UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------------
Commission File Number 1-9792
Cavalier Homes, Inc.
--------------------
(Exact name of Registrant as specified in its charter)
Delaware 63-0949734
- -------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
Highway 41 North & Cavalier Road, Addison, Alabama 35540
--------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(256) 747-0044
--------------
(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 2, 1998
- ---------------------------- -------------------------------
Common Stock, $.10 Par Value 19,633,151 Shares
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information (Unaudited)
Consolidated Condensed Balance Sheets - 3
September 25, 1998 and December 31, 1997
Consolidated Condensed Statements of Income - 4
Thirteen and Thirty-nine Weeks Ended September 25, 1998
and September 26, 1997
Consolidated Condensed Statements of Cash Flows - 5
Thirty-nine Weeks Ended September 25, 1998 and
September 26, 1997
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 15
Item 5. Other Matters 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
18
Certain items in the report that follows are marked with an asterisk (*),
indicating that they are subject to the "Safe Harbor" Statement under the
Private Securities Litigation Reform Act of 1995 found on page 17 of this
report.
<PAGE>
<TABLE>
<CAPTION>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
September 25, December 31,
ASSETS 1998 1997
---------------- ----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 41,304 $ 37,276
Certificates of deposit, maturing within one year - 4,000
Accounts receivable, less allowance for
losses of $1,190 (1998) and $1,175 (1997) 36,641 8,449
Notes and installment contracts receivable - current 1,313 1,561
Inventories 39,399 29,697
Deferred income taxes 8,418 7,240
Other current assets 2,609 1,292
---------------- ----------------
Total current assets 129,684 89,515
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT (Net) 57,849 53,434
---------------- ----------------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $740 (1998)
and $1,272 (1997) 23,802 46,614
---------------- ----------------
GOODWILL, less accumulated amortization of
$3,882 (1998) and $3,102 (1997) 20,217 19,551
---------------- ----------------
OTHER ASSETS 3,412 2,440
---------------- ----------------
TOTAL $ 234,964 $ 211,554
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 393 $ 3,271
Notes payable 3,276 -
Accounts payable 20,825 9,575
Amounts payable under dealer incentive programs 16,395 14,614
Accrued compensation and related withholdings 10,115 4,294
Estimated warranties 12,200 11,700
Accrued merger and related costs 627 5,178
Other accrued expenses 21,005 12,399
---------------- ----------------
Total current liabilities 84,836 61,031
---------------- ----------------
DEFERRED INCOME TAXES 498 297
---------------- ----------------
LONG-TERM DEBT 3,850 15,808
---------------- ----------------
OTHER LONG-TERM LIABILITIES 2,146 867
---------------- ----------------
STOCKHOLDERS' EQUITY:
Series A Junior Participating Preferred Stock, $.01 par value; 200,000
shares authorized, none issued
Preferred stock, $.01 par value;
300,000 shares authorized, none issued
Common stock, $.10 par value; 50,000,000 shares authorized, 20,247,051
shares issued and 19,772,451 outstanding (1998);
19,941,357 shares issued and outstanding (1997) 2,025 1,994
Additional paid-in capital 60,414 57,228
Retained earnings 85,858 74,329
Treasury Stock, at cost (474,600 shares) (4,663) -
----------------------------------
Total stockholders' equity 143,634 133,551
---------------- ----------------
TOTAL $ 234,964 $ 211,554
================ ================
See Notes to Consolidated Condensed Financial Statements
</TABLE>
<TABLE>
<CAPTION>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
(UNAUDITED)
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------- ----------------------------------
September 25, September 26, September 25, September 26,
1998 1997 1998 1997
--------------- ---------------- ---------------- ----------------
REVENUES:
<S> <C> <C> <C> <C>
Net sales $ 156,346 $ 138,276 $ 446,085 $ 423,977
Financial services 1,152 1,382 4,605 3,820
--------------- ---------------- ---------------- ----------------
157,498 139,658 450,690 427,797
--------------- ---------------- ---------------- ----------------
COST OF SALES 126,864 115,444 365,772 354,512
SELLING, GENERAL AND ADMINISTRATIVE:
Manufacturing 21,632 17,356 60,880 49,757
Financial services 904 855 2,632 2,275
--------------- ---------------- ---------------- ----------------
149,400 133,655 429,284 406,544
--------------- ---------------- ---------------- ----------------
OPERATING PROFIT 8,098 6,003 21,406 21,253
--------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense:
Manufacturing (107) (157) (380) (580)
Financial services - (217) (281) (540)
Life Insurance Proceeds - - - 1,500
Other, net 759 353 1,643 1,218
--------------- ---------------- ---------------- ----------------
652 (21) 982 1,598
--------------- ---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 8,750 5,982 22,388 22,851
INCOME TAXES 3,530 2,343 9,057 8,439
--------------- ---------------- ---------------- ----------------
NET INCOME $ 5,220 $ 3,639 $ 13,331 $ 14,412
=============== ================ ================ ================
BASIC NET INCOME PER SHARE $ 0.26 $ 0.18 $ .67 $ .73
=============== ================ ================ ================
DILUTED NET INCOME PER SHARE $ 0.26 $ 0.18 $ .66 $ .72
=============== ================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 20,072,336 19,869,210 20,029,432 19,813,209
=============== ================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING,
ASSUMING DILUTION 20,307,857 20,055,274 20,304,704 20,011,665
=============== ================ ================ ================
See Notes to Consolidated Condensed Financial Statements
</TABLE>
<TABLE>
<CAPTION>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
Thirty-nine Weeks Ended
----------------------------------
September 25, September 26,
1998 1997
---------------- ----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 13,331 $ 14,412
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,124 5,582
Provision for credit losses and repurchase commitments (517) 279
Gain on sale of installment contracts (1,517) -
Loss on sale of property, plant and equipment 60 250
Equity in net income of unconsolidated affiliates (252) (261)
Minority interest in net income of consolidated subsidiaries 314 109
Compensation related to the issuance of stock options 231 134
Changes in assets and liabilities provided (used) cash, net of effects of acquisitions:
Accounts receivable (28,165) (25,055)
Inventories (6,844) (2,624)
Accounts payable 11,194 6,173
Other assets and liabilities 10,887 4,238
---------------- ----------------
Net cash provided by operating activities 4,846 3,237
---------------- ----------------
INVESTING ACTIVITIES:
Net cash paid in connection with acquisitions (2,358) (871)
Proceeds from the sale of property, plant and equipment 64 86
Capital expenditures (8,925) (7,889)
Purchases of certificates of deposit (6,044) (345)
Maturities of certificates of deposit 10,044 4,544
Distribution from equity investments 124 138
Proceeds from sale or maturity of marketable securities - 1,097
Purchase of marketable securities - (149)
Purchases and originations of notes and installment contracts (13,812) (15,589)
Proceeds from sale of installment contracts 35,040 -
Principal collected on notes and installment contracts 3,862 4,100
Increase in value of cash surrender value of life insurance (917) -
---------------- ----------------
Net cash provided by (used in) investing activities 17,078 (14,878)
---------------- ----------------
FINANCING ACTIVITIES:
Net payments on notes payable 420 -
Payments on long-term debt (14,836) (11,889)
Proceeds from long-term borrowings - 8,552
Cash dividends paid (1,802) (1,100)
Proceeds from exercise of stock options 171 4
Net proceeds from sales of common stock 2,814 1,448
Purchase of treasury stock (4,663) -
---------------- ----------------
Net cash used in financing activities (17,896) (2,985)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,028 (14,626)
---------------- ----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 37,276 29,751
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,304 $ 15,125
================ ================
See Notes to Consolidated Condensed Financial Statements
</TABLE>
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
For the Thirteen and Thirty-nine Week Periods
Ended September 25, 1998 and September 26, 1997
(Dollars in Thousands, Except Per Share Amounts)
1. BUSINESS COMBINATION AND BASIS OF PRESENTATION
o 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 consolidated
condensed financial statements have been restated to include
the financial position, results of operations and cash flows
of Belmont for all periods presented. Previously reported
amounts for the individual companies 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.
o 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 management,
these statements contain all adjustments necessary to present
fairly the Company's financial position as of September 25,
1998, and the results of its operations and its cash flows for
the thirteen and thirty-nine week periods ended September 25,
1998 and September 26, 1997, respectively. All adjustments are
of a normal, recurring nature.
o The results of operations for the thirteen and thirty-nine
week periods ended September 25, 1998 are not necessarily
indicative of the results to be expected for the full year.
