housing.
For a more detailed description of Belmont and this transaction, you should
review Cavalier's Current Reports on Form 8-K dated August 20, 1997, December
11, 1997 and January 15, 1998 (as amended by Form 8-K/A dated March 16, 1998 and
Form 8-K/A dated March 17, 1998), and Cavalier's Registration Statement on Form
S-4 filed with the Commission on December 2, 1997 (Reg. No. 333-41319). The
acquisition of Belmont will require the consolidation of functions and the
integration of departments, systems and procedures, which will present
significant management challenges. We cannot make any assurances that we will
successfully accomplish these actions as rapidly as currently expected, if at
all. Although our primary purpose in taking such actions is to realize direct
cost savings and other operating efficiencies, synergies and benefits, Cavalier
cannot assure stockholders of the extent to which or whether such cost savings,
efficiencies, synergies or benefits will be achieved.
Cyclical and Seasonal Nature of the Manufactured Housing Industry
The manufactured housing industry is highly cyclical and seasonal and has
experienced wide fluctuations in aggregate sales in the past, resulting in the
failure of many manufacturing concerns. Many of the same national and regional
economic and demographic factors that affect the broader housing industry also
affect the market for manufactured homes. Historically, most sectors of the home
building industry, including the manufactured housing industry, have been
affected by the following, among other things:
o changes in general economic conditions;
o inflation;
o levels of consumer confidence;
o employment and income levels;
o housing demand;
o availability of alternative forms of housing;
o availability of financing; and
o the level and stability of interest rates.
9
The Manufactured Housing Institute ("MHI") reported that from 1983 to 1991,
aggregate domestic shipments of manufactured homes declined 42%. According to
industry statistics, after a ten-year low in floor shipments in 1991, the
industry recovered significantly. Since 1992, floor shipments have increased
each year, as set forth in the table to the right, although the growth rate has
gradually slowed. Industry floor shipments in 1998 improved over 1997, with the
MHI reporting floor shipments increased 8% in 1998 over 1997. Over the past
several years, the manufactured housing industry has also experienced increases
in both the number of retail dealers and manufacturing capacity, which we
believe is currently resulting in slower retail turnover, higher dealer
inventories and increased price competition.
- --------------------------------------------------------------------------------
Percentage Increase in Floor Shipments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1992............................21%
1993............................22%
1994............................23%
1995............................12%
1996............................10%
1997.............................1%
1998.............................8%
10
Sales in the manufactured housing industry are also seasonal in nature, with
sales of homes traditionally being stronger in April through October and weaker
during the first and last part of the calendar year. While seasonality did not
significantly impact Cavalier's business from 1992 through 1996, when industry
shipments were steadily increasing, the recent tightening of competitive
conditions may signal a return to the industry's traditional seasonal patterns.*
We cannot predict how long the recent tightening of competitive conditions will
last, or what the extent of their impact will be on the future results of
operations and financial condition of Cavalier. Furthermore, because of the
cyclical and seasonal nature of the manufactured housing industry and the recent
increase in competitive conditions, Cavalier cannot assure its investors that
the manufactured housing industry is not entering a change in its cycle or
returning to traditional seasonal patterns, either of which could have a
material adverse effect on Cavalier's results of operations or financial
condition.
Limitations on Ability to Pursue Growth Strategy
Cavalier's current growth strategies are to:
o expand the financing and other activities of CAC;
o develop its exclusive dealer network;
o develop the production and distribution of component parts for
manufactured housing;
o pursue additional acquisitions, and
o to a lesser extent, acquire or open Cavalier-owned retail locations.
Since 1991, Cavalier has expanded manufacturing capacity to meet the increased
demand for its manufactured homes. Downturns in shipments in the manufactured
housing industry, or a decline in the demand or in the growth in demand for
Cavalier's homes, could have a material adverse effect on us. Our ability to
execute our growth strategy depends on a number of factors, including the
following:
o general economic and industry conditions;
o competition from other companies in the same business as us;
o our ability to attract, retain or sell to additional independent
dealers, especially, exclusive dealers;
o the availability of semi-skilled workers in the areas in which our
manufacturing facilities are located;
o the ability of CAC to be competitive;
o the availability of capital and financing; and
o the ability to find and consummate attractive acquisitions and to
successfully integrate the operations of the acquired businesses.
There are other factors in addition to those listed above, many of which are
beyond our control. Cavalier cannot assure investors that our growth strategy
will be successful. Further, if our growth strategy is unsuccessful, we cannot
assure that this lack of success will not have a material adverse effect upon
Cavalier's results of operations or financial condition.
Uncertainties Regarding Retail Financing Activities
Cavalier purchases retail installment finance loans that have been originated by
our independent exclusive dealers. We maintain a reserve for estimated credit
losses on installment sale contracts owned by CAC to provide for future losses
based on our historical loss experience, current economic conditions and
portfolio performance. It is difficult to predict with any certainty the
appropriate reserves to establish, and we cannot assure investors that CAC will
not experience losses that exceed Cavalier's loss reserves and have a material
adverse effect on Cavalier's results of operations and financial condition.
Volatility or a significant change in interest rates might also materially
affect CAC's and Cavalier's business, results of operations or financial
condition.
Our strategy currently includes the continued expansion of the financial
services segment of our business. Accordingly, we may incur additional debt, or
other forms of financing, in order to continue to fund such growth. We may also
engage in other transactions, such as selling or securitizing portions of our
installment loan portfolio, that are designed to facilitate the ability of CAC
to purchase and/or originate an increased volume of loans and to reduce our
exposure to interest rate fluctuations and installment loan losses. Cavalier has
entered into such a transaction pursuant to the Retail Finance Agreement
discussed above under "Retail Finance Activities," and on March 13, 1998, sold
approximately $25 million of its loans. Additionally, CAC has periodically sold
installment loan contracts throughout 1998 to another financial institution. The
Company may sell a substantial portion of its existing loan portfolio in 1999
under this agreement in addition to the periodic sale of loans purchased by CAC
in the future. Cavalier believes the periodic sale of installment contracts
under the Retail Finance Agreement will reduce requirements for both working
capital and borrowings, increase Cavalier's liquidity, reduce Cavalier's
exposure to interest rate fluctuations and enhance the ability of CAC to
increase its volume of loan purchases. However, we cannot assure investors that
additional sales will indeed be made under this agreement or that CAC and
Cavalier will be able to realize the expected benefits from such agreement. We
also cannot offer any assurance that possible additional financing, or the
aforementioned transactions involving our installment loan portfolio, will be
available on terms acceptable to Cavalier. If they are not, we may be forced to
curtail the expansion of our financial services business and to alter our other
strategies.
- --------
* See Safe Harbor Statement on page 53.
11
Limitations on Availability of Consumer and Dealer Financing
Third-party lenders generally provide consumer financing for manufactured home
purchases. Our sales depend in large part on the availability and cost of
financing for manufactured home purchasers and dealers. The availability and
cost of such financing is further dependent on financial institutions' lending
practices, the strength of the credit markets generally, governmental policies
and other conditions, all of which are beyond our control. In addition, most
states classify manufactured homes for both legal and tax purposes as personal
property rather than real estate. As a result, financing for the purchase of
manufactured homes is characterized by shorter loan maturities and higher
interest rates, and in certain periods such financing is more difficult to
obtain than conventional home mortgages. Unfavorable changes in these factors
may have a material adverse effect on Cavalier's results of operations or
financial condition.
Potential Unavailability and Increases in Prices of Raw Materials
The availability and pricing of certain raw materials, particularly lumber,
sheetrock, particle board and insulation may significantly affect Cavalier's
operating costs. Sudden increases in demand for these construction materials
caused by natural disasters or other market forces can greatly increase the
costs of materials or limit the availability of such materials. Increases in
costs cannot always be reflected immediately in prices and, consequently, may
adversely impact Cavalier's profitability. Further, a reduction in the
availability of raw materials also may affect our ability to meet or maintain
production requirements. Currently Cavalier is experiencing tightened supply
from its traditional vendors of certain types of raw materials, including
sheetrock and insulation, required for the production of our manufactured homes.
Contingent Repurchase and Guaranty Obligations
Manufactured housing companies customarily enter into repurchase and other
recourse agreements with lending institutions which have provided wholesale
floor plan financing to dealers. Substantially all of Cavalier's sales are made
to dealers located primarily in the South Central and South Atlantic regions of
the United States pursuant to repurchase agreements with lending institutions.
These agreements generally provide that Cavalier will repurchase our products
from the lending institutions for the balance due them in the event such product
is repossessed upon a dealer's default. The risk of loss under repurchase
agreements is lessened by the fact that (1) sales of our manufactured homes are
spread over a relatively large number of independent dealers; (2) the price that
Cavalier is obligated to pay under such repurchase agreements generally declines
over the period of the agreement and also declines during such period based on
predetermined amounts; and (3) in many cases, Cavalier has been able to resell
homes repurchased from lenders in the ordinary course of business without
incurring significant losses. While we have established a reserve for possible
repurchase losses, we cannot assure investors that we will not incur material
losses in excess of these reserves in the future.
Intense Competition
The production and sale of manufactured homes is a highly competitive industry,
characterized by low barriers to entry and severe price competition. Competition
is based primarily on the following factors:
o price;
o repair service;
o product features and quality;
o reputation for service and quality;
o depth of field inventory;
o delivery capabilities;
o warranty repair service;
o dealer promotions;
o merchandising; and
o terms of dealer and retail consumer financing.
In addition, Cavalier competes with other manufacturers, some of which maintain
their own retail sales centers, for independent dealers. Manufactured homes also
compete with other forms of low-cost housing, including site-built,
prefabricated and modular homes, apartments, townhouses and condominiums. We
face direct competition from numerous manufacturers, many of which possess
greater financial, manufacturing, distribution and marketing resources. As a
result of these competitive conditions, Cavalier may not be able to sustain past
levels of sales or to continue its recent sales growth or profitability.
Reliance on Executive Officers
Cavalier's success depends highly upon the personal efforts and abilities of its
current executive officers. Specifically, Cavalier relies on the efforts of its
Chairman of the Board, Barry B. Donnell, its President and Chief Executive
Officer, David A. Roberson, and its Vice President, Chief Financial Officer and
Secretary-Treasurer, Michael R. Murphy. The loss of the services of one or more
of these individuals could have a material adverse effect upon our business. We
12
do not have employment or non-competition agreements with any of our executive
officers. Our continued growth, including the expansion of CAC's business, will
depend upon our ability to attract and retain additional experienced management
personnel.
Dependence on Independent Dealers
Cavalier depends on independent dealers for substantially all retail sales of
our manufactured homes. Typically only one dealer within a given market area
distributes a particular product line of ours. Our relationships with our
dealers are cancelable on short notice by either party. The manufactured housing
industry has recently experienced a trend of increasing competition for quality
independent dealers. Many manufacturers, which had previously not owned their
own retail sales centers, have begun purchasing independent dealers and/or
establishing their own retail sales centers. While we believe that our relations
with our independent dealers are generally good, we cannot assure our investors
that we will be able to maintain these relations, that these dealers will
continue to sell our homes, or that we will be able to attract and retain
quality independent dealers.
Potential Adverse Effects on Regulation
Cavalier 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 under such act by the U. S.
Department of Housing and Urban Development ("HUD"), impose comprehensive
national construction standards for manufactured homes and preempt conflicting
state and local regulations. Cavalier's failure to comply with such regulations
could expose us to a wide variety of sanctions, including closing one or more
manufacturing facilities. HUD has promulgated regulations with respect to
structural design and wind loads and energy conservation. Cavalier's operations
were not materially affected by the regulations; however, HUD has these matters
under continuous review and we cannot predict what effect (if any) additional
regulations promulgated by HUD would have on us or the manufactured housing
industry as a whole. In addition, the U. S. Consumer Product Safety Commission
regulates certain components of manufactured homes. Cavalier'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, and both state and
local entities regulate utility connections. In addition, federal, state and
local authorities regulate the transportation of manufactured homes on highways.
