CAVALIER HOMES INC
10-Q, 1996-11-12
MOBILE HOMES
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                        SECURITIES & EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended September 27, 1996
                                        --------------------
                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from --------------- to ---------------

                          Commission File Number 1-9792

                              Cavalier Homes, Inc.
             (Exact name of Registrant as specified in its charter)


            Delaware                                            63-0949734
      --------------------                                 --------------------
(State or other jurisdiction of                               (IRS Employer
incorporation or organization)                            Identification Number)


            Highway 41 North & Cavalier Road, Addison, Alabama 35540
            --------------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)


                                 (205) 747-1575
            --------------------------------------------------------
              (Registrant's telephone number, including area code)


            --------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last year)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No


         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the close of the latest practicable date.

            Class                              Outstanding at November 11, 1996
- ---------------------------                      ---------------------------
Common Stock $.10 Par Value                            9,715,496 Shares



                                      -1-
<PAGE>


                      CAVALIER HOMES, INC. AND SUBSIDIARIES


                                      INDEX

                                                                      Page No.
Part I.  Financial Information (Unaudited)

         Consolidated Condensed Balance Sheets -
         September 27, 1996 and December 31, 1995                         3

         Consolidated Condensed Statements of Income -
         Thirteen and Thirty-Nine Weeks ended September 27, 1996
         and September 29, 1995                                           4

         Consolidated Condensed Statements of Cash
         Flows - Thirty-Nine Weeks ended September 27, 1996 and
         September 29, 1995                                               5

         Notes to Consolidated Condensed Financial Statements             6

         Management's Discussion and Analysis of
         Financial Condition and Results of Operations                    9

Part II. Other Information

         Item 5.  Other Matters                                          13

         Item 6.  Exhibits                                               13

         Signatures                                                      14






                                      -2-
<PAGE>
                     CAVALIER HOMES, INC. AND SUBSIDIARIES
                     CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
<S>                                                                            <C>              <C>

                                                                                 September 27,     December 31,
 ASSETS                                                                               1996             1995
 CURRENT ASSETS:
      Cash and cash equivalents                                                $   10,242,000   $   21,005,084
      Marketable securities available for sale                                      2,101,000        3,583,129
      Accounts receivable, less allowance for
             losses of $800,000 (1996) and $750,000 (1995)                         23,006,000        1,893,400
      Installment contracts receivable - current                                      968,000          693,967
      Inventories                                                                  13,699,000        9,540,491
      Deferred income taxes                                                         3,997,000        3,647,984
      Income tax deposit                                                              946,000             -
      Other current assets                                                            499,000        1,954,350
                                                                                -------------    -------------
             Total current assets                                                  55,458,000       42,318,405
                                                                                -------------    -------------
 PROPERTY, PLANT AND EQUIPMENT (Net)                                               24,367,000       18,893,497

 INSTALLMENT CONTRACTS RECEIVABLE, less
     allowance for credit loss of $768,000 (1996)
     and $551,188 (1995)                                                           29,121,000       17,964,038

 GOODWILL, less accumulated amortization of
     $518,000 (1996) and $309,729 (1995)                                            3,710,000        2,213,000

 OTHER ASSETS                                                                       4,006,000        1,236,958
                                                                                -------------    -------------
                                                                               $  116,662,000   $   82,625,898
                                                                                =============    =============

 LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
      Current portion of long-term debt                                        $      920,000   $      666,467
      Accounts payable                                                             14,142,000        7,098,602
      Amounts payable under dealer incentive programs                              10,592,000        6,997,496
      Accrued wages and related withholdings                                        3,421,000        1,219,891
      Accrued incentive compensation                                                2,552,000        2,018,702
      Estimated warranties                                                          6,900,000        5,800,000
      Accrued insurance                                                             1,017,000        1,676,164
      Other accrued expenses                                                        6,323,000        4,923,839
      Accrued income taxes                                                            660,000          795,861
                                                                                -------------    -------------
           Total current liabilities                                               46,527,000       31,197,022

 DEFERRED INCOME TAXES                                                              1,529,000        1,042,862
                                                                                -------------    -------------
 LONG-TERM DEBT                                                                     5,340,000        4,314,319
                                                                                -------------    -------------
 STOCKHOLDERS' EQUITY:
      Preferred stock, $.01 par value; authorized
         500,000 shares, none issued
      Common stock, $.10 par value; authorized
         15,000,000 shares; issued 9,698,346 (1996)
         and 8,993,951 (1995) shares                                                  970,000          899,395
      Additional paid-in capital                                                   30,762,000       22,804,129
      Retained earnings                                                            31,534,000       22,368,171
                                                                                -------------    -------------
          Total stockholders' equity                                               63,266,000       46,071,695
                                                                                -------------    -------------
                                                                               $  116,662,000   $   82,625,898
                                                                                =============    =============
</TABLE>


     See Notes to Consolidated Condensed Financial Statements

                                      -3-
<PAGE>
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                   CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                   (UNAUDITED)