The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis and
financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
o Per share amounts are calculated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per
Share". Earnings per share, basic and diluted, are computed by
dividing net income by the weighted average common shares
outstanding (basic EPS) or weighted average common shares
outstanding assuming dilution (diluted EPS) as detailed below:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------- ----------------------------------
September 25, September 26, September 25, September 26,
1998 1997 1998 1997
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Weighted average common shares 20,072,336 19,869,210 20,029,432 19,813,209
outstanding (basic)
Dilutive effect if stock options
were exercised 235,521 186,064 275,272 198,456
--------------- ---------------- ---------------- ----------------
Weighted average common shares
outstanding, assuming dilution (diluted) 20,307,857 20,055,274 20,304,704 20,011,665
=============== ================ ================ ================
</TABLE>
o Inventories consist primarily of raw materials and are stated
at the lower of cost (first-in, first-out method) or market.
o Certain amounts from the prior periods have been reclassified
to conform to the 1998 presentation.
o During 1998, the Company acquired the assets of two
manufactured housing retail organizations for a net cash
payment of $2,358. The acquisitions were accounted for as
purchases and resulted in $1,447 of goodwill, which is being
amortized using the straight-line method over 15 years. The
results of operations of the acquired companies are included
with those of Cavalier from the respective acquisition dates.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
For the Thirteen and Thirty-nine Week Periods Ended
September 25, 1998 and September 26, 1997
(Dollars in Thousands, Except Per Share Amounts)
2. ACCOUNTING STANDARD NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This statement is effective
for financial statements issued for fiscal years beginning after
December 15, 1997. The adoption of the provisions of this Statement is
expected to result only in increased disclosures on segment information
and will not impact the amounts in the financial statements.*
<TABLE>
<CAPTION>
3. SUPPLEMENTAL CASH FLOW DISCLOSURES Thirty-nine Weeks Ended
-------------------------------
September 25, September 26,
1998 1997
-------------------------------
<S> <C> <C>
Cash paid for: Interest $ 632 $ 1,089
Income taxes $ 8,622 $ 8,401
</TABLE>
4. CREDIT ARRANGEMENTS
In June 1998, the Company executed an amended $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 (as defined) 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 (8.50% at September
25, 1998), or, if elected by the Company, the 90-day LIBOR Rate plus
2.5% (7.8125% at September 25, 1998).
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 $25,000.
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%,
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.
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 Cavalier Acceptance Corporation
("CAC"), and the capital stock of certain of the Company's consolidated
subsidiaries. The bank's commitment under the Credit Facility expires
in April 2000.
No amounts were outstanding under the Credit Facility at September 25,
1998.
5. STOCKHOLDERS' EQUITY
o The Company paid cash dividends during this quarter and the
previous three quarters as follows (all amounts are per
share):
<TABLE>
<S> <C> <C>
Record Date Payment Date Dividend Paid
----------- ------------ -------------
July 31, 1998 August 14, 1998 $ .030
April 30, 1998 May 15, 1998 $ .030
January 30, 1998 February 16, 1998 $ .030
October 31, 1997 November 14, 1997 $ .018
</TABLE>
- ---------------------------------------
* See Safe Harbor Statement on page 17.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
For the Thirteen and Thirty-nine Week Periods
Ended September 25, 1998 and September 26, 1997
(Dollars in Thousands, Except Per Share Amounts)
5. STOCKHOLDERS' EQUITY (Continued)
o During the third quarter of 1998, Cavalier initiated a stock
repurchase program to repurchase 500,000 shares of its common
stock. At September 25, 1998, 474,600 shares had been
repurchased for $4,663 which is recorded as treasury stock.
6. COMMITMENTS AND CONTINGENCIES
o It is customary practice for companies in the manufactured
housing industry to enter into repurchase and other recourse
agreements with lending institutions which have provided
wholesale floor plan financing to dealers. Substantially all
of the Company's sales are made to dealers located primarily
in the southeast, southwest and midwest regions of the United
States and are pursuant to repurchase agreements with lending
institutions. These agreements generally provide for
repurchase of the Company's products from the lending
institutions for the balance due them in the event of
repossession upon a dealer's default. Although the Company is
contingently liable for an amount estimated to be $211,000
under these agreements as of September 25, 1998, such
contingency is mitigated by the fact that (i) sales of
manufactured homes are spread over a relatively large number
of dealers; (ii) the price the Company is obligated to pay
under such repurchase agreements generally declines over the
period of the agreement; and (iii) the Company may be able to
reduce its losses by the resale value of the homes which may
be required to be repurchased. The Company has an allowance
for losses of $1,190 based on prior experience and current
market conditions. Management expects no material loss in
excess of the allowance.*
o 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 25, 1998, the Company was
contingently liable for future retrospective premium
adjustments up to a maximum of $5,700 in the event that
additional losses are reported related to prior periods.
o The Company is engaged in various legal proceedings that are
incidental to and arise in the course of its business.
Certain of the cases filed against the Company and other
companies engaged in businesses similar to the Company allege,
among other things, breach of contract and warranty, product
liability, personal injury and fraudulent, deceptive or
collusive practices in connection with their businesses.
These kinds of suits are typical of suits that have been
filed in recent years, and they sometimes seek certification
as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. 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.
o The Company and certain of its equity partners have jointly
and severally guaranteed revolving notes for two companies
and a letter of credit for one company in which the Company
owns various equity interests. The guarantees are limited to
various percentages of the outstanding debt up to a maximum
guaranty of $1,500. At September 25, 1998, $3,000 was
outstanding under the various guarantees, of which the Company
had guaranteed $720.
- ---------------------------------------
* See Safe Harbor Statement on page 17.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 25, 1998
General
Cavalier's principal business, since its inception in 1984, is to design,
produce and sell manufactured homes. In 1992, the Company, through its wholly
owned subsidiary, CAC, started retail installment financing.
Effective December 31, 1997, the Company merged (the "Merger") with Belmont
Homes, Inc. ("Belmont"), whose shares were traded on The Nasdaq National Market
under the symbol "BHIX". In the Merger, Belmont became a wholly owned subsidiary
of the Company, and each Belmont share issued and outstanding immediately prior
to the effective time of the Merger was converted into the right to receive 0.80
shares of the common stock of the Company. The Company issued 7,555,121 shares
of its common stock in the Merger in exchange for the outstanding shares of
Belmont common stock. The Merger was accounted for as a pooling of interests
and, accordingly, the Company's financial statements have been restated to
include the financial position, results of operations and cash flows of Belmont
for all periods presented. The information herein is presented on a combined
basis.
As of September 1998, the Company had acquired the assets of two manufactured
home retail organizations. The results of operations of the acquired
organizations are included with those of Cavalier from the respective
acquisition dates. These acquisitions were in key markets served by the Company.
The Company's retail business includes four retail sales centers in the
southeastern United States, with year-to-date revenues of $4,615,000. Some
portion of manufactured housing revenues are eliminated in consolidation because
homes sold by the Company's manufacturing plants to Company-owned retailers
cannot be recognized as sales on a consolidated basis until homes are sold to
retail customers. The Company's major marketing strategy remains focused on
building distribution through exclusive independent dealer relationships. In the
future the Company may supplement the independent dealer network with franchise
dealerships and company sales centers in certain key markets.* The Company may,
in the future, also acquire other retailers.*
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. 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,
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. In
1997, the industry reported a 2.8% decline in shipments from 1996, its first
decrease in shipments in six years.
Industry shipments in 1998 have improved over 1997, with the Manufactured
Housing Institute reporting floor shipments increased 7.0% through August 1998
over 1997. Multi-section shipments represented 60.2% of industry shipments
through August 1998 versus 56.4% through the same period in 1997. A
single-section home is comprised of one floor, while a multi-section home is
comprised of two or more floors.
- ---------------------------------------
* See Safe Harbor Statement on page 17.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 25, 1998
Results of Operations
The following tables set forth, for the periods and dates indicated, certain
financial and operating data, including, as applicable, the percentage of net
sales or total revenue:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME SUMMARY For the Thirteen Weeks Ended
-------------------------------------------------------------------------------------
(Dollars in Thousands) September 25, 1998 September 26, 1997 Difference
--------------------------- --------------------------- --------------------------
Net Sales $ 156,346 100.0% $ 138,276 100.0% $ 18,070 13.1%
Cost of Sales 126,864 81.1% 115,444 83.5% 11,420 9.9%
-------------- ----------- ------------- ------------ -------------
Gross Profit on Sales $ 29,482 18.9% $ 22,832 16.5% $ 6,650 29.1%
============== ============= =============
Net Sales $ 156,346 $ 138,276 $ 18,070 13.1%
Financial Services 1,152 1,382 (230) -16.6%
-------------- ------------- -------------
Total Revenue $ 157,498 100.0% $ 139,658 100.0% $ 17,840 12.8%
============== ============= =============
Selling, General and Administrative $ 22,536 14.3% $ 18,211 13.0% $ 4,325 23.7%
Operating Profit $ 8,098 5.1% $ 6,003 4.3% $ 2,095 34.9%
Other Income $ 652 0.4% $ (21) 0.0% $ 673 -3204.8%
Net Income $ 5,220 3.3% $ 3,639 2.6% $ 1,581 43.4%
STATEMENT OF INCOME SUMMARY For the Thirty-Nine Weeks Ended
-------------------------------------------------------------------------------------
(Dollars in Thousands) September 25, 1998 September 26, 1997 Difference
--------------------------- --------------------------- --------------------------
Net Sales $ 446,085 100.0% $ 423,977 100.0% $ 22,108 5.2%
Cost of Sales 365,772 82.0% 354,512 83.6% 11,260 3.2%
-------------- ----------- ------------- ------------ -------------
Gross Profit on Sales $ 80,313 18.0% $ 69,465 16.4% $ 10,848 15.6%
============== ============= =============
Net Sales $ 446,085 $ 423,977 $ 22,108 5.2%
Financial Services 4,605 3,820 785 20.5%
-------------- ------------- -------------
Total Revenue $ 450,690 100.0% $ 427,797 100.0% $ 22,893 5.4%
============== ============= =============
Selling, General and Administrative $ 63,512 14.1% $ 52,032 12.2% $ 11,480 22.1%
Operating Profit $ 21,406 4.7% $ 21,253 5.0% $ 153 0.7%
Other Income $ 982 0.2% $ 1,598 0.4% $ (616) -38.5%
Net Income $ 13,331 3.0% $ 14,412 3.4% $ (1,081) -7.5%
</TABLE>
<TABLE>
<CAPTION>
For the Thirteen Weeks For the Thirty-nine Weeks
OPERATING DATA SUMMARY Ended Ended
--------------------------- --------------------------
(Dollars in Thousands) September 25, September 26, September 25, September 26,
1998 1997 1998 1997
----------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Installment Loan Purchases $ 6,475 $ 4,340 $ 13,464 $ 14,831
Capital Expenditures $ 4,505 $ 2,933 $ 8,925 $ 7,889
Home Shipments 6,285 5,782 18,099 18,105
Floor Shipments 9,371 8,396 26,915 25,588
Independent Exclusive Dealer Locations 219 145 219 145
Home Manufacturing Facilities 23 22 23 22
</TABLE>
Net Sales. Net sales for the third quarter increased $18,070,000 (13.1%) as
compared to the same period in 1997, and increased $22,108,000 (5.2%) for the
nine months ending September 25, 1998. The increase in sales for both periods
over 1997 is in part attributable to improved industry conditions. Floor
shipments increased by 11.6% for the third quarter and 5.2% year-to-date over
1997. Homes sold for the quarter increased 8.7% over the third quarter of 1997,
with no percentage change for the nine month period. During the quarter, 49% of
the Company's homes sold were multi-section homes, compared to 45% for the
previous year's comparable period, with year-to-date multi-section home sales
increasing to 49% compared to 41% for the prior year. As part of the Company's
marketing program, the exclusive dealer distribution system has grown to 219
independent exclusive dealer locations, up from 145 dealer locations at the end
of the third quarter of 1997.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 25, 1998
Financial Services Revenue. Financial services revenue increased $785,000 for
the year over 1997 primarily due to a gain on the sale of a significant portion
of CAC's loan portfolio in the first quarter of 1998 as well as the subsequent
periodic resale of loans. The effect of the portfolio sale on financial services
revenue has been to reduce the amount of interest income on the portion of the
portfolio sold. Financial services revenue decreased for the third quarter of
1998 as compared to 1997 by $230,000 due primarily to the reduced loan
portfolio.