Cavalier 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 Cavalier'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."
Cavalier cannot assure its investors that failure to comply with any laws or
regulations applicable to or affecting Cavalier will not adversely affect us.
Compliance with Environmental Laws
Federal, state and local laws and regulations relating to the generation,
storage, handling, emission, transportation and discharge of materials into the
environment govern Cavalier's operations. In addition, third parties and
governmental agencies in some cases have the power under such laws and
regulations to require remediation of environmental conditions and, in the case
of governmental agencies and entities, to impose fines and penalties. The
requirements of such laws and enforcement policies have generally become more
strict in recent years. Accordingly, we cannot assure investors that we will not
be required to incur response costs, remediation expenses, fines, penalties or
other similar damages, expenses or liabilities, or to incur operational
shut-downs, business interruptions or similar losses, associated with compliance
with environmental laws and enforcement policies that either individually or in
the aggregate would have a material adverse effect on our results of operations
or financial condition.
Litigation
We suggest that you read Item 3., Legal Proceedings, below, for description of
certain risk factors associated with litigation.
Volatility of Stock Price
The Company's common stock is traded on the NYSE. The market price of the
Company's common stock may be subject to significant fluctuations in response to
variations in the Company's operating results and other factors affecting the
Company specifically, the manufactured housing industry generally, and the stock
market generally.
13
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,
1998.
Approximate Owned/
Location Use (Number of Facilities) Square Footage Leased
Manufacturing & Distribution
Belmont Homes, Inc.
Belmont Mississippi Manufacturing facilities (3) 354,000 Owned
Clarksdale, Mississippi Manufacturing facility (1) 91,000 Owned
Cavalier Homes of Alabama
Addison, Alabama Manufacturing facilities (4) 545,000 Owned (a)
Buccaneer Homes
Hamiliton, Alabama Manufacturing facility (1) 195,000 Owned
Winfield, Alabama Manufacturing facilities (2) 205,000 Leased
Town & Country Homes
Fort Worth, Texas Manufacturing facility (1) 101,000 Owned
Mineral Wells, Texas Manufacturing facility (1) 81,000 Leased
Graham, Texas Manufacturing facility (1) 103,000 Leased
Spirit Homes, Inc.
Conway, Arkansas Manufacturing facilities (2) 220,000 Owned
Bigelow, Arkansas Manufacturing facility (1) 80,000 Owned
Bellcrest Homes, Inc.
Millen, Georgia Manufacturing facilities (2) 164,000 Owned
Adrian, Georgia Manufacturing facility (1) 90,000 Owned
Brigadier Homes of North Carolina
Nashville, North Carolina Manufacturing facility (1) 130,000 Owned
Homestead Homes
Cordele, Georgia Manufacturing facility (1) 110,000 Owned
Mansion Homes
Robbins, North Carolina Manufacturing facility (1) 99,000 Leased
Riverchase Homes
Haleyville, Alabama Manufacturing facility (1) 78,000 Owned
Astro Homes
Shippenville, Pennsylvania Manufacturing facility (1) 120,000 Owned
Quality Housing Supply, LLC
Hamiliton, Alabama Manufacturing facility (1) 50,000 Leased
Winfield, Alabama Distribution facility (1) 48,000 Leased
BRC Components, Inc.
Phil Campbell, Alabama Distribution facility (1) 50,000 Leased
Financial Services
Hamilton, Alabama Administrative Office 7,000 Owned
Haleyville, Alabama Administrative Office 1,000 Leased
Greensboro, North Carolina Administrative Office 2,000 Leased
General Corporate & Other
Addison, Alabama Administrative Office 8,000 Owned
Wichita Falls, Texas Administrative Office 1,000 Leased
Haleyville, Alabama Administrative Office 4,000 Leased
(a) During the first quarter of 1999, the Company purchased two of these
manufacturing facilities which were previously leased.
In general, the manufacturing facilities are in good condition and are operated
at capacities which range from approximately 52% to 90%, excluding the facility
in Adrian, Georgia which began production in March 1999, and the idle facility
in Bigelow, Arkansas.
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
14
compensatory and punitive damages and trials by jury. The outcome of many of the
cases in which the Company is involved or may in the future become involved
cannot be predicted with any degree of reliability, and the potential exists for
unanticipated material adverse judgments against the Company and its respective
subsidiaries.
In addition, Belmont has been sued by three former shareholders (the
"Plaintiffs") of Belmont Homes, Inc., an Alabama corporation which originally
owned the initial Belmont manufacturing facility ("BHIA"), in the Circuit Court
of Madison County, Alabama (Case Number CV 97-2297) 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. In May 1998, the Circuit Court
of Madison County, Alabama, upon motion of the defendants, transferred the
Madison County action to the Circuit Court of Franklin County, Alabama, and the
plaintiffs subsequently appealed this decision to transfer to the Alabama
Supreme Court. 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.*
In September 1998, the Company and certain of its subsidiaries, along with a
number of other manufactured housing producers, the Manufacturing Housing
Institute, and the Manufactured Housing Association for Regulatory Reform, were
named as defendants in a lawsuit purporting to be brought on behalf of all
Kentucky residents who own manufactured homes produced by the defendants. The
complaint was filed in the Commonwealth of Kentucky Pendleton Circuit Court,
Case No. 98-CI-00143, and alleges that the defendants engaged in wrongful
conduct and fraudulent misrepresentation and concealment, and that manufactured
housing units are unsafe and/or dangerous for residential use because their
design allegedly makes them more susceptible to fire. The plaintiffs seek
compensatory and punitive damages, a requirement to retrofit manufacturing
housing units with sprinkler systems, and other equitable and legal relief. The
Plaintiffs seek to bring the lawsuit as a class action, but the court has not
yet ruled as to whether class action status is proper. The Company believes the
claims are without merit and intends to vigorously defend the case. The outcome
of this litigation and its effect on the Company cannot presently be determined,
however, and the possibility exists for an adverse resolution of the litigation
which could have a material adverse effect on the results of operations and
financial condition of the Company. *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders during the last quarter of the
fiscal year.
- -------
* See Safe Harbor Statement on page 53.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK-
HOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CAV". The following table sets forth, for each of the periods
indicated, the reported high and low closing sale prices per share on the NYSE
for the Company's common stock and the cash dividends paid per share in such
periods. All adjusted prices of the Company's common stock have been rounded to
the nearest one-eighth of one dollar.
Closing Sales Price
------------------------------
High Low Dividends
--------------- ------------- -----------
Year ended December 31, 1998
Fourth Quarter $ 11 3/8 $ 7 7/8 $ 0.040
Third Quarter $ 13 $ 9 1/16 0.030
Second Quarter $ 12 11/16 $ 10 7/8 0.030
First Quarter $ 11 13/16 $ 9 5/8 0.030
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
As of March 22, 1999, the Company had approximately 450 shareholders of record
and 5,900 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 consolidated
net income for the two most recent fiscal years.
- --------
* See Safe Harbor Statement on page 53.
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, 1998, have been derived from the consolidated financial statements
of the Company. The Company's audited financial statements as of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31, 1998, including the notes thereto and the related report of Deloitte &
Touche LLP, independent auditors, are included elsewhere in this report. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements (including the Notes thereto) and the other
financial information contained elsewhere in this report, and with the Company's
consolidated financial statements and the notes thereto appearing in the
Company's previously filed Annual Reports on Form 10-K.
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ------------ ----------- -----------
(in thousands, except per share amounts)
Statement of Income Data
Revenue:
Home manufacturing net sales $ 598,116 $ 553,730 $ 572,997 $ 420,519 $ 312,268
Financial services 6,088 5,346 3,333 1,764 703
Other 9,866 2,112 841 271 -
----------- ----------- ----------- ----------- -----------
Total revenue 614,070 561,188 577,171 422,554 312,971
Cost of sales 496,708 464,222 482,204 354,811 265,943
Selling, general and administrative 87,611 72,526 54,120 39,035 28,109
Non-recurring merger and related
costs - 7,359 - - -
----------- ----------- ----------- ----------- -----------
Operating profit 29,751 17,081 40,847 28,708 18,919
Life insurance proceeds - 1,500 1,750 - -
Other income (expense) - net 1,531 (242) 1,589 90 (612)
----------- ----------- ----------- ----------- -----------
Income before taxes $ 31,282 $ 18,339 $ 44,186 $ 28,798 $ 18,307
=========== =========== =========== =========== ===========
Net income $ 18,655 $ 10,247 $ 27,479 $ 17,630 $ 11,458
=========== =========== =========== =========== ===========
Basic net income per share1 $ .94 $ .52 $ 1.42 $ 1.06 $ .83
=========== =========== =========== =========== ===========
Diluted net income per share1 $ .93 $ .51 $ 1.39 $ 1.03 $ .82
=========== =========== =========== =========== ===========
Cash dividend per share1 $ .13 $ .07 $ .06 $ .04 $ .02
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding1 19,905 19,835 19,363 16,630 13,824
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding, assuming dilution1 20,144 20,028 19,799 17,057 14,036
=========== =========== =========== =========== ===========
Other Data
Capital expenditures $ 14,655 $ 10,186 $ 16,106 $ 13,482 $ 7,665
=========== =========== =========== =========== ===========
December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Balance Sheet Data
Working capital $ 41,707 $ 28,484 $ 24,746 $ 22,157 $ 18,095
Total assets $ 235,952 $ 211,554 $ 196,387 $ 132,694 $ 86,859
Long-term debt $ 3,650 $ 15,808 $ 6,227 $ 11,233 $ 13,057
Stockholders' equity $ 144,911 $ 133,551 $ 122,652 $ 75,119 $ 41,767
1 As adjusted for all stock splits.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Industry Outlook
The Company's business is cyclical and seasonal and is influenced by many of the
same economic and demographic factors which affect the housing market as a
whole. The manufactured housing industry experienced significant growth in
shipments from 1992 through 1996. Since 1992, floor shipments have increased
each year, although the growth rate gradually slowed to 1% in 1997. Industry
floor shipments in 1998 improved over 1997, with the Manufactured Housing
Institute reporting floor shipments increased 7.8% in 1998 over 1997. The
Company attributes this growth to a reduction in alternative housing, increased
availability of retail financing, increased consumer confidence and continuing
strength in the national economy. As a result, the manufactured housing industry
has, over the past several years, also experienced increases in both the number
of retail dealers and manufacturing capacity. The Company believes these
increases are currently resulting in slower retail turnover, higher dealer
inventories and increased price competition. Multi-section shipments continue to
grow as a percentage of overall shipments and represented 61.3% of industry
shipments in 1998 versus 57.9% in 1997. A single-section home is comprised of
one floor, while a multi-section home is comprised of two or more floors.
Results of Operations
The following table summarizes certain financial and operating data including,
as applicable, the percentage of total revenue:
For the Year Ended December 31,
----------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
----------------------- ---------------------- ----------------------
Home manufacturing net sales $ 598,116 $ 553,730 $ 572,997
Financial services 6,088 5,346 3,333
Other 9,866 2,112 841
---------- ---------- ----------
Total revenue $ 614,070 100.0% $ 561,188 100.0% $ 577,171 100.0%
========== ========== ==========
Total revenue $ 614,070 100.0% $ 561,188 100.0% $ 577,171 100.0%
Cost of sales 496,708 80.9% 464,222 82.7% 482,204 83.5%
---------- ------- ---------- ------- ---------- -------
Gross profit $ 117,362 19.1% $ 96,966 17.3% $ 94,967 16.5%
========== ======= ========== ======= ========== =======
Selling, general and administrative $ 87,611 14.3% $ 72,526 12.9% $ 54,120 9.4%
Non-recurring merger and related costs $ - 0.0% $ 7,359 1.3% $ - 0.0%
Operating profit $ 29,751 4.8% $ 17,081 3.0% $ 40,847 7.1%
Other income $ 1,531 0.2% $ 1,258 0.2% $ 3,339 0.6%
Net income $ 18,655 3.0% $ 10,247 1.8% $ 27,479 4.8%
Installment loan purchases $ 27,438 $ 18,013 $ 19,932
Capital expenditures $ 14,655 $ 10,186 $ 16,106
Home shipments 24,387 23,602 25,652
Floor shipments 36,517 33,646 34,581
Independent exclusive dealer locations 232 132 115
Company-owned retail locations 5 - -
Home manufacturing facilities 23 22 24
1998 compared to 1997
Revenue
Home manufacturing net sales for 1998 as compared to 1997 increased
by 9%, or $50 million, to a record $603 million, before elimination of
intercompany transactions of $5 million, with home shipments increasing by 3.3%.