<TABLE>
<CAPTION>
<S>                                            <C>              <C>             <C>              <C>
                                                     Thirteen Weeks Ended              Thirty-Nine Weeks Ended
                                               September 27,    September 29,    September 27,    September 29,
 REVENUES:                                          1996             1995             1996             1995
      Net sales                                $  88,976,000    $  70,899,435   $ 254,598,000    $ 199,467,672
      Financial services                             867,000          484,287       2,259,000        1,214,309
                                                ------------     ------------    ------------     ------------
                                                  89,843,000       71,383,722     256,857,000      200,681,981
                                                ------------     ------------    ------------     ------------
 COST OF SALES                                    73,226,000       58,618,426     209,682,000      166,949,601

 SELLING, GENERAL AND ADMINISTRATIVE:
     Manufacturing                                10,643,000        8,461,532      29,975,000       22,576,383
     Financial services                              550,000          252,524       1,417,000          682,407
                                                ------------     ------------    ------------     ------------
                                                  84,419,000       67,332,482     241,074,000      190,208,391
                                                ------------     ------------    ------------     ------------
 OPERATING PROFIT                                  5,424,000        4,051,240      15,783,000       10,473,590
                                                ------------     ------------    ------------     ------------
 OTHER INCOME(EXPENSE):
     Interest expense:
        Manufacturing                                (36,000)          (1,589)        (56,000)          (7,478)
        Financial services                          (126,000)        (127,313)       (369,000)        (376,438)
     Other, net                                      750,000          268,844       1,314,000          655,652
                                                ------------     ------------    ------------     ------------
                                                     588,000          139,942         889,000          271,736
                                                ------------     ------------    ------------     ------------
 INCOME BEFORE INCOME TAXES                        6,012,000        4,191,182      16,672,000       10,745,326

 INCOME TAXES                                      2,403,000        1,712,000       6,667,000        4,337,000
                                                ------------     ------------    ------------     ------------
 NET INCOME                                    $   3,609,000    $   2,479,182   $  10,005,000    $   6,408,326
                                                ============     ============    ============     ============

 NET INCOME PER SHARE                          $        .36     $        .27    $        1.02    $         .71
                                                ============     ============    ============     ============

 WEIGHTED AVERAGE SHARES OUTSTANDING               9,930,368        9,308,202       9,778,697        9,080,091
                                                ============     ============    ============     ============
</TABLE>




     See Notes to Consolidated Condensed Financial Statements

                                      -4-
<PAGE>
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
<S>                                                                            <C>              <C>
                                                                                    Thirty-Nine Weeks Ended
                                                                                 September 27,    September 29,
                                                                                      1996             1995
 OPERATING ACTIVITIES:
   Net income                                                                  $  10,005,000    $   6,408,326
   Adjustments to reconcile net income to net cash used in 
      operating activities:
        Depreciation and amortization                                              2,741,000        1,738,895
        Provision for credit losses, repurchase commitments 
           and other items                                                           216,000           98,715
        (Gain)loss on sale of property, plant and equipment                          (12,000)          (3,548)
        Equity in undistributed earnings of investments                             (492,000)        (110,818)
        Compensation related to issuance of stock options                            169,000             -
        Changes in assets and liabilities provided(used) 
           cash, net of effects of acquisitions in 1996:
             Accounts receivable                                                 (20,449,000)     (17,978,839)
             Inventories                                                          (4,852,000)      (1,187,363)
             Accounts payable                                                      6,233,000        5,974,238
             Amounts payable under dealer incentive programs                       3,486,000        2,116,052
             Estimated warranties                                                    729,000        1,300,000
             Income tax deposit                                                     (946,000)            -
             Other assets and liabilities                                          5,700,000        2,469,760
                                                                                ------------     ------------
        Net cash provided by operating activities                                  2,528,000          825,418
                                                                                ------------     ------------
 INVESTING ACTIVITIES:
   Proceeds from the sale of property, plant and equipment                            54,000          153,994
   Net cash paid in connection with acquisition of subsidiaries                     (370,000)            -
   Capital expenditures                                                           (6,473,000)      (3,213,846)
   Distribution from equity investments                                              779,000          138,356
   Purchases of marketable securities                                                   -            (991,246)
   Redemptions of marketable securities                                            1,475,000        2,950,000
   Purchases and originations of installment contracts                           (13,745,000)      (7,767,638)
   Principal collected on installment contracts                                    2,097,000        1,009,282
                                                                                ------------     ------------
        Net cash used in investing activities                                    (16,183,000)      (7,721,098)
                                                                                ------------     ------------
 FINANCING ACTIVITIES:
   Long-term borrowings                                                            1,005,000        2,000,000
   Payments on long-term debt                                                       (826,000)        (447,816)
   Cash dividends                                                                   (840,000)        (458,308)
   Net proceeds from exercise of stock options                                     3,553,000          259,495
   Other                                                                                -            (162,403)
                                                                                ------------     ------------
        Net cash provided by financing activities                                  2,892,000        1,190,968
                                                                                ------------     ------------
 NET DECREASE IN CASH AND CASH EQUIVALENTS                                       (10,763,000)      (5,704,712)

 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   21,005,000       16,034,922
                                                                                ------------     ------------
 CASH AND CASH EQUIVALENTS, END OF PERIOD                                      $  10,242,000    $  10,330,210
                                                                                ============     ============