Selling, General and Administrative. Selling, general and administrative expense
increased $4,325,000 during the quarter and $11,480,000 year-to-date over 1997.
These increases are primarily due to $1,439,000 for the quarter and $3,840,000
year-to-date for expanded sales and marketing activities including recruiting,
set-up, and maintenance for our exclusive dealer network and the continued
development of a retail franchise program. Additionally, selling, general and
administrative expense increased $685,000 for the quarter and $1,881,000 for the
year due to higher costs for employee benefits, primarily workers compensation
and health insurance. Other factors contributing to the increase in selling,
general and administrative expenses are the retail acquisitions, opening
additional home manufacturing facilities and the expansion of the supply
distribution business. Quarterly selling, general and administrative expense as
a percentage of total revenue was 14.3% (1998) and 13.0% (1997). Year-to-date
expense as a percentage of total revenue was 14.1% (1998) and 12.2% (1997).
Other Income (Expense).
Interest Expense. Interest expense decreased year-to-date by $457,000 and
$266,000 for the quarter compared to 1997 due to the payoff in March 1998 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 Homes, Inc. acquisition.
Life Insurance Proceeds. The Company recorded a non-recurring gain on life
insurance proceeds during the thirty-nine weeks ended September 26, 1997 of
$1,500,000 million as a result of the death of Belmont's President and Chief
Executive Officer, Jerold Kennedy.
Other, net. Other, net increased by $405,000 for the quarter as compared to 1997
and increased $426,000 for the thirty-nine week period ended September 25, 1998
as compared to 1997. Other, net is primarily comprised of interest income, gains
or losses on sales of investments, equity earnings in investments accounted for
on the equity basis of accounting and an allocation of minority interest. The
increase in other, net is primarily due to increased interest income on earnings
from the cash proceeds of the sale of a portion of CAC's loan portfolio.
Net Income. Net income for the thirteen weeks ended September 25, 1998 was
$5,220,000 compared to $3,639,000 for the comparable 1997 period. Diluted net
income per share during the current quarter is $.26 as compared to $.18 for the
previous year's comparable period. Year-to-date net income at September 25, 1998
was $13,331,000 compared to $14,412,000 for 1997, which included $1,500,000 of
life insurance proceeds, or $.07 per share diluted. Diluted net income per share
year-to-date was $.66 compared to $.72 in 1997. While net income (excluding the
effect of life insurance proceeds received during the 1997 year-to-date period)
improved over the prior year periods due primarily to increased sales resulting
in part from improved industry conditions, net income for the third quarter and
year-to-date was affected by continuing competition in the manufactured housing
industry as well as the impact of the process of integrating Belmont and
Cavalier.
Currently, the Company is experiencing tightened supply from its traditional
vendors of certain types of raw materials 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 substitute
products or suppliers may become scarce. 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. *
Installment Loan Purchases. During the third quarter of 1998, installment loan
purchases were $6,475,000 compared to $4,340,000 for the comparable period in
1997. The increase is due to improved dealer incentives offered by CAC during
the quarter which are comparable to incentives offered by other financing
sources. Year-to-date, installment loan purchases decreased to $13,464,000
compared to $14,831,000 for 1997 as a result of competitive conditions, due, in
part, to higher dealer incentives offered by other financing sources.
- ---------------------------------------
* See Safe Harbor Statement on page 17.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 25, 1998
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>
BALANCE SHEET SUMMARY Balances as of
------------------------------------------------
(Dollars in Thousands) September 25, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Cash and Cash Equivalents $ 41,304 $ 37,276
Certificates of deposit maturing within one year $ - $ 4,000
Accounts Receivable $ 36,641 $ 8,449
Working Capital $ 44,847 $ 28,484
Current Ratio 1.5 to 1 1.5 to 1
Long-Term Debt $ 3,850 $ 15,808
Ratio of Long-Term Debt to Equity 1 to 38 1 to 8
Installment Loan Portfolio $ 25,380 $ 49,146
</TABLE>
The Company's strong cash position enabled it to initiate a stock repurchase
program of 500,000 shares during the third quarter. The Company completed this
repurchase subsequent to the end of the third quarter. The Company's Board of
Directors then authorized the repurchase of up to an additional 1,500,000
shares, of which, 198,900 shares had been repurchased as of November 2, 1998.
The 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 having an outstanding principal balance of $33,523,000 for cash of
$35,040,000, of which approximately $14 million was used to retire debt.
The increase in accounts receivable from December 31, 1997 to September 25,
1998, is a normal seasonal occurrence. As is customary for the Company, most of
its manufacturing operations are idle during the final two weeks of the year for
vacations, holidays and reduced product demand, and during this time, the
Company collects the majority of its outstanding receivables.
The Company's capital expenditures were approximately $8,925,000 for the
thirty-nine weeks ended September 25, 1998, as compared to $7,889,000 for the
comparable period of 1997. Capital expenditures during these periods 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 1998 purchase of a Texas manufacturing facility that
was previously leased.
The Company's primary business segment is the production and sale of
manufactured homes. In 1992, the Company began the operations of CAC to fund the
purchase of installment sale contracts originated with 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 (the "Credit Facility") to provide additional funds for CAC's growth.
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 .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.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 25, 1998
Liquidity and Capital Resources (Continued)
The Credit Facility contains certain restrictive covenants which limit, among
other things, the Company's ability to (i) make dividend payments and purchases
of treasury stock in an aggregate amount which exceeds 50% of consolidated net
income for the two most recent years, (ii) mortgage or pledge assets which
exceed, in the aggregate, $1 million without written notice to the lender,(iii)
incur additional indebtedness, including lease obligations, which exceed in the
aggregate $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 (the "Retail Finance Agreement")
with another lender providing for the periodic resale of a portion of CAC's
loans that meet established criteria. The effect of these transactions on net
income has been 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. 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. *
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.* 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, its independent dealer network
and the pursuit of additional acquisitions. The Company may incur additional
debt, or other forms of financing, in order to continue to fund the pursuit of
such growth strategies. * The Company currently believes existing cash and
investment balances (which include proceeds from the sale of a portion of its
installment loan portfolio described above) and funds available under the Credit
Facility, together with cash provided by operations, will be adequate to fund
the Company's operations and plans for the next twelve months.* In order to
provide additional funds for continued pursuit of the Company's growth
strategies and for operations, the Company may incur, from time to time,
additional short and long-term bank indebtedness and may issue, in public or
private transactions, its equity and debt securities, the availability and terms
of which will depend upon market and other conditions.* The Company may continue
to engage in other transactions, such as selling or securitizing all or portions
of its installment loan portfolio, that are designed to facilitate the ability
of the Company to 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. *
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 systems 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.
The Company has implemented a program to evaluate 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 completed, and the
testing of these systems and microprocessors is approximately 45%
completed. As a result of this assessment, the Company believes that
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.* Plans are underway to identify an appropriate
accounting system for these subsidiaries.
- ---------------------------------------
* See Safe Harbor Statement on page 17.
<PAGE>
PART I.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 25, 1998
Year 2000 Compliance (Continued):
2) The identification of Year 2000 compliance by significant or critical
third parties is in process and is expected to be completed by December
31, 1998.* The scheduled completion date to replace third parties, if
needed, is July 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 October 1999.*
4) The development of a contingency plan is the last phase and is expected
to be completed by October 1999.*
The costs incurred to date to address the Year 2000 issue have not been
material; however, the Company expects to incur between $300,000 and $500,000 as
an expense during 1998 and 1999 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. 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 that 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.