During 1998, 49% of the Company's homes sold were multi-section homes compared
to 42% for the previous year. As the sale of multi-section homes continued to
increase, the number of floors sold in 1998 increased 8.5% from 1997. The
expansion of the Company's multi-section product base is in response to
increasing consumer demand for multi-section homes. At year end, the exclusive
dealer distribution system had grown to 237 exclusive dealer locations,
including five Company-owned retail locations. Sales to exclusive dealers
represented 40% of total 1998 sales compared to 30% in 1997. The Company
attributes the strong growth in its Exclusive Dealer Program to dealer
acceptance of the program's benefits and the introduction of the program to the
Belmont group of dealers. Actual shipments of homes during 1998 were 24,387
versus 23,602 in 1997. The average price of homes sold roseto $24,700 in 1998
from $23,500 in 1997. The increase in the average selling price was primarily
due to price increases instituted by the Company associated with rising prices
in raw materials and an increase in the shipment of multi-section homes.
Revenue from the financial services segment increased $0.7 million in 1998 as
compared to 1997 primarily due to a gain on the sale of a significant portion of
Cavalier Acceptance Corporation's (CAC)loan portfolio in 1998 and the subsequent
periodic resale of loans. In 1998, the effect of the portfolio sale on financial
services revenue was a reduction in interest income earned of $1.4 million,
17
offset by the gain on sale of loans of $2 million. During 1998, the business
focus of CAC changed from building, holding and servicing a portfolio of loans
to purchasing loans from its dealers that are subsequently resold to another
financial institution without CAC retaining the servicing function. During 1998,
CAC purchased contracts totaling $27 million as compared to $18 million in 1997.
Other revenue consists mainly of revenue from wholesale supply businesses and
Company-owned retail sales locations. The supply businesses sell mainly to the
home manufacturing segment, whereas the Company-owned retail sales locations
purchase mainly from the home manufacturing segment. Revenue from external
customers increased $8 million in 1998 over 1997 due primarily to retail sales
of $7 million.
Gross Profit
Gross profit is derived by deducting cost of sales from total revenue. Gross
profit was $117 million, or 19.1%, in 1998 versus $97 million, or 17.3%, in
1997. The Company believes an increase in total revenue and cost savings due to
increased purchasing and other efficiencies after the Belmont merger are
responsible for a significant portion of this increase. Currently, the Company
is experiencing tightened supply from its traditional vendors of certain types
of raw materials, including sheetrock and insulation, required for the
production of its manufactured homes. The Company is attempting to obtain these
products from other vendors and to purchase substitute products, which may
result in higher than normal costs. The possibility exists that the Company may
be unable to recover these additional costs through price increases or that
these and substitute products may become scarce or unavailable. *The Company is
uncertain at this time as to the extent and duration of these developments and
as to what effect these factors may have on the Company's future sales and
earnings.
Selling, General and Administrative
Selling, general and administrative expenses during 1998 were $88 million, or
14.3% of total revenue, compared to $73 million, or 12.9% of total revenue, in
1997, an increase of $15 million as compared to 1997. Of this increase, $4.5
million is related to broadened sales and marketing efforts, including
recruiting, set-up and maintenance of the exclusive dealer network, and the
continued development of a retail infrastructure. Additionally, selling, general
and administrative expenses increased $1.4 million due to higher costs for
employee benefits, primarily health insurance, $1 million for increased warranty
service activities and $0.7 million for the start-up costs associated with
implementing an enterprise-wide management information system. Other factors
contributing to the increase in selling, general and administrative expenses are
the costs associated with retail acquisitions, opening an additional home
manufacturing facility and the expansion of the supply distribution business.
Operating Profit
Operating profit is derived by deducting cost of sales and selling, general and
administrative expenses from total revenue. Operating profit improved $13
million to $30 million in 1998 from $17 million in 1997. Home manufacturing
operating profit improved $2.5 million due to an increase in sales and cost
savings associated with increased purchasing and other efficiencies after the
Belmont merger. Financial services operating profit improved $0.2 million due to
a gain on the sale of a significant portion of CAC's loan portfolio, offset by
reduced interest income on the portion of the portfolio sold. Additionally,
operating profit improved due to the absence of a $7.4 million non-recurring
merger charge in 1997.
Other Income (Expense)
Interest expense decreased in 1998 from 1997 due to the March 1998 retirement of
the financial services debt which was paid with the proceeds from the sale of a
portion of CAC's loan portfolio, as well as the payoff in September 1997 of debt
that had been used to support the 1996 Bellcrest acquisition, offset by floor
plan interest in 1998 incurred in connection with the Company-owned retail sales
locations.
Other, net, is primarily comprised of interest income (unrelated to financial
services), gains or losses on sales of assets, equity earnings in investments
accounted for on the equity basis of accounting and applicable allocation of
minority interest. The increase of $1.1 million in 1998 as compared to 1997 was
primarily due to increased interest income on earnings from the cash proceeds
from the sale of a portion of CAC's loan portfolio.
Net Income
Net income improved $8.5 million to $18.7 million in 1998 from $10.2 million in
1997 due primarily to an increase in total revenue, the cost savings associated
with increased purchasing and other efficiencies after the Belmont merger and
the absence of the non-recurring merger charge of $6.5 million net of taxes.
- --------
* See Safe Harbor Statement on page 53.
18
1997 compared to 1996
Revenue
Home manufacturing net sales for 1997 as compared to 1996 decreased by 3%, or
$19 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 was
primarily attributable to increased competition in the manufactured housing
industry related t an increase in manufacturing capacity, higher dealer
inventories and slower retail inventory turnover. Net sales for 1997 included
approximately $51 million from Bellcrest, which was acquired in October 1996.
Shipments of homes during 1997 were 23,602 compared to 25,652 in 1996. During
1997, the average price of homes sold rose to $23,500 versus $22,300 in 1996.
The increase in the average selling price was primarily due to price increases
established by the Company in response to rising prices in raw materials and an
increase in the shipment of multi-section homes. During 1997, the percentage of
multi-section homes sold was 42%, up from 35% of total homes sold in 1996.
Revenue from the financial services segment increased $2 million in 1997 as
compared to 1996 due primarily to an increase in the loan portfolio to $49
million at year-end 1997 from $36 million at the end of 1996. During 1997, CAC
purchased contracts totaling $18 million as compared to $20 million in 1996.
Other revenue consists primarily of revenue from wholesale supply businesses
which sell mainly to the home manufacturing segment. Revenue from external
customers increased $1 million in 1997 over 1996 due primarily to the start-up
of a new supply company in 1997.
Gross Profit
Gross profit is derived by deducting cost of sales from total revenue. Gross
profit was $97 million, or 17.3%, in 1997 versus $95 million, or 16.5%, in 1996.
Gross profit for 1997 was negatively impacted by a reduction in home
manufacturing net sales and $0.8 million charged to warranty expense in
connection with conforming Belmont's contractual warranty arrangements to
Cavalier's.
Selling, General and Administrative
Selling, general and administrative expenses during 1997 were $73 million, or
12.9% of total revenue, compared to $54 million, or 9.4% of total revenue, in
1996. During 1997, selling, general and administrative expenses increased $19
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.
Merger and Related Costs
In connection with the Belmont merger, the Company recorded charges of $7.4
million in 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 expenses and merger and related costs from total revenue.
Operating profit declined $23.8 million from 1996 to 1997. Home manufacturing
operating profit declined $17.4 million primarily due to the reduction in sales
and the increase in costs associated with new or expanded manufacturing
facilities of $9.1 million. Financial services operating profit improved $0.8
million primarily due to the increase in its loan portfolio. Additionally,
operating profit declined due to the non-recurring merger and related costs
associated with the Belmont merger of $7.4 million.
Other Income (Expense)
Interest expense for 1997 increased by $0.6 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, interest on two new industrial
development bond issues, as well as the additional borrowings incurred to
support the level of purchases of retail installment sales contracts by CAC.
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.
19
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.
Net Income
Net income declined from 1996 to 1997 primarily due to the reduction in home
manufacturing 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).
Liquidity and Capital Resources
Balances as of December 31,
--------------------------------
(Dollars in thousands) 1998 1997 1996
---------- ---------- ---------
Cash and cash equivalents $ 64,243 $ 37,276 $ 29,751
Certificates of deposit, maturing within one year $ - $ 4,000 $ -
Working capital $ 41,707 $ 28,484 $ 24,746
Current ratio 1.5 to 1 1.5 to 1 1.4 to 1
Long-term debt $ 3,650 $ 15,808 $ 6,227
Ratio of long-term debt to equity 1 to 40 1 to 8 1 to 20
Installment loan portfolio $ 26,117 $ 49,146 $ 36,425
As of December 31, 1998, the Company had working capital of $42 million compared
to $28 million at the end of 1997, an increase of $14 million. The 1998 increase
in working capital and the decreases in long-term debt and the debt to equity
ratio were due to the sale of a portion of CAC's installment loan portfolio, of
which a portion of the proceeds were used to retire approximately $14 million in
debt and approximately $13 million was invested in short-term assets. Operating
activities provided cash of $37 million in 1998. The Company's capital
expenditures were approximately $15 million in 1998. Capital expenditures during
1998 included normal property, plant and equipment additions and replacements,
the continued expansion and modernization of certain of the Company's
manufacturing facilities, as well as the purchase of a Texas manufacturing
facility that was previously leased, land adjacent to a North Carolina and a
Georgia manufacturing facility, and an additional manufacturing facility in
Georgia to be placed in operation in 1999. During the first quarter of 1999, the
Company purchased, for a total of $3.4 million, two Alabama manufacturing
facilities that were previously leased. The Company also initiated a stock
repurchase program during the latter part of 1998 of 2,000,000 shares, of which
852,600 shares had been repurchased at December 31, 1998 for approximately $8
million. The Company completed this repurchase during the first quarter of 1999,
and the Board of Directors has authorized the repurchase of an additional
2,000,000 shares. During the first of quarter of 1999, through March 23, 1999,
the Company purchased 1,459,000 shares for $14 million.
As of December 31, 1997, the Company had working capital of $28 million compared
to $25 million at the end of 1996, an increase of $3 million. The 1997 working
capital increase of $3 million was due primarily to net long-term borrowings of
$3 million, $2 million in proceeds from the sale of common stock, installment
loan collections of $5 million and net cash provided by operating activities of
$23 million for the year, reduced by $10 million in capital expenditures and $18
million in installment loan purchases. Capital expenditures during 1997 included
normal property, plant and equipment additions and replacements and the
acquisition of a home manufacturing facility in Texas.
