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.
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.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are engaged in various legal proceedings that are incidental to and arise in the course of its business. Certain of the cases filed against the Company and its subsidiaries and companies engaged in businesses similar to it allege, among other things, breach of contract and warranty, product liability, personal injury and fraudulent, deceptive or collusive practices in connection with their businesses. These kinds of suits are typical of suits that have been filed in recent years, and they sometimes seek certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. 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.
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.
PART II
ITEM 5.
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.
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.
1 As adjusted for all stock splits.
ITEM 7.
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:
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,
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.
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.
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
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
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.
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.
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.
ITEM 8.
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.
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.
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.
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
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
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) - --------------------------------------------------------------------------------
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) - --------------------------------------------------------------------------------
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - --------------------------------------------------------------------------------
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.
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.
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.
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 ========
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
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
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:
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.
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
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.
Information regarding all of the Company's stock option plans is summarized below:
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:
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:
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 ========= =========
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).
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.
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.
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.
* * * * *
CAVALIER HOMES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1998, 1997 and 1996 (Dollars in Thousands)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
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.
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.
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.
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