- ---------------------------------------
* See Safe Harbor Statement on page 17.
<PAGE>
PART II.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Other Information
September 25, 1998
ITEM 1 LEGAL PROCEEDINGS
Reference is made to the legal proceedings previously reported in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 under the
heading "Item 3 - Legal Proceedings", and in the Company's Quarterly Report on
Form 10-Q for the period ended June 26, 1998, under the heading "Part II, Item 1
- - Legal Proceedings."
In September 1998, the Company and certain of its subsidiaries, along with a
number of other manufactured housing producers, the Manufactured 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 owned 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.
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 5 OTHER MATTERS
The Board of Directors declared the quarterly cash dividend of $.04 per share,
an increase of 33%, payable on November 16, 1998 to stockholders of record on
October 30, 1998.
In accordance with the provisions of Rule 14a-8 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), stockholders wishing to submit a
proposal to be considered for inclusion in the Company's proxy statement and on
the proxy solicitation/voting instruction card for the Company's 1999 Annual
Meeting of Stockholders must submit the proposal in writing to the Company on or
before December 11, 1998.
In addition, the Securities and Exchange Commission recently amended Rule 14a-4
promulgated under the Exchange Act. As amended, Rule 14a-4 provides that a proxy
solicited by management of the Company may confer discretionary authority upon
management of the Company to vote on a matter for an annual meeting of
stockholders if the Company did not have notice of such matters at least (i) 45
days prior to the first anniversary date of the mailing of the prior year's
proxy statement (the "Proxy Rules Date") or (ii) that amount of time required by
the advance notice provisions of the Company's Amended and Restated By-laws, as
amended (the "By-laws Date"). The proxy statement for the Company's 1998 Annual
Meeting of Stockholders was mailed to stockholders on April 10, 1998;
accordingly, the Proxy Rules Date is February 24, 1999. In addition, the
Company's Amended and Restated By-laws, as amended (the "By-laws"), establish an
advance notice procedure with regard to stockholder proposals to be brought
before an annual meeting of stockholders, which procedure was recently amended.
For business to be properly brought before an annual meeting by a stockholder,
the stockholder must give notice not less than 45 days nor more than 90 days
prior to the first anniversary of the date on which the prior year's proxy
materials were mailed; provided, however, that in the event the 1999 annual
meeting is more than 30 days before or more than 60 days after (other than as a
result of adjournment) the anniversary date of the prior year's annual meeting,
notice must be delivered no earlier than 90 days prior to such annual meeting
and not later than the later of the 60th day prior to such meeting or the 10th
day after the Company publicly announces the date of such meeting. The Company
currently expects the 1999 Annual Meeting of Stockholders to be held within 30
days of the anniversary of the 1998 Annual Meeting. Therefore, a stockholder
must notify the Company between January 10, 1999 and February 24, 1999 of a
proposal for the 1999 Annual Meeting of Stockholders which the stockholder
intends to present other than by inclusion in the Company's proxy material.
<PAGE>
PART II.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Other Information
September 25, 1998
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) (3) Articles of Incorporation and By-laws.
(a) The Amended and Restated Certificate of Incorporation of
the Company, filed as Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993,
and the amendment thereto, filed as Exhibit 3(b) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 26, 1997, is incorporated herein by
reference.
(b) 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 September 26, 1997, and the
amendment thereto filed as Exhibit 3(e) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 26, 1997, is incorporated herein by reference.
(c) Amendment to the Company's Amended and Restated By-laws,
as amended.
(d) The Certificate of Designation of Series A Junior
Participating 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, is incorporated herein by reference.
(4) Instruments Defining the Rights of Security Holders.
(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(b) and
Exhibit 3(c) above.
(c) Rights Agreement between Cavalier Homes, Inc. and Chase
Mellon Shareholder Services, LLC, filed as Exhibit 4 to
the Company's Current Report on Form 8-K dated October 30,
1996, is incorporated herein by reference.
(10) Material Contracts.
(a) Form of Indemnification Agreement by and between Cavalier
Homes, Inc. and each member of its Board of Directors.
(b) Retention and Severance Agreement, dated August 26, 1998,
by and between Cavalier Homes, Inc. and Barry B. Donnell.
(c) Retention and Severance Agreement, dated August 26, 1998,
by and between Cavalier Homes, Inc. and David A. Roberson.
(d) Retention and Severance Agreement, dated August 26, 1998,
by and between Cavalier Homes, Inc. and Michael R. Murphy.
(e) 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, is incorporated herein by reference.
(11) Statement re: Computation of Net Income per Common Share.
(27) Article 5 - Financial Data Schedule and Restated Financial
Data Schedule for Form 10-Q submitted as Exhibit 27 as an
EDGAR filing only.
(b) Current Report on Form 8-K.
None.
<PAGE>
PART II.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Other Information
September 25, 1998
"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, the business and
growth and financing strategies of the Company, the Company's plans and
expectations regarding the merger with Belmont and the achievement of cost
savings and synergies, the Company's anticipation regarding results in future
periods and the Company's plans and expectations regarding the Year 2000 issue),
as well as those statements specifically designated with an asterisk (*), or
which contain the words "estimates", "projects", "intends", "believes",
"anticipates", "expects", "may", "appears", and words of similar import,
constitute forward-looking statements, are based upon current expectations and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements and words involve
known and unknown assumptions, risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements or words. Such
assumptions, risks, uncertainties and factors include those included in the
Company's Annual Report on Form 10-K for the period ended December 31, 1997,
including, without limitation, under the heading "Item 1. Business - Risk
Factors" and those associated with general economic and business conditions;
manufactured housing and retail consumer financing industry trends, cyclicality
and seasonality; availability of consumer and dealer financing; changes and
volatility and uncertainty in interest rates; the sufficiency of reserves
established for installment contract receivables; warranty, product liability,
workers' compensation and other litigation arising in the course of the
Company's manufacturing and financial services business; contingent repurchase
and guaranty obligations; dependence on key personnel and favorable
relationships with employees; demographic changes; whether the current and
emerging generations of retirees will have the same interest in purchasing
manufactured homes; competition; raw material and labor costs and availability;
import protection and regulation; relationships with and dependence on
customers, distributors and dealers; changes in the business strategy or
development plans of the Company; the availability, terms and deployment of
capital; changes in or the failure to comply with government regulations; 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 ability of the Company and third parties with whom it does business to
identify and correct, with respect to the Year 2000 issue, all relevant computer
codes and embedded chips, unanticipated delays or difficulties in the
implementation of the Company's Year 2000 project plans and the ability of third
parties to redress their respective computer systems as they relate to the Year
2000 issue; and other assumptions, risks, uncertainties and factors reflected
from time to time in the Company's filings with the Securities and Exchange
Commission. The Company expressly disclaims any obligation to update any
forward-looking statements as a result of developments occurring after the
filing of this report.
<PAGE>
PART II.
CAVALIER HOMES, INC. AND SUBSIDIARIES
Other Information
September 25, 1998
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 4, 1998 /s/ David A. Roberson
------------------------------------
David A. Roberson - President
and Chief Executive Officer
Date: November 4, 1998 /s/ Michael R. Murphy
------------------------------------
Michael R. Murphy -
Chief Financial Officer (Principal
Financial and Accounting Officer)
CERTIFICATE REGARDING AMENDMENT
TO THE
AMENDED AND RESTATED
BY-LAWS, AS AMENDED,
OF
CAVALIER HOMES, INC.
The undersigned, Michael R. Murphy, the Vice President, Chief Financial
Officer and Secretary-Treasurer of Cavalier Homes, Inc., a Delaware corporation
(the "Corporation"), does hereby certify as follows:
1. Section 2.4(a)(2) of the Amended and Restated By-Laws, as amended
(the "ByLaws"), of the Corporation has been amended and restated in its entirety
by replacing such subsection with the following:
(a)(2) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (C) of
Paragraph (a)(1) of this by-law, the stockholder must have given timely notice
thereof in writing to the secretary of the corporation and such other business
must be otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the corporation not later than the close of business on the
forty-fifth (45th) day nor earlier than the close of business on the ninetieth
(90th) day prior to the first anniversary of the date on which the corporation
first mailed its proxy materials for the prior year's annual meeting of
Stockholders; provided, however, that in the event that the date of the annual
meeting is more than thirty (30) days before or more than sixty (60) days after
(other than as a result of adjournment) the anniversary date of the prior year's
annual meeting, notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the ninetieth (90th) day prior to such
annual meeting and not later than the close of business on the later of the
sixtieth (60th) day prior to such annual meeting or the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made by the corporation. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth (A) as to each person whom the stockholder proposes to nominate for
election or re-election as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11
thereunder (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (B) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (C) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
corporation's books, and of such
<PAGE>
beneficial owner and (ii) the class and number of shares of the corporation
which are owned beneficially and of record by such stockholder and beneficial
owner.
2. The foregoing amendment to the By-laws of the Corporation was duly
adopted in accordance with the provisions of the General Corporation Law of the
State of Delaware and the Corporation's By-laws.
IN WITNESS WHEREOF, the undersigned has executed this certificate as of
the 2nd day of November, 1998.
/s/ Michael R. Murphy
-------------------------------
Michael R. Murphy
INDEMNIFICATION AGREEMENT
This Agreement (the "Agreement") is made as of this 21st day of July,
1998, by and between Cavalier Homes, Inc., a Delaware corporation (the
"Company"), and ________________________ ("Indemnitee").