The Company entered into a credit agreement with its primary lender in February
1994 and later amended it in March 1996 and June 1998. The credit facility
presently consists of a $35 million revolving, warehouse and term-loan
agreement. The credit facility contains a revolving line of credit which
provides for borrowings (including letters of credit) of up to 80% and 50% of
the Company's eligible (as defined) accounts receivable and inventories,
respectively, up to a maximum of $10 million. Interest is payable under the
revolving line of credit at the bank's prime rate, or, if elected by the
Company, the 90-day LIBOR Rate plus 2.5%. The warehouse and term-loan agreements
contained in the credit facility provide for borrowings of up to 80% of the
Company's eligible (as defined) installment sales contracts, up to a maximum of
$25 million. Interest on the term notes is fixed for a period of five years from
issuance at a rate based on the weekly average yield on five-year treasury
securities averaged over the preceding 13 weeks, plus 1.95%, with a floating
rate for the remaining two years (subject to certain limits) equal to the bank's
prime rate plus 0.75%. The warehouse component of the credit facility provides
for borrowings of up to $25 million with interest payable at the bank's prime
rate, or, if elected by the Company, the 90-day LIBOR Rate plus 2.5%. However,
in no event may the aggregate outstanding borrowings under the warehouse and
term-loan agreement exceed $25 million. Under the credit facility, no amounts
were outstanding at December 31, 1998, and $12.7 million was outstanding at
December 31, 1997.
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
20
income for the two most recent years, (ii) mortgage or pledge assets which
exceed, in the aggregate, $1 million, (iii) incur additional indebtedness,
including lease obligations, which exceed in the aggregate $10 million and (iv)
make capital expenditures in excess of $14 million. In addition, the credit
facility contains certain financial covenants requiring the Company to maintain
on a consolidated basis certain defined levels of net working capital (at least
$3.5 million), tangible net worth (which must increase at least $2 million per
year, subject to a carryover for increases in excess of $2 million in the prior
year), debt to equity ratio (not to exceed 2 to 1) and cash flow to debt service
ratio (not less than 1.5 to 1). The credit facility also requires CAC to comply
with certain specified restrictions and financial covenants.
Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds borrowed under its credit line with its primary lender. In
February 1998, CAC entered into an agreement with another lender providing for
the periodic resale of a portion of CAC's loans that meet established criteria.
In March 1998, CAC sold, under the retail finance agreement, a substantial
portion of its then existing portfolio of loans. The effect of this transaction
on net income was to reduce the amount of financial services revenue from
interest income on this portion of the portfolio, offset by reduced interest
expense on retired debt and earnings on the remaining proceeds. Pursuant to the
retail finance agreement, the Company may sell a substantial portion of its
existing installment loan portfolio in fiscal year 1999, in addition to the
periodic sale of installment contracts purchased by CAC in the future. * The
Company believes the periodic sale of installment contracts under the retail
finance agreement will reduce requirements for both working capital and
borrowings, increase the Company's liquidity, reduce the Company's exposure to
interest rate fluctuations and enhance the ability of CAC to increase its volume
of loan purchases.* There can be no assurance, however, that additional sales
will be made under this agreement, or that CAC and the Company will be able to
realize the expected benefits from such agreement. *
The Company's growth strategy currently includes the continued expansion of
financial services, component supply operations, and its independent dealer
network, the pursuit of additional acquisitions and, to a lesser extent, the
acquisition or opening of Company-owned retail locations. The Company currently
believes existing cash and funds available under the credit facility, together
with cash provided by operations, will be adequate to fund the Company's
operations and plans for the next twelve months. In order to provide additional
funds for continued pursuit of the Company's growth strategies and for
operations, the Company may incur, from time to time, additional short and
long-term bank indebtedness or other forms of financing and may issue, in public
or private transactions, its equity and debt securities, the availability and
terms of which will depend upon market and other conditions. * The Company may
engage in other transactions, such as selling or securitizing all or portions of
its installment loan portfolio, that are designed to facilitate the ability of
the Company to originate an increased volume of loans and to reduce the
Company's exposure to interest rate fluctuations and has entered into such a
transaction pursuant to the retail finance agreement, as further described
above. * There can be no assurance that such possible additional financing, or
the aforementioned potential transactions involving the Company's installment
loan portfolio, will be available on terms acceptable to the Company. It is
possible that a future lack of financing or a prolonged downturn in industry
conditions could cause the Company to curtail 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, however, can affect the ability of the Company to
increase its selling prices. As discussed above, the Company currently is
experiencing tightened supply of certain types of raw materials. For a further
discussion of this matter, see "1998 Compared to 1997 - Gross Profit." The
Company believes that the relatively moderate rate of inflation over the past
several years has not had a significant impact on its sales or profitability,
but can give no assurance that this trend will continue in the future. *
Impact of Accounting Statements
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 is required to be adopted for years beginning
after June 15, 1999. The Company is currently evaluating SFAS 133 and has not
yet determined its impact on the Company's consolidated financial statements.
Year 2000 Compliance
Many of the Company's computer systems and software products, as well as the
systems and products of third parties doing business with the Company, are
subject to the "Year 2000" issue, which is the inability of a computer to
correctly process dates after December 31, 1999. This inability could
potentially cause affected computers to shut down or perform incorrect
calculations, ultimately resulting in a system failure, disruption of
operations, and the inability to engage in normal business activities. This
issue also affects products or system which contain embedded computer chips with
date sensitive programming such as security systems, telephone equipment and
office equipment. As a result, many companies' software and computer systems
need to be upgraded or replaced in order to address the Year 2000 issue.
- --------
* See Safe Harbor Statement on page 53.
21
The Company has implemented a program to evaluate and address the risks and
problems associated with the Year 2000 issue. This program identifies four
stages as follows:
1) The preliminary assessment of each computer system and microprocessor
the Company utilizes for Year 2000 compliance is complete, and the
testing of these systems and microprocessors is approximately 75%
complete. As a result of this assessment, the Company believes most of
the significant systems and microprocessors it utilizes are currently
Year 2000 compliant or will be with the installation of available
upgrades, except for an accounting system used by two of the Company's
subsidiaries. *
2) The identification of Year 2000 compliance by significant or critical
third parties has been completed, and the scheduled completion date to
replace all non-compliant third parties is October 1999.
3) The completion of any Company system conversions and verification that
all Company systems are Year 2000 compliant are expected to be
completed by December 1999. *
4) The development of a contingency plan is the last phase and is expected
to be completed by October 1999. The Company currently expects its
contingency plan to include installation of certain Year 2000 compliant
software, currently in use at most of its operations, for the two
subsidiaries with non-compliant accounting software. *
The costs incurred to date to address the Year 2000 issue have not been
material; however, the Company expects to incur between $800,000 and $1,200,000
as an expense, in addition to approximately $200,000 of capital expenditures,
during 1999 in order to complete the assessment and implementation, and to fund
such cost from operations. * This anticipated cost is required to replace
non-compliant microprocessors and to purchase and implement accounting software
for two of the Company's subsidiaries. These activities are being performed in
conjunction with a larger multi-year migration from the Company's current
systems to an enterprise-wide management information system. This estimate
assumes that third parties have correctly assessed and communicated to the
Company the status of their Year 2000 compliance, and that material Year 2000
compliance issues with respect to third parties who have not communicated with
the Company will not arise in the future. * Because of this reliance and the
subjective nature of the Year 2000 compliance issue, the actual costs to address
and resolve any non-compliance issues may differ materially from those
anticipated.
The Company could be affected if the Year 2000 issue affects suppliers'
abilities to provide raw materials needed in the manufacturing process. The
Company is also dependent on third parties or government agencies to 1) supply
sufficient electrical power, utilities, transportation and other services to
sustain the manufacturing process and CAC's operations, 2) process, pay and
maintain records of certain employee benefits, 3) supply funds in a timely
fashion for its dealers and retail customers to purchase homes, and 4) fund
sales of portions of CAC's loan portfolio. Any failure on the part of these
third parties could have a material adverse effect on the business operations
and financial performance of the Company. *
If the Company's efforts to resolve the Year 2000 issue are not adequate or
implemented in a timely manner, the Company could experience a disruption in its
normal business activities. * Management of the Company believes the most
reasonably likely worst case scenario would be the delay in collections from
third party financing agents which could result in liquidity issues for the
Company, as well as the delay of financial reporting due to any accounting
processes which may need to be performed manually until all Year 2000 issues are
resolved. * However, the potential consequences of the Year 2000 issue are
inherently uncertain, and consequently, no assurance can be given that this will
be the reasonably likely worst case scenario.
Market Risk
Market risk is the risk of loss arising from adverse changes in market prices
and interest rates. The Company is exposed to interest rate risk inherent in its
financial instruments. The Company is not currently subject to foreign currency
or commodity price risk. The Company manages its exposure to these market risks
through its regular operating and financing activities.
The Company is exposed to market risk related to investments held in a
non-qualified trust used to fund benefits under its deferred compensation plan.
These investments totaled $1.4 million at December 31, 1998. Due to the
long-term nature of the benefit liabilities that these assets fund, the
Company's exposure to market risk is low. A decline in market value of these
investments would not result in a material near term funding of the trust or
exposure to the benefit liabilities funded.
The Company purchases retail installment contracts from its exclusive dealers,
at fixed interest rates, in the ordinary course of business, and periodically
resells certain of these loans to a financial institution under the terms of the
retail finance agreement discussed above. The periodic resale of installment
contracts reduces the Company's exposure to interest rate fluctuations, as the
majority of contracts are held for a short period of time. Additionally, the
Company has installment loans receivable in its portfolio of $25 million which
may be sold during 1999. The Company's portfolio consists of fixed rate
contracts with interest rates generally ranging from 8.0% to 13.0% and an
average original term of 216 months at December 31, 1998. The Company estimated
the fair value of its installment contracts receivable using discounted cash
flows and interest rates offered by CAC on similar contracts at December 31,
1998.
- --------
* See Safe Harbor Statement on page 53.
22
The Company has notes payable under retail floor plan agreements and an
Industrial Development Revenue Bond issue that are exposed to changes in
interest rates. Although these borrowings are floating rate debt, the interest
rate risk posed by these borrowings currently is low because the amount of debt
has historically been small in relation to annual cash flow. The Company has the
ability to retire this debt if interest rates were to increase significantly.
Additionally, the Company has two Industrial Development Revenue Bond issues at
fixed interest rates. The estimated fair value of outstanding borrowings
approximated carrying value at December 31, 1998. The Company estimated the fair
value of its debt instruments using rates at which the Company believes it could
have obtained similar borrowings at that time. The Company also has the ability
to incur debt under its credit facility which provides for interest at the
bank's prime rate for the revolving and warehouse line of credit and at fixed
rates for a certain period of time for the term notes. The table below provides
information about the Company's financial instruments that are sensitive to
changes in interest rates at December 31, 1998.
Assumed Annual Principal Cash Flows
----------------------------------------------------------------------------
(dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair value
Installment loan portfolio $ 862 $ 961 $1,071 $1,194 $1,331 $20,698 $26,117 $ 26,211
(weighted average interest rate - 10.93%)
Expected Principal Maturity Dates
----------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair value
Notes payable and long-term debt $ 4,568 $ 429 $ 457 $ 480 $ 499 $ 1,785 $ 8,218 $ 8,218
(weighted average interest rate - 7.44%)
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Selected Quarterly Financial Data (Unaudited)
The table below sets forth certain unaudited quarterly financial data for the
two years ended December 31, 1998 and 1997. The Company believes that the
following quarterly financial data includes all adjustments necessary for a fair
presentation, in accordance with generally accepted accounting principles. The
following quarterly financial data should be read in conjunction with the other
financial information contained elsewhere in this report. The operating results
for any interim period are not necessarily indicative of results for a complete
year or for any future period.