</TABLE>







     See Notes to Consolidated Condensed Financial Statements

                                      -5-
<PAGE>

                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
     For the Thirteen and Thirty-Nine Week Periods Ended September 27, 1996
                             And September 29, 1995

1.       BASIS OF PRESENTATION

         *        The  accompanying  consolidated condensed financial statements
                  have been prepared in compliance  with Form 10-Q  instructions
                  and thus do not include all of the  information  and footnotes
                  required  by  generally  accepted  accounting  principles  for
                  complete financial statements.  In the opinion of the Company,
                  these statements contain all adjustments  necessary to present
                  fairly the  Company's  financial  position as of September 27,
                  1996 and December 31, 1995,  and the results of its operations
                  for the thirteen and thirty-nine  week periods ended September
                  27,  1996 and  September  29,  1995 and its cash flows for the
                  thirty-nine   week  periods  ended   September  27,  1996  and
                  September 29, 1995. All adjustments are of a normal  recurring
                  nature.

         *        The results of  operations  for the thirteen  and  thirty-nine
                  weeks ended September 27, 1996 are not necessarily  indicative
                  of the results to be expected for the full year.

         *        Inventories consist primarily of raw materials  and are stated
                  at the lower of cost  (first-in, first-out method) or market.

         *        The  Company   accounts  for  its  marketable   securities  in
                  accordance with Statement of Financial Accounting Standard No.
                  115,  Accounting  for Certain  Investments  in Debt and Equity
                  Securities,  which  requires  that  marketable  securities  be
                  classified into three categories - held to maturity, available
                  for sale,  and  trading,  each having a  specified  accounting
                  treatment as to carrying  value and  recognition of unrealized
                  gains and losses.

         *        Certain  amounts from the 1995 periods have been  reclassified
                  to   conform   to  the   1996   period   presentation.   These
                  reclassifications  had no effect on results of  operations  or
                  stockholders' equity.

         *        Net income per share is computed by dividing  net  earnings by
                  the  weighted   average  number  of  shares  of  common  stock
                  outstanding  during the thirteen and thirty-nine  week periods
                  after  giving  effect  to  the  equivalent  shares  which  are
                  issuable upon the exercise of stock options  determined by the
                  treasury stock method.

2.       SUPPLEMENTAL CASH FLOW DISCLOSURES          Thirty-Nine Weeks Ended
                                                   September 27,  September 29,
                                                        1996          1995
         Cash paid for:    Interest               $     432,000     $   383,916
                           Income taxes           $   3,545,000     $ 3,536,337

         During the  thirty-nine  week period  ended  September  27,  1996,  the
         Company  made a non-cash  contribution  of the  following  assets as an
         equity investment in a limited liability company:

         Inventory                                              $   1,623,000
         Property, plant and equipment (net)                          554,000
         Investment in a door manufacturer                            219,000
                                                                 -------------
           Total assets contributed                             $   2,396,000
                                                                 =============
3.       CREDIT ARRANGEMENTS

         *        In  February  1994,   the  Company   executed  a  $13  million
                  revolving,  warehouse  and  term-loan  agreement  (the "Credit
                  Facility")  with  its  primary  lender.  The  Credit  Facility
                  contains  a  revolving  line  of  credit  which  provides  for
                  borrowings  (including letters of credit) of up to 80% and 50%
                  of the Company's eligible (as defined) accounts receivable and
                  inventories,  respectively,  up to a  maximum  of $5  million.
                  Interest is payable under the revolving  line of credit at the
                  bank's prime rate (8.25% at September 27, 1996).

                                      -6-
<PAGE>


                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
     For the Thirteen and Thirty-Nine Week Periods Ended September 27, 1996
                             And September 29, 1995

3.       CREDIT ARRANGEMENTS - Continued


                  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  sale  contracts,  up to a
                  maximum of $8  million.  Interest on term notes is fixed for a
                  period of five  years  from  issuance  at a rate  based on the
                  weekly average yield on five year treasury securities averaged
                  over the  preceding  13 weeks,  plus 2.4%,  and floats for the
                  remaining  two years at a rate  (subject  to  certain  limits)
                  equal to the  bank's  prime  rate  plus  .75%.  The  warehouse
                  component of the Credit Facility provides for borrowings of up
                  to $2 million with  interest  payable at the bank's prime rate
                  plus 1%.  However,  in no event may the aggregate  outstanding
                  borrowings under the warehouse and term-loan  agreement exceed
                  $8 million.

                  The Credit Facility  contains  certain  restrictive  covenants
                  which limit the  aggregate of dividend  payments and purchases
                  of treasury  stock to 50% of  consolidated  net income for the
                  two most recent years.  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.