W I T N E S S E T H:
WHEREAS, it is essential to the Company and its stockholders
to attract and retain qualified and capable directors and officers; and
WHEREAS, Indemnitee is unwilling to serve, or continue, in
Indemnitee's present capacity without assurances that adequate
liability insurance, indemnification or a combination thereof is, and
will continue to be, provided; and
WHEREAS, the Amended and Restated By-laws of the Company (the
"Bylaws") require the Company to indemnify its directors and officers
and allows the Company to indemnify employees; and
WHEREAS, the Company, in order to induce Indemnitee to
continue to serve the Company, has agreed to provide Indemnitee with
the benefits contemplated by this Agreement; and
WHEREAS, as a result of the provision of such benefits,
Indemnitee has agreed to serve or continue to serve the Company;
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including the
Indemnitee's continued service to the Company, the adequacy and
sufficiency of which are hereby acknowledged, the Company and
Indemnitee hereby agree as follows:
1. Definitions. The following terms, as used herein, have the
following respective meanings:
(a) The "Act" means the Securities Exchange Act of 1934,
as amended.
(b) An "Affiliate" of a specified Person is a Person who
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the Person specified.
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(c) The term "Associate", when used to indicate a relationship
with any Person, means (i) any corporation or organization (other than the
Company or a Subsidiary) of which such Person is an officer, director or partner
or is, directly, or indirectly, the Beneficial Owner of ten percent (10%) or
more of any class of Equity Securities, (ii) any trust or other estate in which
such Person has a substantial beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity (other than an Employee
Plan Fiduciary), (iii) any Relative of such Person, or (iv) any officer or
director of any corporation controlling or controlled by such Person.
(d) "Beneficial Ownership" shall be determined, and a Person
shall be the Beneficial Owner of all securities which such Person is deemed to
own beneficially, pursuant to Rule 13d-3 (or any successor rule or statutory
provision), or, if Rule 13d-3 shall be rescinded and there shall be no successor
rule or statutory provision thereto, pursuant to Rule 13d-3 as in effect on the
date hereof; provided, however, that a Person shall, in any event, also be
deemed to be the Beneficial Owner of any Voting Share: (a) of which such Person
or any of its Affiliates or Associates is, directly or indirectly, the
Beneficial Owner, or (b) of which such Person or any of its Affiliates or
Associates has (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants, or options, or otherwise, or (ii) sole or shared voting or
investment power with respect thereto pursuant to any agreement, arrangement,
understanding, relationship or otherwise (but shall not be deemed to be the
Beneficial Owner of any Voting Shares solely by reason of a revocable proxy
granted for a particular meeting of stockholders, pursuant to a public
solicitation of proxies for such meeting, with respect to shares of which
neither such Person nor any such Affiliate or Associate is otherwise deemed the
Beneficial Owner), or (c) of which any other Person is, directly or indirectly,
the Beneficial Owner if such first mentioned Person or any of its Affiliates or
Associates acts with such other Person as a partnership, syndicate or other
group pursuant to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of capital stock of the
Company; and provided further, however, that (i) no director or officer of the
Company, nor any Associate or Affiliate of any such director or officer, shall,
solely by reason of any or all of such directors and officers acting in their
capacities as such, be deemed for any purposes hereof to be the Beneficial Owner
of any Voting Shares of which any other such director or officer (or any
Associate or Affiliate thereof) is the Beneficial Owner and (ii) no Employee
Plan Fiduciary or any Associate or Affiliate of any such Employee Plan
Fiduciary, shall, solely by reason of being an Employee Plan Fiduciary or
Associate or Affiliate of an Employee Plan Fiduciary, be deemed for any purposes
hereof to be the Beneficial Owner of any Voting Shares held by or under any such
plan.
(e) The "Board of Directors" means the Board of Directors of
the Company.
(f) A "Change in Control" shall be deemed to have occurred if
(i) any Person (other than (A) the Company or any
Subsidiary, (B) any pension, profit sharing, employee stock ownership
or other employee benefit plan of the Company or any Subsidiary or any
trustee of or fiduciary with respect to any such plan when acting in
such capacity, or (C) any Person who is as of the date and time of this
Agreement the Beneficial Owner of twenty percent (20%) or more of the
total voting power of the Voting Shares) becomes, after the date of
this Agreement,
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the Beneficial Owner of twenty percent (20%) or more, but no greater
than fifty percent (50%), of the total voting power of the Voting
Shares, unless prior thereto the Continuing Directors approve the
transaction that results in such Person becoming the Beneficial Owner
of twenty percent (20%) or more, but no greater than fifty percent
(50%), of the total voting power of the Voting Shares;
(ii) any Person (other than (A) the Company or any
Subsidiary, (B) any pension, profit sharing, employee stock ownership
or other employee benefit plan of the Company or any Subsidiary or any
trustee of or fiduciary with respect to any such plan when acting in
such capacity, or (C) any Person who is as of the date and time of this
Agreement the Beneficial Owner of twenty percent (20%) or more of the
total voting power of the Voting Shares) is or becomes, after the date
of this Agreement, the Beneficial Owner of more than fifty percent
(50%) of the total voting power of the Voting Shares, regardless of the
whether the transaction or event by which the fifty percent (50%) level
is exceeded is approved by the Continuing Directors;
(iii) At any time Continuing Directors no longer
constitute a majority of the Board of Directors of the Company; or
(iv) The consummation of (A) a merger or
consolidation of the Company, statutory share exchange, or other
similar transaction (other than such a transaction that is solely for
the purpose of changing the domicile of the Company) with another
corporation, partnership, or other entity or enterprise in which either
the Company is not the surviving or continuing corporation or shares of
common stock of the Company are to be converted into or exchanged for
cash, securities other than common stock of the Company, or other
property, (B) a sale or disposition of all or substantially all of the
assets of the Company, or (C) the dissolution of the Company.
(g) "Claim" means any threatened, pending or completed action,
suit, arbitration or proceeding against or directed at Indemnitee whether
brought by or in the right of the Company or otherwise, or any inquiry or
investigation against or directed at Indemnitee that Indemnitee in good faith
believes might lead to the institution of any such action, suit, arbitration or
proceeding, whether civil, criminal, administrative, investigative or other, or
any appeal therefrom.
(h) "Continuing Directors" means directors (i) who were
directors of the Company at the beginning of the 24-month period ending on the
date the determination is made (the "Period"), or (ii) whose election, or
nomination for election, by the Company's stockholders was approved by (A) at
least a majority of the directors who are in office at the time of the election
or nomination and who either (i) were directors at the beginning of the Period,
or (ii) were elected, or nominated for election, by a at least a majority of the
directors who were in office at the time of the election or nomination and were
directors at the beginning of the Period, or (B) a committee of the Board of
Directors elected or approved by at least a majority of the directors who are in
office at the time of the election or approval of such committee and who either
(i) were directors at the beginning of the Period, or (ii) were elected, or
nominated for election, by at least a majority of the directors
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who were in office at the time of such election or nomination and were directors
at the beginning of the Period.
(i) "D & O Insurance" means any valid directors' and officers'
liability insurance policy maintained by the Company for the benefit of the
Indemnitee, if any.
(j) "Determination" means a determination, and "Determined"
means a matter which has been determined based on the facts known at the time,
by: (i) a majority vote of a quorum of Disinterested Directors, or (ii) if such
quorum is not obtainable, or even if obtainable, if a quorum of Disinterested
Directors so directs, by Independent Legal Counsel in a written opinion
addressed to the Company and Indemnitee, or in the event there has been a Change
in Control, by (A) Special Independent Counsel (in a written opinion addressed
to the Company and Indemnitee) selected by Indemnitee as set forth in Section 6,
or (B) a majority vote of a quorum of Disinterested Directors of the Board of
Directors of the Company or of the ultimate parent entity of the Company or
Independent Legal Counsel as set forth in Section 6, or (iii) a majority of the
Disinterested Stockholders of the Company, or (iv) a final adjudication by a
court of competent jurisdiction.
(k) "Disinterested Director" means a director of the Company
(or, if applicable, the ultimate parent entity of the Company) who is not and
was not a party to the Claim giving rise to the subject matter of a
Determination.
(l) "Disinterested Stockholder" means a stockholder of the
Company who is not and was not a party to the Claim giving rise to the subject
matter of a Determination.
(m) An "Employee Plan Fiduciary" means a Person who serves in
a fiduciary capacity with respect to an employee benefit plan (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended)
of the Company or any Subsidiary.
(n) "Equity Security" has the meaning given to such term under
Rule 3a11-1 of the General Rules and Regulations under the Act.
(o) "Excluded Claim" means any payment for Losses and Expenses
in connection with any Claim: (i) based upon or attributable to Indemnitee
gaining in fact any personal profit or advantage to which Indemnitee is not
entitled; or (ii) for the return by Indemnitee of any remuneration paid to
Indemnitee without the previous approval of the stockholders of the Company
which is illegal; or (iii) for an accounting of profits in fact made from the
purchase or sale by Indemnitee of securities of the Company within the meaning
of Section 16 of the Act; or (iv) resulting from Indemnitee's fraudulent,
deliberately dishonest or willful misconduct, conduct in bad faith or a knowing
violation of law (including criminal law); or (v) the payment of which by the
Company under this Agreement is not permitted by applicable law; or (vi) based
upon or attributable to an intentional infliction of harm on the Company or its
stockholders; or (vii) based upon any violation of Section 174 of the State
Corporation Law, as amended.