Fourth Quarter Third Quarter Second Quarter First Quarter Total
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
1998
Revenue:
Home manufacturing $ 158,457 $ 152,542 $ 164,274 $ 122,843 $ 598,116
Financial services 1,526 1,121 1,015 2,426 6,088
Other 3,397 3,835 2,324 310 9,866
------------ ------------ ------------ ------------ ------------
Total revenue 163,380 157,498 167,613 125,579 614,070
Gross profit 32,444 30,634 31,460 22,824 117,362
Net income 5,324 5,220 5,069 3,042 18,655
Basic net income per share a .27 .26 .25 .15 .94
Diluted net income per share a .27 .26 .25 .15 .93
1997
Revenue:
Home manufacturing $ 132,297 $ 137,744 $ 158,015 $ 125,674 $ 553,730
Financial services 1,526 1,382 1,296 1,142 5,346
Other 786 532 396 398 2,112
------------ ------------- ------------ ------------ ------------
Total revenue 134,609 139,658 159,707 127,214 561,188
Gross profit 23,681 24,214 27,273 21,798 96,966
Net income (4,165)b 3,639 6,880 c 3,893 10,247 b,c
Basic net income per share a (.21)b .18 .35 c .20 .52 b,c
Diluted net income per share a (.21)b .18 .34 c .19 .51 b,c
a The sum of quarterly amounts may not equal the annual amounts due to rounding.
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 $1,500 or $.08 per share Basic, and $.07
Diluted from life insurance proceeds.
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 company's 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. In addition,
certain amounts from prior periods have been reclassified to conform to the
current presentation.
24
CAVALIER HOMES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Consolidated Financial Statements and Schedule
Independent Auditor's Report 26
Consolidated Balance Sheets 27
Consolidated Statements of Income 29
Consolidated Statements of Stockholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32
Schedule -
II - Valuation and Qualifying Accounts 47
Schedules I, III, IV and V have been omitted because they are either not
required or are inapplicable.
25
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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the index at Item 8. The financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. The
consolidated financial statements and financial statement schedule give
retroactive effect to the merger of the Company and Belmont Homes, Inc., which
has been accounted for as a pooling of interests as described in Note 2 to the
consolidated financial statements. We did not audit the consolidated financial
statements of Belmont Homes, Inc. for the year ended December 31, 1996, which
statements reflect total revenues of $227,817,000. 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,
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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 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 19, 1999
26
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 64,243 $ 37,276
Certificates of deposit, maturing within one year 4,000
Accounts receivable, less allowance for losses of
$1,201 (1998) and $1,175 (1997) 7,678 8,449
Notes and installment contracts receivable - current 1,577 1,561
Inventories 38,803 29,697
Deferred income taxes 9,413 7,240
Other current assets 4,077 1,292
--------- ---------
Total current assets 125,791 89,515
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land 5,414 2,159
Buildings and improvements 41,991 36,741
Machinery and equipment 38,707 32,483
--------- ---------
86,112 71,383
Less accumulated depreciation and amortization 24,690 17,949
--------- ---------
Total property, plant and equipment, net 61,422 53,434
--------- ---------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $760 (1998) and
$1,272 (1997) 24,512 46,614
--------- ---------
GOODWILL, less accumulated amortization
of $4,154 (1998) and $3,102 (1997) 19,945 19,551
--------- ---------
OTHER ASSETS 4,282 2,440
--------- ---------
TOTAL $ 235,952 $ 211,554
========= =========
27
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 405 $ 3,271
Notes payable under retail floor plan agreements 4,163
Accounts payable 15,944 9,575
Amounts payable under dealer incentive programs 18,752 14,614
Accrued compensation and related withholdings 7,154 4,294
Estimated warranties 12,400 11,700
Accrued merger and related costs 5,178
Other accrued expenses 25,266 12,399
--------- ---------
Total current liabilities 84,084 61,031
--------- ---------
DEFERRED INCOME TAXES 390 297
--------- ---------
LONG-TERM DEBT 3,650 15,808
--------- ---------
OTHER LONG-TERM LIABILITIES 2,917 867
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Series A Junior Participating Preferred Stock, $.01 par value; 200,000 shares
authorized, none issued
Preferred stock, $.01 par value; 300,000 shares authorized,
none issued
Common stock, $.10 par value; 50,000,000 shares authorized,
20,282,782 (1998) and 19,941,357 (1997) shares issued 2,028 1,994
Additional paid-in capital 60,760 57,228
Retained earnings 90,400 74,329
Treasury stock, at cost; 852,600 shares (8,277)
---------- ----------
Total stockholders' equity 144,911 133,551
---------- ----------
TOTAL $ 235,952 $ 211,554
========== ==========
See notes to consolidated financial statements.
28
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1998 1997 1996
REVENUES $ 614,070 $ 561,188 $ 577,171
------------ ------------ ------------
COST OF SALES 496,708 464,222 482,204
SELLING, GENERAL AND ADMINISTRATIVE 87,611 72,526 54,120
MERGER AND RELATED COSTS 7,359
------------ ------------ ------------
584,319 544,107 536,324
------------ ------------ ------------
OPERATING PROFIT 29,751 17,081 40,847
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (820) (1,511) (845)
Life insurance proceeds 1,500 1,750
Other, net 2,351 1,269 2,434
------------ ------------ ------------
1,531 1,258 3,339
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 31,282 18,339 44,186
INCOME TAXES 12,627 8,092 16,707
------------ ------------ ------------
NET INCOME $ 18,655 $ 10,247 $ 27,479
============ ============ ============
BASIC NET INCOME PER SHARE $ 0.94 $ 0.52 $ 1.42
============ ============ ============
DILUTED NET INCOME PER SHARE $ 0.93 $ 0.51 $ 1.39
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 19,904,746 19,834,942 19,362,944
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
ASSUMING DILUTION 20,143,795 20,028,181 19,799,492
============ ============ ============
See notes to consolidated financial statements.
29
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
BALANCE, JANUARY 1, 1996 $ 1,830 $ 34,013 $ 39,276 $ 75,119
Sale of common stock to public 64 11,661 11,725
Stock options exercised 73 4,419 4,492
Income tax benefit attributable to exercise of
stock options 3,692 3,692
Sale of common stock under Employee Stock
Purchase Plan 2 238 240
Common stock issued in connection with
acquisitions 5 887 892
Accrued compensation 216 216
Cash dividends paid ($.06 per share) (1,203) (1,203)
Net income 27,479 27,479
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 1,974 55,126 65,552 122,652
Stock options exercised 7 7
Sale of common stock under Employee Stock
Purchase Plan 5 425 430
Sale of common stock under Dividend
Reinvestment Plan 17 1,653 1,670
Accrued compensation 172 172
Cash dividends paid ($.07 per share) (1,470) (1,470)
Retirement of common stock (2) (155) (157)
Net income 10,247 10,247
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 1,994 57,228 74,329 133,551
Stock options exercised 4 153 157
Income tax benefit attributable to exercise of
stock options 90 90
Sale of common stock under Employee Stock
Purchase Plan 5 504 509
Sale of common stock under Dividend
Reinvestment Plan 25 2,579 2,604
Accrued compensation 206 206
Cash dividends paid ($.13 per share) (2,584) (2,584)
Purchase of treasury stock $ (8,277) (8,277)
Net income 18,655 18,655
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 $ 2,028 $ 60,760 $ 90,400 $ (8,277) $ 144,911
========== ========== ========== ========== ==========
See notes to consolidated financial statements.
30
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 18,655 $ 10,247 $ 27,479
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,365 7,492 5,760
Provision for credit losses and repurchase commitments (486) 669 389
Gain on sale of installment contracts (2,048)
(Gain) loss on sale of property, plant and equipment 49 340 (144)
Other, net 267 211 (93)
Changes in assets and liabilities provided (used) cash,
net of effects of acquisitions:
Accounts receivable 787 2,574 (672)
Inventories (6,248) (488) (8,021)
Accounts payable 6,313 (3,310) (146)
Amounts payable under dealer incentive programs 4,138 761 4,508
Accrued compensation and related withholdings 2,860 (1,743) 1,188
Estimated warranties 700 1,134 1,744
Other assets and liabilities 4,006 5,361 1,695
--------- --------- ---------
Net cash provided by operating activities 37,358 23,248 33,687
--------- --------- ---------
INVESTING ACTIVITIES:
Net cash paid in connection with acquisitions (2,358) (871) (8,515)
Proceeds from sale of property, plant and equipment 282 122 228
Capital expenditures (14,655) (10,186) (16,106)
Purchases of certificates of deposit (6,044) (8,000) (16,114)
Maturities of certificates of deposit 10,044 12,243 14,588
Proceeds from sale or maturity of marketable securities 1,097 2,479
Net change in notes and installment contracts (23,119) (13,547) (17,216)
Proceeds from sale of installment contracts 47,852
Other investing activities (1,085) 133 616
--------- --------- ---------
Net cash provided by (used in) investing activities 10,917 (19,009) (40,040)
--------- --------- ---------
FINANCING ACTIVITIES:
Net borrowings on notes payable 1,307
Proceeds from long-term borrowings 25,263 9,650
Payments on long-term debt (15,024) (22,457) (12,610)
Net proceeds from sales of common stock 3,113 2,100 11,965
Proceeds from exercise of stock options 157 7 4,492
Cash dividends paid (2,584) (1,470) (1,203)
Purchase of treasury stock (8,277)
Other financing activities (157) 750
--------- --------- ---------
Net cash provided by (used in) financing activities (21,308) 3,286 13,044
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 26,967 7,525 6,691
--------- --------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,276 29,751 23,060
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 64,243 $ 37,276 $ 29,751
========= ========= =========
See notes to consolidated financial statements.
31
CAVALIER HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Cavalier Homes, Inc. and its wholly-owned and
majority-owned subsidiaries (collectively, the "Company"). The Company's
minority ownership interests in various joint ventures are accounted for
using the equity method and are included in other assets in the
accompanying consolidated balance sheets. Intercompany transactions have
been eliminated in consolidation. See Note 10 for information related to
the Company's business segments.
Nature of Operations - The Company designs and manufactures a wide range
of high quality manufactured homes which are sold to a network of dealers
located primarily in the South Central and South Atlantic regions of the
United States. In addition, through its financial services segment, the
Company offers retail installment sale financing and related insurance
products for manufactured homes sold through the Company's exclusive
dealer locations and company-owned retail locations.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and notes. Actual results could
differ from those estimates.
Fair Value of Financial Instruments - The carrying value of the Company's
cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short-term maturity of
those instruments. Additional information concerning the fair value of
other financial instruments is disclosed in Notes 3 and 4.
Cash Equivalents - The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
Inventories - Inventories consist primarily of raw materials and are
stated at the lower of cost (first-in, first-out method) or market. During
1998, 1997, and 1996, the Company purchased raw materials of approximately
$11,413, $10,573 and $11,645, respectively, from a joint venture.
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 $388, $270 and $73 in
1998, 1997 and 1996, 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 the
expected periods to be benefited, 15 to 25 years, using the straight-line
method. The Company evaluates the recoverability of goodwill primarily
using forecasted undiscounted cash flows, supplemented if necessary by an
independent appraisal of fair value.
32
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 a subsidiary 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 9. For Company-owned retail locations,
revenue is recorded upon transfer of title to the retail home buyer.
Interest income on installment contracts receivable is recognized using
the interest method.
Product Warranties - The Company provides the retail home buyer a one-year
limited warranty covering defects in material or workmanship in home
structure, plumbing and electrical systems. A liability is provided for
estimated future warranty costs relating to homes sold, based upon
management's assessment of historical experience factors and current
industry trends.
Allowance for Losses on Installment Contracts - The Company has provided
an allowance for estimated future losses resulting from retail financing
activities of Cavalier Acceptance Corporation ("CAC"), a wholly-owned
subsidiary, primarily based upon management's assessment of historical
experience and current economic conditions.
Insurance - The Company's workmen's compensation, product liability and
general liability insurance coverages (with the exception of a subsidiary
whose insurance is provided under fully insured policies) are provided
under incurred loss, retrospectively rated premium plans. Under these
plans, the Company incurs insurance expense based upon various rates
applied to current payroll costs and sales. Annually, such insurance
expense is adjusted by the carrier for loss experience factors subject to
minimum and maximum premium calculations. Refunds or additional premiums
are estimated 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.