                  On March 14,  1996,  the Company  executed an amendment to the
                  Credit   Facility  which   increased  the  maximum   available
                  borrowings  under  the  warehouse  and  term-loan   agreements
                  contained  in the  Credit  Facility  to $18  million  from the
                  previous  limit of $8 million.  The  amendment  increased  the
                  total amount of available borrowings under the Credit Facility
                  (including  the revolving  line of credit) to $23 million from
                  $13  million.   In  addition  to  the  increase  in  available
                  borrowings  under the Credit  Facility,  the interest  rate on
                  prospective  borrowings  under the  term-loan  portion  of the
                  agreement was reduced by .40%. The bank's commitment under the
                  Credit  Facility will expire in April of 1998. All other major
                  terms and commitments remain unchanged.

                  As of September 27 1996, the Company had  $4,214,000  borrowed
                  under the Credit Facility.

4.       STOCKHOLDERS' EQUITY

         *        A  three-for-two  stock split of the  Company's  common  stock
                  which was  effected  in the form of a 50% stock  dividend  was
                  distributed on February 15, 1996 to  stockholders of record on
                  January 31, 1996 and a  five-for-four  stock split effected in
                  the form of a 25% stock dividend was distributed on August 15,
                  1995  to   stockholders  of  record  on  July  31,  1995.  All
                  historical  dividends and earnings per share amounts have been
                  adjusted for the stock splits.

         *        Cash  dividends were paid during this quarter and the previous
                  three quarters as follows (all amounts are per share):

                                                                 Split Adjusted
                  Record Date            Payment Date            Dividend Paid

                  July 31, 1996           August 15, 1996          $      .03
                  April 30, 1996          May 15, 1996             $      .03
                  January 31, 1996        February 15, 1996        $      .03
                  October 31, 1995        November 15, 1995        $      .02



                                      -7-
<PAGE>


                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
     For the Thirteen and Thirty-Nine Week Periods Ended September 27, 1996
                             And September 29, 1995

5.       COMMITMENTS AND CONTINGENCIES

         *        It  is a  customary  practice  in  the   manufactured  housing
                  industry  to  enter  into   repurchase   and  other   recourse
                  agreements  with  lending  institutions  which  have  provided
                  wholesale  floor plan financing to dealers.  These  agreements
                  generally  provide for  repurchase of the  Company's  products
                  from the lending  institutions for the balance due them in the
                  event of repossession  upon a dealer's  default.  Although the
                  Company is contingently  liable for  approximately $78 million
                  at September  27,  1996,  such  contingency  is reduced by the
                  resale  value  of  the  homes  which  may  be  required  to be
                  repurchased.  Losses  under  these  agreements  have  not been
                  significant  in the past and  management  expects no  material
                  loss in excess of the allowance provided of $800,000.

         *        The  Company's  workmen's  compensation, product liability and
                  general  liability  insurance  coverages  are  provided  under
                  incurred  loss,  retrospectively  rated premium  plans.  Under
                  these plans, the Company incurs insurance  expenses based upon
                  various  rates  applied  to current  payroll  costs and sales.
                  Annually,  such insurance expenses are adjusted by the carrier
                  for loss  experience  factors  subject to minimum  and maximum
                  premium  calculations.  At September 27, 1996, the Company was
                  contingently   liable   for   future   retrospective   premium
                  adjustments  up to a maximum of $6.3 million in the event that
                  additional  losses are reported related to prior periods.  The
                  Company has recorded an estimated  liability of  approximately
                  $1.1 million  related to such incurred but not reported claims
                  at September 27, 1996.  Management expects no material loss in
                  excess of this allowance.

         *        The Company is engaged in various legal proceedings incidental
                  to  its  business.   In  management's  opinion,  the  ultimate
                  liability,  if any, with respect to these  proceedings  is not
                  presently  expected to have a material  adverse  effect on the
                  Company's   financial  condition  or  results  of  operations;
                  however, the ultimate resolution of these matters could result
                  in losses in excess of current estimates.


6.       ACQUISITIONS

         In August of 1995,  the  Company  acquired  an option to  purchase  the
         balance  (73.5%)  of the  outstanding  shares of common  stock of Wheel
         House Structures, Inc. ("Wheel House") not already owned by the Company
         through the  reissuance  of treasury  stock and the  issuance of common
         stock with a total value of $464,063.  In January of 1996,  the Company
         exercised the option and acquired the  remaining  common stock of Wheel
         House  through the issuance of common  stock  valued at  $690,937.  The
         total  purchase  price of the  acquisition  was $1,155,000 and has been
         accounted  for under the  purchase  method.  The Company  acquired  the
         manufacturing facility operated by Wheel House for $550,000 cash and an
         assumption of long-term debt of $1,100,000,  a total  consideration  of
         $1,650,000.   The   acquisition   was   immaterial   to  the  Company's
         consolidated financial statements.

         In April of 1996,  Company acquired all of the outstanding shares of an
         insurance  agency in  exchange  for common  stock with a total value of
         $200,000.  The acquisition was immaterial to the Company's consolidated
         financial statements.

         In August of 1996, the Company and another manufactured housing company
         formed Quality Housing Supply,  LLC, a limited  liability  company,  to
         manufacture and sell laminated  wallboard and doors,  and to distribute
         other products,  to each member company and others in the  manufactured
         housing  industry.  The  limited  liability  company  was formed by the
         Company contributing  substantially all of the assets of a wholly owned
         subsidiary,  and the other member contributing an equal amount of cash.
         The acquisition was immaterial to the Company's  consolidated financial
         statements.