(p) "Expenses" means any reasonable expenses incurred by
Indemnitee as a result of a Claim or Claims made against Indemnitee for
Indemnifiable Events, including, without limitation, reasonable attorneys fees
and all other reasonable costs, expenses and obligations paid
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or incurred in connection with investigating, defending, being a witness in or
participating in (including on appeal) or preparing to defend, be a witness in
or participate in any Claim relating to any Indemnifiable Event.
(q) "Fines" means any fine, penalty or, with respect to an
employee benefit plan, any excise tax or penalty assessed with respect thereto.
(r) "Indemnifiable Event" means any event or occurrence,
occurring prior to or after the date of this Agreement, related to the fact that
Indemnitee is or was a director, officer, employee, trustee, agent or fiduciary
of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, committee member, agent or fiduciary of
another corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, or by reason of anything done or not done by Indemnitee,
including, but not limited to, any breach of duty, neglect, error, misstatement,
misleading statement, omission, or other act done or wrongfully attempted by
Indemnitee, or any of the foregoing alleged by any claimant, in any such
capacity.
(s) "Independent Legal Counsel" means a law firm or a member
of a law firm that (i) neither is nor in the past five years has been retained
to represent any material matter by the Company, any Subsidiary, Indemnitee or
any other party to the Claim, (ii) under applicable standards of professional
conduct then prevailing would not have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee"s rights
to indemnification under this Agreement, and (iii) is reasonably acceptable to
the Company and Indemnitee.
(t) "Losses" means any amounts or sums which Indemnitee is
legally obligated to pay as a result of a Claim or Claims made against
Indemnitee for Indemnifiable Events including, without limitation, damages,
attorneys' fees, judgments and sums or amounts paid in settlement of a Claim or
Claims, and Fines.
(u) "Person" means any individual, partnership, corporation,
limited liability partnership, limited liability corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
(v) "Relative" means a Person's spouse, parents, children,
siblings, mothers- and fathers-in-law, sons- and daughters-in-law and brothers-
and sisters-in-law.
(w) "Reviewing Party" means any appropriate person or body
consisting of a member or members of the Company's Board of Directors or any
other person or body appointed by the Board (including Independent Legal Counsel
and Special Independent Counsel) who is not a party to the particular Claim for
which Indemnitee is seeking indemnification.
(x) A "Rule" shall refer to a rule of the General Rules and
Regulations under the Act.
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(y) A "Special Independent Counsel" means Independent Legal
Counsel that shall have the authority and responsibility more fully set forth in
Section 6 hereof and shall be compensated by the Company as more fully set forth
in said section.
(z) The "State Corporation Law" means the General Corporation
Law of the State of Delaware.
(aa) "Subsidiary" means any corporation of which more than
fifty percent (50%) of any class of Equity Security is owned, directly or
indirectly, by the Company.
(bb) "Voting Shares" means any issued and outstanding shares
of capital stock of the Company entitled to vote generally in the election of
directors.
2. Basic Indemnification Agreement. In consideration of, and as an
inducement to, the Indemnitee rendering valuable services to the Company, the
Company agrees that in the event Indemnitee is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall advance Expenses to and indemnify and
hold Indemnitee harmless to the fullest extent authorized by law, against any
and all Expenses and Losses (including all interest, assessments and other
charges paid or payable in connection with or in respect of such Expenses and
Losses of such Claim), whether or not such Claim proceeds to judgment or is
settled or otherwise is brought to a final disposition, subject in each case, to
the further provisions of this Agreement.
3. Limitations on Indemnification. Notwithstanding the provisions of
Section 2, Indemnitee shall not be indemnified and held harmless from any Losses
or Expenses (a) which have been Determined, as provided herein, to constitute an
Excluded Claim; (b) to the extent Indemnitee is indemnified by the Company and
has actually received payment pursuant to the By-laws, Certificate of
Incorporation, D&O Insurance, or otherwise; or (c) other than pursuant to the
last sentence of Section 4(d) or Section 13, in connection with any Claim
initiated by Indemnitee, unless the Company has joined in or the Board of
Directors has authorized such Claim. Indemnitee shall have the right to appeal
any Determination to a court of competent jurisdiction and if successful shall
be entitled to receive indemnification against or for any Losses and Expenses
incurred in connection with such appeal.
4. Indemnification Procedures
(a) Within ten (10) days after receipt by Indemnitee of notice
of any Claim, Indemnitee shall, if indemnification with respect thereto may be
sought from the Company under this Agreement, notify the Company of the
commencement thereof and shall include in or with the notice such documentation
and information as is reasonably available to Indemnitee and is reasonably
necessary to determine whether and to what extent Indemnitee is entitled to
indemnification. The Secretary of the Company shall, promptly upon receipt of
such a notice from Indemnitee, advise the Board of Directors in writing that
Indemnitee has requested indemnification. The foregoing notwithstanding, any
failure by Indemnitee to notify the Company of the commencement of any Claim
will not relieve the Company of any liability that it may have to Indemnitee
hereunder, except
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to the extent that the Company demonstrates that the defense of such action is
prejudiced by Indemnitee's failure to give such notice. Indemnitee agrees
further not to make any admission or effect any settlement with respect to such
Claim without the consent of the Company, except any Claim with respect to which
the Indemnitee has undertaken the defense in accordance with the second to last
sentence of Section 4(d).
(b) If, at the time of the receipt of such notice, the Company
has D&O Insurance in effect, the Company shall give prompt notice of the
commencement of such Claim to the insurers in accordance with the procedures set
forth in the respective policies. The Company shall thereafter use reasonable
efforts to cause such insurers to pay, on behalf of Indemnitee, all Losses and
Expenses payable as a result of such Claim.
(c) To the extent the Company does not, at the time of the
Claim, have applicable D&O Insurance, or if a Determination is made that any
Expenses arising out of such Claim will not be payable under the D&O Insurance
then in effect, or in the event and to the extent that the D&O Insurance then in
effect fails to pay Expenses arising out of such Claim or the insurer fails to
assume the defense of the Claim, the Company shall be obligated to pay the
Expenses of any Claim in advance of the final disposition thereof and the
Company, if appropriate, shall be entitled to assume the defense of such Claim,
with counsel reasonably satisfactory to Indemnitee , upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, the Company will not be liable to Indemnitee under this Agreement for
any legal or other Expenses subsequently incurred by the Indemnitee in
connection with such defense other than reasonable Expenses of investigation
incurred by Indemnitee at the request of the Company; provided that Indemnitee
shall have the right to employ his or her own counsel in such Claim but the fees
and expenses of such counsel incurred after delivery of notice from the Company
of its assumption of such defense shall be at the Indemnitee's expense; provided
further that if: (i) the employment of counsel by Indemnitee at the Company's
expense has been previously authorized by the Company; (ii) there is, under
applicable standards of professional conduct, a conflict of interest on any
significant issue between the positions of the Company and Indemnitee in the
conduct of any such defense; or (iii) the Company shall not, in fact, have
employed counsel to assume the defense of such action, the reasonable fees and
expenses of counsel shall be at the expense of the Company; provided, however,
that the Indemnitee together with all other parties being indemnified by the
Company under agreements similar to this Agreement or the Certificate of
Incorporation or By-laws, shall be entitled as a group to retain only one law
firm to represent them in any single action unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more such indemnitees, in which case each indemnitee
with respect to whom such a conflict exists (or group of indemnitees who among
them have no such conflict) may retain one separate law firm. In addition,
Indemnitee shall have the right to appeal any Determination to a court of
competent jurisdiction, and if successful shall be entitled to receive
indemnification against and for Losses and Expenses incurred in connection with
such appeal.
(d) All payments on account of the Company's indemnification
obligations under this Agreement shall be made within sixty (60) days of
Indemnitee's written request therefor (which shall in no event be made prior to
Indemnitee being liable therefor) unless a Determination is made that the Claims
giving rise to Indemnitee's request are Excluded Claims or otherwise not payable
under this Agreement, provided that all payments on account of the Company's
obligation to pay
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Expenses under Section 4(c) of this Agreement prior to the final disposition of
any Claim shall be made within twenty (20) days of Indemnitee's written request
therefor (which shall in no event be made prior to Indemnitee being liable
therefor) and such obligation shall not be subject to any such Determination but
shall be subject to Section 4(e) of this Agreement. In the event the Company
takes the position that the Indemnitee is not entitled to indemnification in
connection with any Claim, the Indemnitee shall have the right at Indemnitee's
own expense to undertake defense of any such Claim, insofar as such proceeding
involves Claims against the Indemnitee, by written notice given to the Company
within ten (10) days after the Company has notified the Indemnitee in writing of
its contention that the Indemnitee is not entitled to indemnification. If it is
subsequently determined in connection with such proceeding that the
Indemnifiable Events are not Excluded Claims and that the Indemnitee, therefore,
is entitled to be indemnified under the provisions of Section 2 hereof, the
Company shall promptly indemnify the Indemnitee.
(e) Indemnitee hereby expressly undertakes and agrees to
reimburse the Company for all Losses and Expenses paid by the Company in
connection with any Claim against Indemnitee in the event and only to the extent
that a determination shall have been made by a court of competent jurisdiction
in a decision from which there is no further right to appeal that Indemnitee is
not entitled to be indemnified by the Company for such Losses and Expenses
because the Claim is an Excluded Claim or because Indemnitee is otherwise not
entitled to payment under this Agreement; and, further, Indemnitee shall pay the
costs and expenses of the Company if it obtains such a determination and such
court further determines that the position of such Indemnitee was not made in
good faith or was frivolous.