Net Income Per Share - In accordance with Statement of Financial
Accounting Standards ("SFAS") 128, Earnings per Share, the Company reports
two separate net income per share numbers, basic and diluted. Both are
computed by dividing net income by the weighted average shares outstanding
(basic) or weighted average shares outstanding assuming dilution (diluted)
as detailed below (in thousands of shares):
1998 1997 1996
Weighted average shares outstanding 19,905 19,835 19,363
Dilutive effect of stock options and warrants 239 193 436
-------- -------- --------
Weighted average shares outstanding,
assuming dilution 20,144 20,028 19,799
======== ======== ========
During 1996, the Company's Board of Directors declared a 3 for 2 stock
split in January and a 5 for 4 stock split in October. All applicable
share and per share data have been restated to give effect to all stock
splits. Options and warrants that could potentially dilute basic net
income per share in the future were not included in the computation of
diluted net income per share because to do so would have been
antidilutive. Antidilutive options and warrants were 641,796, 1,398,595,
and 209,057 for 1998, 1997, and 1996, respectively.
33
Recent Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS 130, Reporting Comprehensive Income.
This statement is now effective, but has no impact on the Company. In June
1998, FASB issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133 is required to be adopted for years beginning
after June 15, 1999. The Company is currently evaluating SFAS 133 and has
not yet determined its impact on the Company's consolidated financial
statements.
Reclassifications - Certain amounts from the prior periods have been
reclassified to conform to the 1998 presentation.
2. BUSINESS COMBINATION AND ACQUISITION
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 were restated to include the financial position, results of
operations and cash flows of Belmont for all periods presented prior to
the merger.
Revenues and net income for the separate companies and the combined
amounts presented in the consolidated financial statements are as follows
(excluding non-recurring merger and related costs in 1997):
1997 1996
Revenues:
Cavalier $ 336,343 $ 349,354
Belmont 224,845 227,817
--------- ---------
Combined $ 561,188 $ 577,171
========= =========
Net income:
Cavalier $ 10,428 $ 15,366
Belmont 5,688 12,113
--------- ---------
Combined $ 16,116 $ 27,479
========= =========
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 non-recurring
and include $2.5 million from the earn-out provision contained in the
Stock Purchase Agreement between Belmont and the shareholders of
Bellcrest, $0.9 million for severance costs associated with the
consolidation of certain administrative functions, $3.1 million for
printing, investment banking, legal, accounting and other fees, and $0.9
million for other costs associated with combining and realigning the
operations of the two companies. Of the merger and related costs of $7.4
million, $5.2 million was recorded as an accrued liability in the
consolidated balance sheet at December 31, 1997.
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.
34
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 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
connection with the merger described above, the Company also paid the
remaining $2,500 to the former shareholders.
In connection with the merger, warrants issued to a former Bellcrest
shareholder in connection with the acquisition of Bellcrest were converted
to warrants to purchase 60,000 shares of Cavalier common stock. The
warrants, which expire in October 2001, are exercisable at $18.34 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,
1998.
3. INSTALLMENT CONTRACTS RECEIVABLE
CAC finances retail sales through the purchase of installment contracts
from a portion of the Company's exclusive dealers. Standard loan programs
require minimum down payments, ranging from 0% to 15% 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 8.0% to 13.0% and from 9.25% to 14.0% at December
31, 1998 and 1997, respectively. The average original term of the
portfolio was approximately 216 and 217 months at December 31, 1998 and
1997, respectively. During 1998, CAC entered into an agreement to sell,
without recourse (provided that the transferred loan was properly
originated by the dealer and purchased by CAC), contracts in its portfolio
that meet specified credit criteria. Under this agreement, CAC sold
$45,804 contracts receivable and realized a gain of $2,048.
At December 31, 1998, estimated principal payments under installment
contracts receivable are as follows:
1999 $ 862
2000 961
2001 1,071
2002 1,194
2003 1,331
Thereafter 20,698
--------
Total $ 26,117
========
35
Activity in the allowance for losses on installment contracts was as
follows:
1998 1997 1996
Balance, beginning of year $ 1,272 $ 941 $ 551
Provision for losses 1,042 1,329 778
Charge-offs, net (1,554) (998) (388)
-------- -------- -------
Balance, end of year $ 760 $ 1,272 $ 941
======== ======== =======
At December 31, 1998 and 1997, the estimated fair value of installment
contracts receivable was $26,211 and $50,103, respectively. These fair
values were estimated using discounted cash flows and interest rates
offered by CAC on similar contracts at that time.
4. CREDIT ARRANGEMENTS
The Company has a $35,000 revolving, warehouse and term-loan agreement
(the "Credit Facility") with its primary bank, whose president is a
director of the Company. The Credit Facility contains a revolving line of
credit which provides for borrowings (including letters of credit) of up
to 80% and 50% of the Company's eligible accounts receivable and
inventories, respectively, up to a maximum of $10,000. Interest is payable
under the revolving line of credit at the bank's prime rate (7.75% and
8.50% at December 31, 1998 and 1997, respectively) or, if elected by the
Company, the 90-day LIBOR rate plus 2.5% (7.57% at December 31, 1998). No
amounts were outstanding under the revolving line of credit at December
31, 1998 or 1997.
The warehouse and term-loan agreement contained in the Credit Facility
provide for borrowings of up to 80% of the Company's eligible installment
sale contracts, up to a maximum of $25,000. Interest on term notes is
fixed for a period of five years from issuance at a rate based on the
weekly average yield on five-year treasury securities averaged over the
preceding 13 weeks, plus 1.95%, and floats for the remaining two years at
a rate (subject to certain limits) equal to the bank's prime rate plus
.75%. The warehouse component of the Credit Facility provides for
borrowings of up to $25,000 with interest payable at the bank's prime rate
or, if elected by the Company, the 90-day LIBOR rate plus 2.5%. However,
in no event may the aggregate outstanding borrowings under the warehouse
and term-loan agreement exceed $25,000. Amounts outstanding under the
warehouse and term-loan portion of the Credit Facility were $-0- and
$12,744 at December 31, 1998 and December 31, 1997, 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, restrict the Company's ability to pledge assets, incur
additional indebtedness and make capital expenditures, and require the
Company to maintain certain defined financial ratios. 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 2000.
The Company has other lines of credit with banks totaling $2,000, which
expire in July, 1999. Amounts outstanding under these facilities totaled
$-0- and $1,000 at December 31, 1998 and 1997, respectively. Interest
rates under these lines range from prime to prime plus 2%. The Company
also
36
has $4,163 of notes payable under retail floor plan agreements. The notes
are collateralized by inventories of $3,775 and bear interest at prime at
December 31, 1998.
The Company has amounts outstanding under three Industrial Development
Revenue Bond issues ("Bonds") of $4,052 and $4,442 at December 31, 1998
and 1997, 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.
During 1998, the Company repaid a term-loan with a balance of $887 at
December 31, 1997. This loan accrued interest at 7.95% and was payable in
equal monthly installments.
At December 31, 1998, principal repayment requirements on long-term debt
are as follows:
Year Ending
December 31,
1999 $ 405
2000 429
2001 457
2002 480
2003 499
Thereafter 1,785
-------
4,055
Total
Less current portion 405
-------
Long-term debt $ 3,650
=======
The estimated fair value of outstanding borrowings approximated carrying
value at December 31, 1998 and 1997. 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, 1998, 1997 and
1996 was $776, $1,445 and $910, respectively.
5. STOCKHOLDERS' EQUITY
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 unit. Upon certain events
relating to the acquisition of, or right to acquire, beneficial ownership
of 20% or more of the Company's outstanding common stock by a third party,
or a change in control of the Company, the Rights entitle the holder to
acquire, after the Rights are no longer redeemable by the Company, shares
of common stock of the Company (or, in certain cases, securities of an
acquiring person) for each Right held at a significant discount.The Rights
will expire on November 6, 2006, unless redeemed earlier by the Company at
$.01 per Right
37
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 January 1996, Belmont completed a public offering of approximately
640,000 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, 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 offering,
and on the weighted average shares of common stock outstanding for 1996,
giving effect to the number of shares sold in the offering, the proceeds
of which were used to repay such preferred stock and debt, is as follows
assuming the transaction was effective on January 1, 1996:
1996
Net income, as adjusted $ 27,526
==========
Diluted net income per share $ 1.39
==========
Weighted average shares outstanding, assuming dilution 19,868,292
==========
6. INCENTIVE PLANS
Dealership Stock Option Plan -
o During 1998, the Company amended the Dealership Stock Option Plan
(the "Dealer Plan") to revise the criteria for earning stock options.
The Plan allows for 562,500 options to be issued to eligible
independent dealerships at a price equal to the fair market value on
the date of grant. These options are earned based on the amount
of contracts funded through CAC. Options granted under the Plan are
immediately exercisable and expire three years from the grant date.
Since these options have been granted to persons other than employees,
the Company adopted the recognition and measurement provisions of SFAS
123, Accounting for Stock-Based Compensation.
Employee and Director Plans:
o The Company has a Key Employee Stock Incentive Plan (the "1996 Plan")
which provides for the granting of both incentive and non-qualified
stock options. Additionally, the 1996 Plan provides for stock
appreciation rights and awards of both restricted stock and performance
shares. Options are granted at prices and terms determined by the
compensation committee of the Board of Directors. The 1996 Plan also
provides for an additional number of common shares to be reserved for
issuance each January 1 equal to 1.5% of the number of the common
shares outstanding on that date. Options granted under the 1996 Plan
are generally exercisable six months after the grant date and expire
ten years from the date of grant.
o The Company also has a Non-employee Director Plan under which 625,000
shares of the Company's common stock were reserved for grant to
non-employee directors at fair market value on the date of such grant.
Options are granted upon the director's initial election and
automatically on an annual basis thereafter. Options granted under the
plan are generally exercisable six months after the grant date and
expire ten years from the date of grant.
38
o The Company has an Employee Stock Purchase Plan under which 625,000
shares of the Company's common stock may be issued to eligible
employees at a price equal to the lesser of 85% of the market price of
the stock as of the first or last day of the payment periods (as
defined). Employees may elect to have a portion of their compensation
withheld, subject to certain limits, to purchase the Company's common
stock.
o The Company has a Deferred Compensation and Flexible Option Plan
(the "Deferred Plan") which provides for deferral of a portion of
certain key employees' earnings plus a Company match. Upon the
occurrence of a distributable event, the employee will receive the
greater of cash at a fixed annual return or shares of the Company's
common stock credited to his account valued at fair market value. The
Company funds benefits under the Deferred Plan through cash
contributions and through the issuance to a trust of a stock option at
the time of deferral at an exercise price equal to fair market value on
the date of the grant. Under the Deferred Plan, there are 500,000
shares of Company common stock available for issuance. At December 31,
1998, the Company had recorded plan investments of $1,406 and a
deferred compensation liability of $1,630.
Compensation expense recorded in connection with these plans for the years
ended December 31, 1998 and 1997 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
exercisable at a price of $12.00 or higher were repriced to an exercise
price of $10.625. In addition, on January 17, 1997, an option issued under
the 1993 Non-employee Director's Plan to purchase 25,000 shares at $15.40
per share was canceled and reissued for 17,250 shares at $10.625 per
share.
During 1998, the Company revised the Dividend Reinvestment Plan to
increase the shares available under the Plan to 500,000 and to eliminate
the optional cash payment feature of the Plan. Participants in the Plan
may purchase additional shares of the Company's common stock by
reinvesting the cash dividends on all, or part, of their shares. The
purchase price of the stock will be the higher of 95% of the average
daily high and low sale prices of the Company's common stock on the four
trading days including and preceding the Investment Date (as defined) or
95% of the average high and low sales prices on the Investment Date.