                                      -8-
<PAGE>


                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                               September 27, 1996

General

The  principal  business of the Company  since its inception has been the design
and production of manufactured  homes.  Currently the Company operates  thirteen
facilities  engaged in the  manufacture  of homes.  In early 1992,  the Company,
through its wholly owned subsidiary  Cavalier  Acceptance  Corporation  ("CAC"),
commenced retail installment sale financing operations. During 1994, the Company
formed  Cavalier  Insurance  Agency,  Inc.  ("CIA")  to sell  various  insurance
products.  The  operations  of CAC and  CIA are  reported  under  the  financial
services business segment in the Company's annual report.

The Company's business is cyclical and seasonal and is influenced by many of the
same national and regional  demographic  factors that affect the general  United
States housing market. According to industry statistics, after a ten year low in
shipments of homes in 1991,  the industry has recovered  significantly,  posting
increases in shipments of 24%, 21%, 20% and 12% for 1992,  1993 , 1994 and 1995,
respectively,  as compared to the prior year.  Industry statistics for the first
nine months of 1996 show an increase of 9%. The Company attributes the upturn in
the  manufactured  housing  industry to  increased  consumer  confidence,  wider
acceptance  of  manufactured   housing,  a  reduction  in  the  availability  of
alternative  housing,  increased  availability  of  consumer  financing  and  an
improvement in the overall economy.

Accordingly,  as business  conditions have improved the Company has expanded its
manufacturing  operations  to increase and improve its  capacity to  manufacture
homes.  During the last three  years the  Company  has opened or  acquired  five
facilities in Alabama,  two facilities in Texas and one facility each in Georgia
and Pennsylvania.

Results of Operations

The following  tables set forth,  for the periods and dates  indicated,  certain
financial,  operating,  and balance sheet data  including,  as  applicable,  the
percentage of net sales or total revenue:
<TABLE>
<CAPTION>
<S>                                 <C>                   <C>      <C>                   <C>      <C>                   <C>
FINANCIAL DATA                                                          Thirteen Weeks Ended
                                             September 27, 1996             September 29, 1995           Change over Prior Period
                                                                       (dollars in thousands)

Net Sales                           $       88,976           100.0%$       70,900           100.0%$       18,076            25.5%
Cost of Sales                       $       73,226            82.3%$       58,618            82.7%$       14,608            24.9%
                                     -------------        --------- -------------        --------- -------------        ---------
Gross Profits on Sales              $       15,750            17.7%$       12,282            17.3%$        3,468            28.2%
                                     =============        ========= =============        ========= =============        =========

Net Sales                           $       88,976                 $       70,900                 $       18,076            25.5%
Financial Services                  $          867                 $          484                 $          383            79.1%
                                     -------------        --------- -------------        --------- -------------        ---------
Total Revenue                       $       89,843           100.0%$       71,384           100.0%$       18,459            25.9%
                                     =============        ========= =============        ========= =============        =========

Selling, General and Administrative $       11,193            12.5%$        8,714            12.2%$        2,479            28.4%

Net Income                          $        3,609             4.0%$        2,479             3.5%$        1,130            45.6%

                                                                         Thirty-Nine Weeks
                                             September 27, 1996             September 29, 1995           Change over Prior Period
                                                                       (dollars in thousands)

Net Sales                           $      254,598           100.0%$      199,468           100.0%$       55,130            27.6%
Cost of Sales                       $      209,682            82.4%$      166,950            83.7%$       42,732            25.6%
                                     -------------        --------- -------------        --------- -------------        ---------
Gross Profits on Sales              $       44,916            17.6%$       32,518            16.3%$       12,398            38.1%
                                     =============        ========= =============        ========= =============        =========

Net Sales                           $      254,598                 $      199,468                 $       55,130            27.6%
Financial Services                  $        2,259                 $        1,214                 $        1,045            86.1%
                                     -------------        --------- -------------        --------- -------------        ---------
Total Revenue                       $      256,857           100.0%$      200,682           100.0%$       56,175            28.0%
                                     =============        ========= =============        ========= =============        =========

Selling, General and Administrative $       31,392            12.2%$       23,259            11.6%$        8,133            35.0%

Net Income                          $       10,005             3.9%$        6,408             3.2%$        3,597            56.1%


</TABLE>

                                      -9-
<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                               September 27, 1996

<TABLE>
<CAPTION>
<S>                                      <C>                           <C>                          <C>
OPERATING DATA                                                          Thirteen Weeks Ended
                                         September 27, 1996             September 29, 1995           Change over Prior Period

Home Shipments                               3,763                          3,061                            702            22.9%

                                                                         Thirty-Nine Weeks
                                         September 27, 1996             September 29, 1995           Change over Prior Period

Home Shipments                              10,728                          8,769                          1,959            22.3%


BALANCE SHEET DATA                                                       Thirty-Nine Weeks
                                         September 27, 1996             September 29, 1995           Change over Prior Period
                                                                       (dollars in thousands)

Installment Loan Portfolio                  30,857                         16,584                         14,273            86.1%