(f) Indemnitee agrees to cooperate with any Persons making a
Determination with respect to Indemnitee's entitlement to indemnification under
this Agreement, including providing to such Person upon reasonable advance
request any documentation or information which is not privileged or otherwise
protected from disclosure and which is reasonably available to Indemnitee and is
reasonably necessary to such Determination. Any Expenses incurred by Indemnitee
in so cooperating with the Persons making such Determination shall be borne by
the Company (irrespective of the Determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold the
Indemnitee harmless therefrom.
5. Settlement. The Company shall have no obligation to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any Claim
effected without the Company's prior written consent. The Company shall not be
required to obtain the consent of Indemnitee to the settlement of any Claim
which the Company has undertaken to defend if the Company assumes full and sole
responsibility for such settlement and the settlement grants Indemnitee a
complete and unqualified release in respect of the potential liability. Neither
the Company nor Indemnitee shall unreasonably withhold their consent to any
proposed settlement.
6. Change in Control; Extraordinary Transactions. (a) The Company and
Indemnitee agree that if there is a Change of Control of the sort set forth in
clause (i) of Section 1(f), then all Determinations thereafter with respect to
the rights of Indemnitee to be paid Losses and Expenses under this Agreement
shall be made by a majority vote of a quorum of Disinterested Directors of the
Company, or if the Company is a Subsidiary of any other Person, then by a
majority vote of a quorum of Disinterested Directors of the ultimate parent
entity of the Company, or if such
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a quorum is not obtainable, or even if obtainable, if a quorum of Disinterested
Directors of the Company or the ultimate parent entity of the Company so
directs, by Independent Legal Counsel in a written opinion addressed to the
Company and Indemnitee, or, in any such case, by a court of competent
jurisdiction. The Company and Indemnitee agree that if there is a Change in
Control of the Company other than a Change of Control of the sort set forth in
clause (i) of Section 1(f), then all Determinations thereafter with respect to
the rights of Indemnitee to be paid Losses and Expenses under this Agreement
shall be made only by a Special Independent Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld) or
by a court of competent jurisdiction. The Company shall pay the reasonable fees
of such Special Independent Counsel and shall indemnify such Special Independent
Counsel against any and all reasonable expenses (including reasonable attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(b) The Company covenants and agrees that, in the event of a
Change in Control of the sort set forth in clause (iv) of Section 1(f), the
Company will use all reasonable efforts (i) to have the obligations of the
Company under this Agreement expressly assumed by the surviving, purchasing or
succeeding entity, or (ii) otherwise to adequately provide for the satisfaction
of the Company's obligations under this Agreement, in a manner reasonably
acceptable to the Indemnitee.
7. No Presumption. For purposes of this Agreement, the termination of
any Claim by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not, of itself, create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
8. Non-exclusivity, Duration, Etc. The rights of the Indemnitee
hereunder shall be in addition to any other rights Indemnitee may have under the
Certificate of Incorporation, the By-laws, the State Corporation Law, any other
agreement, any vote of Disinterested Stockholders or Disinterested Directors or
otherwise, both as to action in the Indemnitee's official capacity and as to
action in any other capacity by holding such office, and the rights and
obligations under this Agreement shall continue in full force and effect after
the Indemnitee ceases to serve the Company as a director, officer, employee,
agent or fiduciary, and for so long as the Indemnitee shall be subject to any
Claim by reason of (or arising in part out of) an Indemnifiable Event and until
all applicable statutes of limitation have expired. To the extent that a change
in the State Corporation Law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
By-laws, Certificate of Incorporation or this Agreement, it is the intent of the
parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change. In the event that a change in the State
Corporation Law (whether by statute or judicial decision) narrows the right of
the Company to indemnify its directors, officers, employees or fiduciaries, such
change, to the extent not otherwise required by such law, statute or decision to
be applied to this Agreement, shall not affect this Agreement or the parties'
rights and obligations hereunder.
9. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee, if an officer or director of the Company, shall be
covered by such policy or policies, in accordance with its or their terms, to
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the maximum extent of the coverage available for any director or officer of the
Company. The Company shall have no obligation to maintain insurance providing
directors' and officers' liability coverage if the Company determines in good
faith that such insurance is not reasonably available or is too expensive, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, or the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit.
10. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
11. Partial Indemnity, Etc. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses and Losses of a Claim but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding
any other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all Claims relating
in whole or in part to any Indemnifiable Event or in defense of any issue or
matter therein, including dismissal without prejudice, Indemnitee shall be
indemnified against all Expenses incurred in connection therewith. In connection
with any Determination as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
12. Liability of Company. The Indemnitee agrees that neither the
stockholders nor the directors nor any officer, employee, representative or
agent of the Company shall be personally liable for the satisfaction of the
Company's obligations under this Agreement, and the Indemnitee shall look solely
to the assets of the Company for satisfaction of any claims hereunder.
13. Enforcement.
(a) Indemnitee's right to indemnification and other rights
under this Agreement shall be specifically enforceable by Indemnitee and shall
be enforceable notwithstanding any adverse Determination by the Company's Board
of Directors, Independent Legal Counsel, the Special Independent Counsel or the
Company's stockholders, and no such Determination shall create a presumption
that Indemnitee is not entitled to be indemnified hereunder.
(b) In the event that any action is instituted by Indemnitee
under this Agreement, or to enforce or interpret any of the terms of this
Agreement, to the extent that Indemnitee is the prevailing party Indemnitee
shall be entitled to be paid all court costs and reasonable expenses, including
reasonable counsel fees, incurred by Indemnitee with respect to such action.
14. Severability. In the event that any provision of this Agreement is
determined by a court to require the Company to do or to fail to do an act which
is in violation of applicable law, such provision (including any provision
within a single section, paragraph or sentence) shall be limited
10
<PAGE>
or modified in its application to the minimum extent necessary to avoid a
violation of law, and, as so limited or modified, such provisions and the
balance of this Agreement shall be enforceable in accordance with their terms to
the fullest extent permitted by law.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State, without reference to the choice
of law provisions of such State.
16. Consent to Jurisdiction. The Company and the Indemnitee each hereby
consent to the non-exclusive jurisdiction of the courts of the State of Alabama
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement may be brought in the state and Federal courts of the State of
Alabama.
17. Notices. All notices or other communications required or permitted
hereunder shall be sufficiently given for all purposes if in writing and
personally delivered, telegraphed, telexed, sent by facsimile transmission sent
by registered or certified mail, return receipt requested, with postage prepaid,
or by nationally recognized overnight courier, addressed as follows, or to such
other address as the parties shall have given notice of pursuant hereto:
(a) If to the Company to:
Cavalier Homes, Inc.
Highway 41 North and Cavalier Road
Addison, Alabama 35540
Fax: 205/747-3044
Attn: __________________
With a copy to:
(b) If to the Indemnitee, to:
Mr. Barry B. Donnell
Cavalier Homes, Inc.
719 Scott Avenue, Suite 600
P.O. Box 5003
Wichita Falls, TX 76307
Fax: 940/766-4616
18. Counterparts. This Agreement may be signed in counterparts, each of
which shall be an original and all of which, when taken together, shall
constitute one and the same instrument.
11
<PAGE>
19. Successors and Assigns. This Agreement shall be (i) binding upon
all successors and assigns of the Company, including any direct or indirect
successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, and (ii) binding
upon and inure to the benefit of any successors and assigns, heirs, and personal
or legal representatives of Indemnitee.
20. Amendment; Waiver. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
[SIGNATURE PAGE FOLLOWS]
12
<PAGE>
IN WITNESS WHEREOF, the Company and Indemnitee have executed
this Agreement as of the day and year first above written.
CAVALIER HOMES, INC.
By:
----------------------------------
Printed Name
Title:
ATTEST:
By:
- ---------------------------------
Printed Name
Title:
INDEMNITEE
[L.S.]
----------------------------------
13
August 26, 1998
Mr. Barry B. Donnell
Cavalier Homes, Inc.
719 Scott Avenue, Suite 600
Wichita Falls, TX 76307
Re: Retention and Severance Agreement
Dear Mr. Donnell:
Cavalier Homes, Inc., a Delaware corporation (the "Company"), considers
the establishment and maintenance of a sound and vital senior management team to
be essential to protecting and enhancing the best interests of the Company and
its stockholders. In this connection, the Company recognizes that the
possibility of a change in control may exist in the future, and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders. Accordingly, the Board of
Directors of the Company (the "Board") has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's senior management, including yourself, to
their assigned duties without distraction in the face of the potentially
disturbing circumstances arising from the possibility of a change in control of
the Company. The Board has also determined that appropriate steps should be
taken to encourage senior management's participation, in the event of a proposed
change of control, in the successful completion of the change of control
transaction while maintaining their focus on business performance and strategy
execution.
In order to induce you to remain in the employ of the Company and in
consideration of your agreeing to remain in the employ of the Company subject to
the terms and conditions set forth below, this letter agreement sets forth the
benefits which the Company agrees will be provided to you in the event your
employment with the Company is terminated subsequent to a change in control of
the Company (as defined in Section 2 of this letter agreement) under the
circumstances described below.
1. Company's Right to Terminate. You acknowledge that this Agreement
does not operate as an employment contract nor establish any right of continued
employment with the Company and that the Company may terminate your employment
at any time, subject to providing the benefits hereinafter specified, if
applicable, in accordance with the terms hereof.