The Company applied Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for
its employee and director plans. Accordingly, no compensation expense has
been recognized for these plans except where the exercise price was less
than the fair value on the date of grant. Had compensation cost been
determined based
39
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:
1998 1997 1996
Net income:
As reported $ 18,655 $ 10,247 $ 27,479
Pro forma $ 16,506 $ 8,661 $ 24,888
Basic net income per share:
As reported $ 0.94 $ 0.52 $ 1.42
Pro forma $ 0.83 $ 0.44 $ 1.29
Diluted net income per share:
As reported $ 0.93 $ 0.51 $ 1.39
Pro forma $ 0.82 $ 0.43 $ 1.26
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:
1998 1997 1996
Dividend yield 1.56 % 1.13 % 0.66 %
Expected volatility 40.49 % 43.94 % 41.25 %
Risk free interest rate 5.52 % 6.12 % 5.99 %
Expected lives 5.0 years 3.0 years 3.0 years
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts, and additional awards in future years are
anticipated.
With respect to options exercised, the income tax benefits resulting from
compensation expense allowable under federal income tax regulations in
excess of the expense reflected in the Company's financial statements have
been credited to additional paid-in-capital. These benefits, which totaled
$90 (1998), $-0- (1997), and $3,692 (1996), represent a noncash financing
transaction for purposes of the consolidated statements of cash flows.
40
Information regarding all of the Company's stock option plans is summarized
below:
Weighted
Weighted Average
Average Fair Value
Shares Exercise Price At Grant Date
Outstanding at December 31, 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
Granted at Fair Value 890,393 10.26 $ 3.50
Exercised (35,267) 4.45
Cancelled (49,746) 11.39
-----------
Outstanding at December 31, 1998 2,559,994 $ 10.52
=========== =========
Options exercisable as of December 31, 1998 2,438,434 $ 10.42
=========== =========
Options exercisable as of December 31, 1997 1,536,986 $ 10.37
=========== =========
Options exercisable as of December 31, 1996 649,947 $ 10.17
=========== =========
Stock options available for future grants at December 31, 1998 were
1,152,864 under all of the Company's various stock option plans.
The following table summarizes information concerning stock options
outstanding at December 31, 1998:
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 - $10.00 465,294 9.30 $ 6.42 450,294 $ 6.38
$10.19 602,983 9.06 $ 10.19 602,983 $ 10.19
$10.22 - $10.63 876,824 8.10 $ 10.57 876,824 $ 10.57
$10.88 - $16.60 614,893 7.89 $ 13.88 508,333 $ 13.99
---------- -----------
$0.55 - $16.60 2,559,994 8.49 $ 10.52 2,438,434 $ 10.42
========== ======= ======== ========== ========
41
7. INCOME TAXES
Provision for income taxes consist of:
1998 1997 1996
Current:
Federal $ 12,469 $ 9,574 $ 15,456
State 2,238 921 2,258
--------- --------- ---------
14,707 10,495 17,714
--------- --------- ---------
Deferred:
Federal (1,337) (2,368) (712)
State (743) (35) (295)
--------- --------- ---------
(2,080) (2,403) (1,007)
--------- --------- ---------
Total $ 12,627 $ 8,092 $ 16,707
========= ========= =========
Total income tax expense for 1998, 1997, and 1996 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:
1998 1997 1996
Income tax at expected federal income tax rate $ 10,948 $ 6,419 $ 15,465
State income taxes, net of federal tax effect 1,100 651 1,810
Non-taxable life insurance proceeds (525) (655)
Non-deductible operating expenses 295 387 107
State jobs tax credits (126) (40) (471)
Non-deductible merger related expenses 1,085
Other 410 115 451
--------- --------- ---------
$ 12,627 $ 8,092 $ 16,707
========= ========= =========
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, 1998 and 1997 were as follows:
1998 1997
---------------------
Assets (Liabilities)
---------------------
Current differences:
Warranty expense $ 4,051 $ 4,058
Inventory capitalization 561 512
Allowance for losses on receivables 718 939
Accrued expenses 4,059 1,132
Other 24 599
--------- ---------
$ 9,413 $ 7,240
========= =========
42
1998 1997
---------------------
Assets (Liabilities)
---------------------
Noncurrent differences:
Depreciation and basis differential
of acquired assets $ (2,061) $ (1,796)
Goodwill (569) (726)
Merger related expenses 1,007 1,331
Other 1,233 894
--------- ---------
$ (390) $ (297)
========= =========
Cash paid for income taxes for the years ended December 31, 1998, 1997 and
1996 was $12,250, $10,632 and $12,387, respectively.
8. 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 $5,517, $4,693 and
$2,893 for years ended December 31, 1998, 1997 and 1996, 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
$623, $545 and $420 for the years ended December 31, 1998, 1997 and 1996,
respectively.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases:
Five of the Company's manufacturing facilities 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 $6
to $22 and provide for lease terms ending from April 1999 to July 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 $850 to $1,900 at any time during the
lease terms. Two purchase options were exercised in January 1999 for
$1,500 and $1,900. The remaining purchase options range from $850 to
$1,125.
Additionally, the Company is obligated under various operating lease
agreements with varying monthly payments and expiration dates through June
2017. Total rent expense under operating leases was $1,353, $1,418 and
$1,242 for the years ended December 31, 1998, 1997 and 1996, respectively,
including rents paid to related parties of $865 (1998), $817 (1997) and
$765 (1996).
43
Future minimum rents payable under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of December
31, 1998 are as follows:
Year Ending
December 31,
1999 $ 592
2000 448
2001 356
2002 296
2003 156
Thereafter 322
-------
Total $ 2,170
=======
Contingent Liabilities and Other:
a. The Company is contingently liable under terms of repurchase
agreements with financial institutions providing inventory financing
for retailers of its products. These arrangements, which are
customary in the industry, provide for the repurchase of products
sold to retailers in the event of default on payments by the
retailer. The risk of loss under these agreements is spread over
numerous retailers. The price the Company is obligated to pay
generally declines over the period of the agreement and is further
reduced by the resale value of repurchased homes. The estimated
potential obligations under such agreements approximated $242,000 at
December 31, 1998. The Company has an allowance for losses of
$1,201 (1998) and $1,175 (1997) based on prior experience and market
conditions. Management expects no material loss in excess of the
allowance.
b. Under the insurance plans described in Note 1, the Company was
contingently liable at December 31, 1998 for future retrospective
premium adjustments up to a maximum of approximately $7,531 in the
event that additional losses are reported related to prior years.
c. The Company is engaged in various legal proceedings that are
incidental to and arise in the course of its business. Certain of
the cases filed against the Company and other companies engaged in
businesses similar to the Company allege, among other things, breach
of contract and warranty, product liability, personal injury and
fraudulent, deceptive or collusive practices in connection with
their businesses. These kinds of suits are typical of suits that
have been filed in recent years, and they sometimes seek
certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. In the
opinion of management, the ultimate liability, if any, with respect
to the proceedings in which the Company is currently involved is not
presently expected to have a material adverse effect on the Company.
However, the potential exists for unanticipated material adverse
judgments against the Company.
d. The Company and certain of its equity partners have jointly and
severally guaranteed revolving notes for three 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 $1,980. At
December 31, 1998, $3,901 was outstanding under the various
guarantees, of which the Company had guaranteed $925.
44
10. SEGMENT INFORMATION
On December 31, 1998, the Company adopted SFAS 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS 131 established
standards for reporting information about segments in annual financial
statements and requires selected information about segments in interim
financial reports issued to stockholders. It also established standards
for related disclosures about products and services, and geographic areas.
Segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and
in assessing performance.
Under this standard, the Company's reportable segments are organized
around products and services. Through its home manufacturing segment, the
Company's 11 divisions, which are aggregated for reporting purposes,
design and manufacture homes which are sold in the United States to a
network of dealers which includes Company owned retail locations. Through
its financial services segment, the Company offers retail installment sale
financing and related insurance products for manufactured homes sold
through the Company's exclusive dealer network and Company-owned retail
locations. The Company's retail locations and various component
manufacturers, which include investments accounted for by the equity
method, are aggregated in a category described as "other". Retail
locations derive their revenue from home sales to individuals, while the
component manufacturers' customers are the Company and other
manufacturers. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies except
that intercompany profits, transactions and balances have not been
eliminated. The Company's determination of segment operating profit does
not reflect other income (expenses) or income taxes.
1998 1997 1996
Gross revenues:
Home manufacturing $ 603,369 $ 553,730 $ 572,997
Financial services 6,088 5,346 3,333
Other 43,866 22,688 14,576
--------- --------- ---------
Gross revenue 653,323 581,764 590,906
--------- --------- ---------
Intersegment revenues:
Home manufacturing 5,253
Financial services
Other 34,000 20,576 13,735
--------- -------- ---------
Intersegment revenues 39,253 20,576 13,735
--------- -------- ---------
Revenues from external customers:
Home manufacturing 598,116 553,730 572,997
Financial services 6,088 5,346 3,333
Other 9,866 2,112 841
--------- -------- ---------
Total revenues $ 614,070 $ 561,188 $ 577,171
========= ========= =========
45
1998 1997 1996
Operating profit:
Home manufacturing $ 26,193 $ 23,742 $ 41,101
Financial services 2,215 2,015 1,236
Other 1,887 598 156
Elimination (826) (77) 119
---------- ---------- ----------
Segment operating profit 29,469 26,278 42,612
General corporate 282 (9,197) (1,765)
---------- ---------- ----------
Operating profit $ 29,751 $ 17,081 $ 40,847
========== ========== ==========
Depreciation and amortization:
Home manufacturing $ 7,305 $ 6,686 $ 5,224
Financial services 209 208 150
Other 531 337 160
---------- ---------- ----------
Segment depreciation and amortization 8,045 7,231 5,534
General corporate 320 261 226
---------- ---------- ----------
Total depreciation and amortization $ 8,365 $ 7,492 $ 5,760
========== ========== ==========
Capital expenditures:
Home manufacturing $ 13,173 $ 8,370 $ 13,349
Financial services 181 265 196
Other 985 89 2,320
---------- ---------- ----------
Segment capital expenditures 14,339 8,724 15,865
General corporate 316 1,462 241
---------- ---------- ----------
Total capital expenditures $ 14,655 $ 10,186 $ 16,106
========== ========== ==========
Identifiable assets:
Home manufacturing $ 151,389 $ 139,454 $ 153,237
Financial services 28,406 41,050 26,283
Other 18,988 7,509 7,954
Elimination (1,753) (421) (77)
---------- ---------- ----------
Segment assets 197,030 187,592 187,397
General corporate 38,922 23,962 8,990
---------- ---------- ----------
Total assets $ 235,952 $ 211,554 $ 196,387
========== ========== ==========
The financial services segment's operating profit includes net interest
income of $2,987, $3,283, and $2,232 for the years ended December 31,
1998, 1997, and 1996, respectively, and gains from the sale of installment
contracts of $2,048 at December 31, 1998. There were no sales of
installment contracts during the years ended December 31, 1997 and 1996.
Identifiable assets for the "other" category include $1,447, $1,264, and
$1,105 of investment in equity method investees as of December 31, 1998,
1997 and 1996, respectively. "Other" segment operating income includes
equity in the net income of investees accounted for by the equity method
of $250, $296, and $533 for the years ended December 31, 1998, 1997 and
1996, respectively.