</TABLE>


Net Sales.  The Company  believes the  increases in net sales of $18.1 and $55.1
million for the  thirteen  and  thirty-nine  weeks  ended  September  27,  1996,
respectively,  over the comparable periods from the previous year were primarily
the result of the continuation of improving  industry trends,  combined with new
and aggressive  marketing programs  instituted by the Company during the current
and prior  periods,  including  the  exclusive  dealer  program and dealer stock
option plan and the increase in manufacturing capacity during the current period
and the previous  year.  The Company  believes  the  increases in the homes sold
during the thirteen and  thirty-nine  week periods ended September 27, 1996 over
the comparable periods in the previous year of 702 and 1,959 homes respectively,
or 22.9% and 22.3%,  respectively are primarily attributable to the same factors
previously described. During the current thirty-nine week period the Company has
experienced a shift in product mix from  single-section  homes to  multi-section
homes.  During  the  thirty-nine  weeks  ended  September  27,  1996  42% of the
Company's  homes  sold  were  multi-section  homes  as  compared  to 38% for the
comparable period in the previous year.

Gross  Profit on Sales.  The  increases  in gross  profit on sales  (derived  by
deducting  cost of sales  from net sales) of $3.5 and $12.4  million  during the
current thirteen and thirty-nine  week periods over the comparable  periods from
the  previous  year are  primarily  attributable  to the  increase  in sales and
improved efficiency in manufacturing operations.

Financial  Services Revenue.  The increases in current period financial services
revenue (primarily  interest income on retail installment  contracts) during the
current  thirteen and thirty-nine  week periods of $383,000 and  $1,045,000,  or
79.1% and 86.1%, respectively,  over the comparable periods in the previous year
are  primarily  attributable  to the growth of the Company's  loan  portfolio to
$30.9 million, an increase of 86.1%.

Selling,  General  and  Administrative.  The  growth  in  selling,  general  and
administrative  expense during the current thirteen and thirty-nine week periods
of $2.5 and $8.1  million,  respectively,  over the previous  year's  comparable
periods  is  primarily  attributable  to the  increase  in sales  combined  with
increased expenses due to the addition of personnel, the opening or expansion of
manufacturing  facilities and increased  administrative  expenses of CAC and CIA
consistent with their growth.

Net  Income.  The  increases  in net income  during  the  current  thirteen  and
thirty-nine  week  periods  of $1.1  and  $3.6  million,  or  45.6%  and  56.1%,
respectively,   over  the  previous  year's  comparable  periods  are  primarily
attributable  to the increase in sales  volume.  Net income per share during the
current thirteen and thirty-nine week periods was $.36 and $1.02,  respectively,
compared to $.27 and $.71 from the  previous  year's  comparable  periods.  (Net
income per share has been adjusted for all previous stock splits.)

                                      -10-
<PAGE>


                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                               September 27, 1996


Liquidity and Capital Resources

The  following  table sets forth certain items  relating to the  measurement  of
liquidity  and  capital  resources  from the  Company's  consolidated  condensed
financial statements for the dates indicated:
<TABLE>
<CAPTION>
<S>                                                  <C>               <C>            <C>
                                                             Balances as of
                                                     September 27,     December 31,      Increase
                                                          1996             1995         (Decrease)

Working Capital                                          8,931            11,121          (2,190)
Current Ratio                                            1.2:1             1.4:1
Long-Term Debt                                           6,260             4,981           1,279
Ratio of Long-Term Debt to Equity                         1:10               1:9
Installment Loan Portfolio at End of Period             30,857            19,209          11,648

</TABLE>


Although earnings for the period increased,  working capital decreased primarily
due to capital  expenditures and  originations of installment  contracts by CAC.
The increase in long-term debt is  attributable  to borrowings by CAC to finance
loan originations and to the purchase of a manufacturing facility in Haleyville,
Alabama (for further information  relating to the purchase of this manufacturing
facility,  see footnote 6 in the  consolidated  condensed  financial  statements
included herein).

The  Company's   primary   business  segment  is  the  production  and  sale  of
manufactured  housing.  In 1992, the Company began the operations of CAC to fund
installment sale contracts to the retail customers of the Company's  Independent
Exclusive  Dealers.  As the  operations  of CAC  expanded,  in February 1994 the
Company  entered into a Credit  Facility with its primary lender (see footnote 3
to the consolidated  condensed financial  statements included herein) to provide
additional  funds for CAC's  growth.  As of September  27, 1996,  the  Company's
portfolio of installment sale contracts had grown to approximately $30.9 million
and had  been  funded  primarily  with  internally  generated  working  capital,
borrowings  under the Credit  Facility and a portion of the net proceeds from an
offering of the Company's common stock during 1994.

Since  entering  into  the  Credit  Facility,  the  Company  has  had  aggregate
borrowings  of $5.7 million in order to continue to fund the  operations  of CAC
and to minimize the interest  rate risk of the  Company's  loan  portfolio.  The
Company expects to continue to borrow funds under the Credit Facility to finance
the  continuing  operations  and growth of CAC. On March 14,  1996,  the Company
executed  an  amendment  to the Credit  Facility  which  increased  the  maximum
available  borrowings under the warehouse and term-loan  agreements contained in
the Credit  Facility to $18 million from the previous  limit of $8 million.  The
amendment  increased the total amount of available  borrowings  under the Credit
Facility  (including  the  revolving  line of  credit) to $23  million  from $13
million.  In addition to the increase in available  borrowings  under the Credit
Facility,  the  interest  rate on  prospective  borrowings  under the  term-loan
portion of the agreement was reduced by .40%. As the  operations of CAC continue
to  expand,  the  Company  anticipates  that it will  be  able to  increase  its
borrowing capacity.

The  Company's  capital  expenditures  were  approximately  $6.5 million for the
thirty-nine  weeks ended  September 27, 1996 as compared to $3.2 million for the
comparable period of 1995.  Capital  expenditures  during these periods included
normal  property,  plant  and  equipment  additions  and  replacements  and  the
continued expansion and modernization of certain of the Company's  manufacturing
facilities.


                                      -11-
<PAGE>


                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                               September 27, 1996


The Company  believes  that  existing  cash and  investment  balances  and funds
available under the Credit Facility,  together with cash provided by operations,
should be adequate to fund the Company's  operations and expansion plans for the
next twelve months.  In order to provide  additional funds for continued pursuit
of the Company's growth  strategies and for operations over the longer term, the
Company  may  incur,  from time to time,  additional  short and  long-term  bank
indebtedness  and may issue, in public or private  transactions,  its equity and
debt securities,  the availability and terms of which may depend upon market and
other  conditions.  There  can be no  assurance  that such  possible  additional
financing will be available on terms acceptable to the Company.

                                      -12-
<PAGE>


                                    PART II.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                                Other Information
                                September 27,1996


ITEM 5            OTHER MATTERS

                  On October 16,  1996,  the Board of  Directors  of the Company
                  announced  a  five-for-four  stock  split in the form of a 25%
                  stock dividend  payable  November 15, 1996 to  stockholders of
                  record as of  October  31,  1996.  In  addition,  the Board of
                  Directors declared its regular quarterly cash dividend of $.03
                  per share  payable on  November  15, 1996 to  stockholders  of
                  record on October 31, 1996.

                  On October  23,  1996 the Board of  Directors  of the  Company
                  adopted a  Stockholder  Rights  Plan in which  rights  will be
                  distributed  on November 6, 1996, as a dividend at the rate of
                  one Right for each share of common stock,  par value $0.10 per
                  share,  held by  stockholders  of  record  as of the  close of
                  business on  November 6, 1996.  The Rights Plan is designed to
                  deter  abusive  takeover  tactics by making them  unacceptably
                  expensive to a  prospective  acquiror  and to  encourage  such
                  prospective  acquiror to negotiate with the Company's Board of
                  Directors  rather  than to  attempt  a hostile  takeover.  The
                  Company filed a Current Report on Form 8-K covering the Rights
                  Plan on October 30, 1996.

                  On October 29, 1996,  Jerry F. Wilson,  the  President,  Chief
                  Executive Officer and a director of the Company,  passed away.
                  On October 31, 1996,  the Board of Directors  elected David A.
                  Roberson, who previously served as Chief Financial Officer, to
                  serve as the Company's Chief Executive  Officer and Michael R.
                  Murphy,  who previously  served as Corporate  Controller,  was
                  elected to serve as the Company's Chief Financial Officer.


ITEM 6            EXHIBITS AND REPORTS ON FORM 8-K

                  The exhibits  required to be filed with this report are listed
                  below.  The  Company  will  furnish  upon  request the exhibit
                  listed upon the receipt of $15.00 per  exhibit,  plus $.50 per
                  page,  to  cover  the cost to the  Company  of  providing  the
                  exhibit.


                  (a)      (11)     Computation of Net Income per Common Share.

                           (27)     Article 5 - Financial Data Schedule for Form
                                    10-Q  submitted  as  exhibit 27 as  an EDGAR
                                    filing only.

                  (b)               The Company did not file a Current Report on
                                    Form 8-K during the quarter ended  September
                                    27, 1996.

                                      -13-
<PAGE>


                                    PART II.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                                Other Information
                               September 27, 1996


              "Safe Harbor" Statement under the Private Securities
                         Litigation Reform Act of 1995:

With the exception of historical factual information, the matters and statements
discussed,  made or incorporated  by reference in this Quarterly  Report on Form
10-Q (including statements regarding trends in the industry and the business and
growth and  financing  strategies  of the  Company)  constitute  forward-looking
statements, contain the words "believes," "anticipates," "expects," and words of
similar import based upon current expectations and are made pursuant to the safe
harbor provisions of the Private Securities  Litigation Reform Act of 1995. Such
forward-looking  statements  and words  involve  known and unknown  assumptions,
risks,  uncertainties  and other  factors  which may cause the  actual  results,
performance or achievements  of the Company to be materially  different from any
future  results,  performance,  or  achievements  expressed  or  implied by such
forward-looking statements or words. Such assumptions,  risks, uncertainties and
factors include those associated with general economic and business  conditions;
manufactured housing and retail consumer financing industry trends,  cyclicality
and  seasonality;  availability  of consumer and dealer  financing;  changes and
volatility  in interest  rates;  the  sufficiency  of reserves  established  for
installment  contract  receivables;   warranty,   product  liability  and  other
litigation  arising in the course of the Company's  manufacturing  and financial
services business; contingent repurchase and guaranty obligations; dependence on
key personnel;  demographic changes;  competition;  raw material and labor costs
and  availability;  import  protection and  regulation;  relationships  with and
dependence  on  customers,  distributors  or  dealers;  changes in the  business
strategy  or  development  plans of the  Company;  the  availability,  terms and
deployment  of  capital;  changes in or the  failure to comply  with  government
regulations;  and the inability or failure to identify or consummate  successful
acquisitions  or to assimilate  the operations of any acquired  businesses  with
those of the Company.  The Company expressly  disclaims any obligation to update
any forward-looking  statements as a result of developments  occurring after the
filing of this report.

SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                                Cavalier Homes, Inc.
                                                ---------------------
                                                Registrant




Date: November 11, 1996                   /s/ David A. Roberson
      -----------------------                 ---------------------
                                              David A. Roberson - President
                                              and Chief Executive Officer



Date: November 11, 1996                   /s/ Michael R. Murphy
      -----------------------                 ---------------------
                                              Michael R. Murphy -
                                              Chief Financial Officer (Principal
                                              Financial and Accounting Officer)







                                      -14-
<PAGE>
                              PART II. - EXHIBIT 11
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                   COMPUTATION OF NET INCOME PER COMMON SHARE

<TABLE>
<CAPTION>
<S>                                           <C>              <C>             <C>                <C>
                                                  Thirteen Weeks Ended              Thirty-Nine Weeks Ended
                                               September 27,    September 29,    September 27,    September 29,
                                                    1996             1995             1996             1995

 PRIMARY AND FULLY DILUTED
      Net Income                              $   3,609,000    $   2,479,182   $  10,005,000      $   6,408,326
                                               ============     ============    ============       ============
 SHARES:

 Primary
   Average common shares outstanding              9,694,183        8,858,588       9,384,892          8,825,130

   Dilutive effect if stock options
     were exercised                                 236,185          449,614         393,805            254,961
                                               ------------     ------------    ------------       ------------
   Average common shares outstanding
     as adjusted (primary)                        9,930,368        9,308,202       9,778,697          9,080,091
                                               ============     ============    ============       ============
 Fully Diluted
   Average common shares outstanding              9,930,368        9,308,202       9,778,697          9,080,091

   Additional dilutive effect if
     stock options were excercised
     (fully)                                           -                -               -                  -
                                               ------------     ------------    ------------       ------------
   Average common shares outstanding
     as adjusted (fully diluted)                  9,930,368        9,308,202       9,778,697          9,080,091
                                               ============     ============    ============       ============

 Primary and Fully Diluted Net
   Income per Common Share                    $         .36   $          .27  $         1.02     $          .71
                                               ============     ============    ============       ============

</TABLE>




                                      -15-


<TABLE> <S> <C>

<ARTICLE>                                                                     5
<CIK>                                                                0000789863
<NAME>                                                      CAVALIER HOMES, INC.
<MULTIPLIER>                                                                  1
<CURRENCY>                                                         U.S. DOLLARS
       
<S>                                                                 <C>
<PERIOD-TYPE>                                                             3-MOS
<FISCAL-YEAR-END>                                                   DEC-31-1996
<PERIOD-START>                                                      JUN-29-1996
<PERIOD-END>                                                        SEP-27-1996
<EXCHANGE-RATE>                                                               1
<CASH>                                                               10,242,000
<SECURITIES>                                                          2,101,000
<RECEIVABLES>                                                        23,006,000
<ALLOWANCES>                                                            800,000
<INVENTORY>                                                          13,699,000
<CURRENT-ASSETS>                                                     55,458,000
<PP&E>                                                               24,367,000
<DEPRECIATION>                                                        8,893,000
<TOTAL-ASSETS>                                                      116,662,000
<CURRENT-LIABILITIES>                                                46,527,000
<BONDS>                                                                       0
                                                         0
                                                                   0
<COMMON>                                                                970,000
<OTHER-SE>                                                           62,296,000
<TOTAL-LIABILITY-AND-EQUITY>                                        116,662,000
<SALES>                                                              88,976,000
<TOTAL-REVENUES>                                                     89,843,000
<CGS>                                                                73,226,000
<TOTAL-COSTS>                                                        73,226,000
<OTHER-EXPENSES>                                                     11,193,000
<LOSS-PROVISION>                                                              0
<INTEREST-EXPENSE>                                                      162,000
<INCOME-PRETAX>                                                       6,012,000
<INCOME-TAX>                                                          2,403,000
<INCOME-CONTINUING>                                                   3,609,000
<DISCONTINUED>                                                                0
<EXTRAORDINARY>                                                               0
<CHANGES>                                                                     0
<NET-INCOME>                                                          3,609,000
<EPS-PRIMARY>                                                             0.360
<EPS-DILUTED>                                                             0.360
        

</TABLE>


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