* * * * *
46
CAVALIER HOMES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
(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, 1998 $ 1,175 26 $ 1,201
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1997 $ 837 527 (189) $ 1,175
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1996 $ 787 51 225 (226) $ 837
============= ============= ============ ========== =========== ===========
Allowance for credit losses:
Year Ended December 31, 1998 $ 1,272 (512) $ 760
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1997 $ 941 1,329 (998) $ 1,272
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1996 $ 551 778 (388) $ 941
============= ============= ============ ========== =========== ===========
Accumulated amortization of goodwill:
Year Ended December 31, 1998 $ 3,102 1,052 $ 4,154
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1997 $ 1,947 1,068 87 $ 3,102
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1996 $ 1,165 782 $ 1,947
============= ============= ============ ========== =========== ===========
Accumulated amortization of non-compete
agreement:
Year Ended December 31, 1998 $ 277 76 $ 353
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1997 $ 221 56 $ 277
============= ============= ============ ========== =========== ===========
Year Ended December 31, 1996 $ 189 32 $ 221
============= ============= ============ ========== =========== ===========
Warranty reserve:
Year Ended December 31, 1998 $ 11,700 700 $ 12,400
============= ============= ============ ========== =========== ===========
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
============= ============= ============ ========== =========== ===========
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For a description of the directors and executive officers of the Company, see
"Election of Directors," "Executive Officers and Principal Stockholders," and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 19, 1999,
which are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For a description of the Company's executive compensation, see "Election of
Directors," "Executive Officers and Principal Stockholders," "Executive
Compensation" (other than the "Report of the Compensation Committee on Executive
Compensation" and the "Performance Graph"), "Compensation Committee Interlocks
and Insider Participation," and ''Certain Relationships and Related
Transactions" of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 1999, which are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
For a description of the security ownership of management and certain beneficial
owners, see "Executive Officers and Principal Stockholders" of the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 19,
1999, 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 19, 1999,
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 26
Consolidated Balance Sheets as of December 31, 1998 and 1997 27
Consolidated Statements of Income for the years ended December 31, 1998, 29
1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended 30
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 31
1998, 1997 and 1996
Notes to Consolidated Financial Statements 32
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 47
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) Composite Amended and Restated Certificate of
Incorporation of the Company.
* (b) The Certificate of Designation of Series A Junior
Participating Preferred Stock of Cavalier Homes, Inc. as filed with the Office
of the Delaware Secretary of State on October 24, 1996 and filed as Exhibit A to
Exhibit 4 to the Company's Registration Statement on form 8-A filed on October
30, 1996.
* (c) The Amended and Restated By-laws of the Company,
filed as Exhibit 3(d) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 27, 1997, and the amendments thereto filed as Exhibit
3(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 26, 1997 and as Exhibit 3(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 25, 1998.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
* (a) Articles four, six, seven, eight and nine of the
Company's Amended and Restated Certificate of Incorporation, as amended,
included in Exhibit 3(a) above.
* (b) Article II, Sections 2.1 through 2.18; Article III,
Sections 3.1 and 3.2; Article IV, Sections 4.1 and 4.3; Article VI, Sections
6.1 through 6.5; Article VIII, Sections 8.1 and 8.2; and Article IX of the
Company's Amended and Restated By-laws, included in Exhibit 3(c) above.
* (c) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
(10) Material contracts
* (a) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
* (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 Plan, filed as Appendix A to the Prospectus appearing in the
Company's Post-Effective Amendment No.1 to Form S-3, Registration No. 333-48111,
filed on September 29, 1998.
* ** (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.
* ** (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, filed as Exhibit 10(j) to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
* ** (k) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, effective January 23, 1998, filed as Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
** (l) Amendment to Cavalier Homes, Inc. Key Employee
Stock Incentive Plan, effective October 20, 1998.
* ** (m) Cavalier Homes, Inc. Amended and Restated Nonemployee
Directors Stock Option Plan, filed as an Appendix to the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders held May 15, 1996.
* ** (n) 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.
* ** (o) Amendment to Cavalier Homes, Inc. Amended and
Restated Nonemployee Directors Plan, filed as Exhibit 10(n) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
* (p) 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.
* (q) Cavalier Homes, Inc. Amended and Restated
Dealership Stock Option Plan filed as Appendix A to the Company's Registration
Statement on Form S-3, Amendment No. 2, Registration No. 33-62487, dated
June 18, 1998.
* (r) 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.
* (s) 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.
* (t) 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.
(u) Revolving, Warehouse and Term Loan Agreement among
the Company and First Commercial Bank dated February 17, 1994.
* (v) Amendments to the Revolving, Warehouse and Term Loan
Agreement among the Company and First Commercial Bank dated March 14, 1996,
filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
* (w) Second Amendment to the Revolving Warehouse and
Term Loan Agreement among Cavalier Homes, Inc. and First Commercial Bank,
dated June 1, 1998, filed as Exhibit 10(b) to the Company's Quarterly Report
on Form 10-Q for the period ended June 26, 1998.
* (x) Assumption Agreement dated as of January 2, 1997,
by and among the Company, First Commercial Bank and certain subsidiaries of
the Company, filed as Exhibit 10(q) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
* (y) Assumption Agreement among Cavalier Homes, Inc. and
First Commercial Bank, dated June 1, 1998, filed as Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the period ended June 26, 1998.
(z) Cavalier Homes, Inc. 1993 Amended and Restated
Nonqualified Stock Option Plan.
* ** (aa) 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.
* (bb) 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.
* (cc) 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.
* (dd) Commercial SubLease 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).
* (ee) 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.
* (ff) 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).
* (gg) 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).
* (hh) 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.
* (ii) 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.
* (jj) 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.
* (kk) 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.
* (ll) 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.
* (mm) 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.
* (nn) 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.
(oo) Guaranty Agreement between First Commercial Bank
and Cavalier Homes, Inc., dated December 18, 1998, relating to guaranty of
payments by Lamraft, LP.
* (pp) 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.
* (qq) Amendment No. 1 to the Agreement and Plan of Merger
referenced in Exhibit 10(pp) above filed as Exhibit 10(e) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1997.
* ** (rr) 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.
* ** (ss) 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.
* (tt) 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.
* (uu) 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.
* (vv) 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.
* (ww) Agreement dated March 10, 1998, by and between
Cavalier Acceptance Corporation and Green Tree Financial Servicing Corporation,
filed as Exhibit 10(xx) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
* (xx) Lease Agreement between The Industrial Development
Board of the Town of Addison and Cavalier Homes of Alabama, a division of
Cavalier Manufacturing, Inc., dated November 1, 1997, filed as Exhibit 10(yy)
to the Company's Annual Report on Form 10-K for the year ended December 31,1997.
* (yy) Commercial Sub-Lease and Agreement between Perfect
Panels, Inc. and Quality Housing Supply, Inc., dated July 1, 1996, filed as
Exhibit 10(zz) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
* (zz) Amended and Restated Finance Agreement among Cavalier
Manufacturing, Inc., Cavalier Acceptance Corporation and certain related
entities and Green Tree Financial Corp. and certain related entities, filed as
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the period
ended March 27, 1998.
* (aaa) Lease Agreement with Option to Purchase dated
November 29, 1995 between Winfield Industrial Properties, Inc. and Superior
Door Company, Inc., predecessor to Quality Housing Supply, LLC, filed as Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the period ended March
27, 1998.
* (bbb) Split dollar Agreement dated May 15, 1998, by
and between the Company and Jerry F. Wilson, Jr. as Trustee of the David
Allen Roberson Family Trust, filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the period ended June 26, 1998.
* (ccc) Cavalier Homes, Inc. Deferred Compensation Plan,
effective April 1, 1998, filed as Exhibit 10(d) to the Company's Quarterly
Report on Form 10-Q for the period ended June 26, 1998.
* (ddd) Cavalier Homes, Inc. Flexible Option Plan filed
as Exhibit 4(e) to the Company's Registration Statement on Form S-8,
Registration No. 333-57743, dated June 28, 1998.
* (eee) Form of Indemnification Agreement by and between
Cavalier Homes, Inc. and each member of its Board of Directors, filed as Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the period ended
September 25, 1998.
* (fff) Retention and Severance Agreement, dated August
26, 1998, by and between Cavalier Homes, Inc. and Barry B. Donnell, filed as
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the period
ended September 25, 1998.
(ggg) Retention and Severance Agreement, dated August
26, 1998, by and between Cavalier Homes, Inc. and David A. Roberson, originally
filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
period ended September 25, 1998, but filed as an exhibit to this Annual Report
on Form 10-K in order to correct a typographical error.
* (hhh) Retention and Severance Agreement, dated August
26, 1998, by and between Cavalier Homes, Inc. and Michael R. Murphy, filed
as Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the period
ended September 25, 1998.
(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.
(27) Financial Data Schedule
(99) Independent Auditor's Report of KPMG Peat Marwick LLP.
_________________________________
* Incorporated by reference herein.
** Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995:
Our disclosure and analysis in this Annual Report on Form 10-K contain some
forward-looking statements. Forward looking statements give our current
expectations or forecasts of future events, including statements regarding
trends in the industry and the business and growth and financing strategies of
Cavalier. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They generally are designated with an
asterisk (*) and use words such as "estimates," "projects," "intends,"
"believes," "anticipates," "expects," "plans," and other words and terms of
similar meaning in connection with any discussion of future operating or
financial performance. From time to time, we may also provide oral or written
forward-looking statements in other materials we release to the public. These
forward-looking statements include statements involving known and unknown
assumptions, risks, uncertainties and other factors which may cause our actual
results, performance or achievements to differ from any future results,
performance, or achievements expressed or implied by such forward-looking
statements or words. In particular, such assumptions, risks, uncertainties and
factors include those associated with the following:
o integrating the business operations and achieving the benefits
of the Belmont merger and other acquisitions;
o the cyclical and seasonal nature of the manufactured housing industry
and the economy generally;
o litigation;
o competition;
o regulatory constraints;
o changes and volatility in interest rates and the availability of
capital and consumer and dealer financing;
o changes in demographic trends, consumer preferences and Cavalier's
business strategy;
o the ability to attract and retain quality independent dealers,
executive officers and other personnel;
o the potential unavailability and price increases for raw materials;
o contingent repurchase and guaranty obligations; and
o unanticipated delays or difficulties in implementing our Year 2000
plans.
Any or all of our forward-looking statements in this report, in the 1998 Annual
Report to Stockholders and in any other public statements we make may turn out
to be wrong. These statements may be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors listed above
will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our future filings with the Securities and Exchange Commission or in any of
our press releases. Also note that, under the heading Risk Factors, we have
provided a discussion of factors that we think could cause our actual results to
differ materially from expected and historical results. Other factors besides
those listed could also adversely affect Cavalier. This discussion is provided
as permitted by the Private Securities Litigation Reform Act of 1995.
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, 1999
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Signature Title Date
/s/ DAVID A. ROBERSON Director and Principal Executive March 30, 1999
- --------------------- Officer
/s/ MICHAEL R. MURPHY Director and Principal Financial March 30, 1999
- --------------------- and Accounting Officer
/s/ BARRY DONNELL Chairman of the Board and Director March 30, 1999
- -----------------
/s/ THOMAS A. BROUGHTON, III Director March 30, 1999
- ----------------------------
/s/ JOHN W LOWE Director March 30, 1999
- ---------------
/s/ LEE ROY JORDAN Director March 30, 1999
- ------------------
/s/ GERALD R. MOORE Director March 30, 1999
- -------------------
/s/ A. DOUGLAS JUMPER, SR. Director March 30, 1999
- --------------------------
/s/ MIKE KENNEDY Director March 30, 1999
- ----------------
INDEX
Exhibit
Number
(3)(a) Composite Amended and Restated Certificate of Incorporation
of the Company.
(10) Material Contracts
(l) Amendment to Cavalier Homes, Inc. Key Employee
Stock Incentive Plan, effective October 20, 1998.
(u) Revolving, Warehouse and Term Loan Agreement among
the Company and First Commercial Bank dated February
17, 1994.
(z) Cavalier Homes, Inc. 1993 Amended and Restated
Nonqualified Stock Option Plan.
(oo) Guaranty Agreement between First Commercial Bank
and Cavalier Homes, Inc., dated December 18, 1998,
relating to guaranty of payments by Lamraft, LP.
(ggg) Retention and Severance Agreement, dated August
26, 1998, by and between Cavalier Homes, Inc. and
David A. Roberson, originally filed as Exhibit 10(c)
to the Company s Quarterly Report on Form 10-Q for
the period ended September 25, 1998, but filed as an
exhibit to this Annual Report on Form 10-K in order
to correct a typographical error.
(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
(27) Financial Data Schedule (Filed as an EDGAR exhibit only)
(99) Independent Auditor's Report of KPMG Peat Marwick LLP