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 2
2. Change in Control. No benefits shall be payable hereunder unless
there shall have been a change in control of the Company, as set forth below and
such change of control occurs prior to the termination of your employment. For
purposes of this Agreement, a "change in control of the Company" means with
respect to the Company, if subsequent to the date of this Agreement:
(a) Any person, entity or "group" (within the meaning of Rules
13d-1 through 13d-6 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (other than any subsidiary or affiliate as of the date hereof
of the Company or any employee benefit plan of the Company) (i) has acquired or
agreed to acquire beneficial ownership of 20% or more of the voting and/or
economic interest in the capital stock of the Company, or (ii) has obtained or
agreed to obtain the power (whether or not exercised) to elect a majority of the
board of directors of the Company; or
(b) A majority of the board of directors of the Company shall
consist at such time of individuals other than (x) members of the board of
directors on the date hereof and (y) other members of such board of directors
nominated, recommended, elected, or approved to succeed or become a director by
a majority of such members referred to in clause (x) or a nominating committee
elected or appointed by such members referred to in clause (x) or by members so
nominated, recommended, elected or approved (such directors described in clauses
(x) and (y) above being hereinafter sometimes referred to as "Continuing
Directors"); or
(c) The approval by the stockholders of the Company of (i) a
merger or consolidation of the Company, statutory share exchange, or other
similar transaction with another corporation, partnership, or other entity or
enterprise in which either the Company is not the surviving or continuing
corporation (other than such a transaction that is solely for the purpose of
changing the domicile of the Company) or shares of common stock of the Company
are to be converted into or exchanged for cash, securities other than common
stock of the Company, or other property, (ii) a sale or disposition of all or
substantially all of the assets of the Company, or (iii) the dissolution of the
Company; or
(d) Any transaction or event relating to the Company occurs
which is (or which would be if the Company had a class of equity securities
registered under Section 12 of the Exchange Act) required to be described
pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act.
3. Termination Following Change in Control. If any of the events
described in Section 2 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 4
hereof upon the subsequent voluntary or involuntary termination of your
employment, whether by you or by the Company, if such termination occurs within
the period beginning on the date that the change of control is completed (the
"Change of Control Date") and ending on the second anniversary of the Change of
Control Date (the "Trigger
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 3
Period") unless such termination is (i) because of your death or Retirement,
(ii) by the Company for Cause or (iii) by the Company or you for Disability
(such termination within such period, as limited by clauses (i) through (iii),
being sometimes referred to hereinafter as a "Payment Trigger"). In the event
your employment is terminated within the Trigger Period, whether by you or the
Company, following the occurrence of any of the events set forth at paragraph
(c) below, such termination of your employment shall be deemed to be an
involuntary termination of your employment by the Company and shall entitle you
to the benefits provided in Section 4 hereof.
(a) Disability; Retirement.
(i) "Disability" shall mean a disability which
entitles you to a disability benefit under a disability program
sponsored or maintained by the Company; provided, that if no such
program is applicable to you, then "Disability" shall mean that, based
on medical evidence reasonably satisfactory to the Compensation
Committee of the Board, you are totally and permanently unable to
engage in any occupation or gainful employment for which you are
reasonably suited by background, training, education or experience.
(ii) Termination by the Company or you of your
employment based on "Retirement" shall mean termination in accordance
with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
(b) Cause. Termination by the Company of your employment for
"Cause" shall mean termination based upon on any of the following:
(i) dishonesty or fraud by you in connection with
your employment;
(ii) appropriation (or attempted appropriation) by
you of a material business opportunity of the Company, including
attempting to secure or securing any personal profit in connection with
any transaction entered into on behalf of the Company;
(iii) misappropriation by you (or attempted
misappropriation) of any of the Company's funds or property;
(iv) your conviction of, or indictment for (or its
procedural equivalent) or entering of a guilty plea or plea of no
contest with respect to, a felony or any other criminal offense
involving moral turpitude (other than traffic offenses); or
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 4
(v) willful misconduct by you in the performance of
your duties with the Company, as determined by the good faith judgment
of the Compensation Committee of the Board.
For purposes of this paragraph, no act, or failure to act, on your part shall be
considered "willful" unless done, or omitted to be done, by you not in good
faith and without any reasonable belief that your action or omission was in the
best interest of the Company. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a Notice of Termination (as defined below) from the
Chief Executive Officer of the Company or the Compensation Committee of the
Board, after reasonable notice to you and an opportunity for you, together with
your counsel, to be heard before the Compensation Committee of the Board (or, if
there be no such committee or such committee delivers the Notice of Termination,
the Board of Directors), finding that in the good faith opinion of such
committee (or the Board) you were guilty of conduct set forth above in clauses
(i), (ii), (iii), (iv) or (v) of the first sentence of this paragraph and
specifying the particulars thereof in detail.
(c) Constructive Termination. Your employment will be deemed
to have been involuntarily terminated by the Company upon the termination of
your employment, whether by you or by the Company, following the occurrence of
any of the following without your prior written consent (any such event being
sometimes referred to hereinafter as your "Constructive Termination"):
(i) subsequent to a change in control of the
Company, any reduction in your title, duties, responsibilities or
authority with the Company immediately prior to the change in control,
except in connection with the termination of your employment for
Cause, Disability, Retirement or as a result of your death or
voluntarily by you; or
(ii) subsequent to a change in control of the
Company, a reduction by the Company in your base salary as in effect
immediately prior to the change in control; or
(iii) subsequent to a change in control of the
Company, a failure by the Company to continue any bonus plans in which
you are presently entitled to participate as the same may be modified
from time to time prior to (but not in anticipation of) such change in
control, or as the same may be modified following such change in
control as may be required by or desirable for the Company due to
changes to (x) the Internal Revenue Code of 1986, as amended (the
"Code"), (y) applicable accounting rules or principles or (z)
applicable laws or regulations, including, without limitation, the
Employee Retirement Income and Security Act of 1974, as amended, (the
"Bonus Plans") or a failure by the Company to continue you
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 5
as a participant in the Bonus Plans on at least the same basis as you
are participating in accordance with the Bonus Plans immediately prior
to the change in control; or
(iv) subsequent to a change in control of the
Company, the failure by the Company to continue in effect any benefit
or compensation plan, life insurance plan, health-and-accident plan or
disability plan in which you are participating immediately prior to the
change in control of the Company (or plans providing you with
substantially similar benefits), the taking of any action by the
Company which would materially adversely affect your participation in
or materially reduce your benefits under any of such plans or deprive
you of any material fringe benefit enjoyed by you immediately prior to
the change in control, or the failure by the Company to provide you
with the number of paid vacation days to which you are then entitled in
accordance with the Company's normal vacation policy in effect
immediately prior to the change in control; or
(v) subsequent to a change in control of the
Company, the failure by the Company to obtain the assumption of or the
agreement to perform this Agreement by any successor as contemplated in
Section 7 hereof; or
(vi) subsequent to a change in control of the
Company, a change in the location of your employment greater than fifty
(50) miles from your office location immediately prior to the change in
control; or
(vii) subsequent to a change in control of the
Company, any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (d) below (and, if applicable, paragraph (b)
above); or
(viii)subsequent to a change in control of the
Company, (A) at the direction or with the concurrence of members of the
Board or management of the Company who became such members following
the change in control, a material business strategic plan, direction,
policy or program of the Company is altered in a material manner
(hereinafter a "Policy Change"), and (B) you disagree in good faith
with such Policy Change and believe in good faith that such Policy
Change will have a material adverse effect on the Company and so state
in a written notice delivered to the Board within thirty (30) days of
becoming aware (or thirty (30) days after you, exercising reasonable
diligence, should have become aware) of such Policy Change, and (C) the
Policy Change is not reversed within thirty (30) days of the date on
which your written notice is received by the Board, and (D) you
terminate your employment with the Company as a result of such
disagreement and belief.
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 6
(d) Notice of Termination. Any purported termination by the
Company pursuant to your Disability or Retirement, as defined in paragraph (a)
above, or for Cause, as defined in paragraph (b) above, or by you pursuant to
your Disability or Retirement, as defined in paragraph (a) above or by you or
the Company based on an event of Constructive Termination, as defined in
paragraph (c) above, shall be communicated by written Notice of Termination to
the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of your
employment under the provision so indicated.
(e) Date of Termination. "Date of Termination" shall mean (A)
if your employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), (B) if you employment is terminated due to your death, the date of your
death, (C) if your employment is terminated pursuant to paragraph (b) above, the
date specified in the Notice of Termination, (D) if your employment is
terminated for Retirement, the date specified in the Notice of Termination, and
(E) if your employment is terminated for any other reason, the date on which a
Notice of Termination is given; provided that if within thirty (30) days after
any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected);
provided further, however, that if such disputed termination constitutes a
Payment Trigger, the Trigger Period shall not run pending resolution of the
dispute but shall recommence upon the date that the dispute is finally
determined (as set forth in the preceding proviso).
4. Certain Benefits Upon Termination. (a) If, after a change in control
of the Company shall have occurred, as defined in Section 2 above, your
employment with the Company shall be terminated (including a Constructive
Termination) within the Trigger Period by the Company or you other than for
Cause, Disability, Retirement or death, and other than by your voluntarily
terminating your employment with the Company, then you shall be entitled to the
benefits provided below:
(i) the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given plus (A) credit for any vacation earned but not taken,
(B) the amount, if any, of any bonus or long-term incentive compensation for a
past fiscal year which has been earned but not yet been paid to you, (C) the
amount, if any, of any bonus for the current year to be paid as a percentage
of Company profit based on the Company's results through the most recent fiscal
quarter as of the Date of Termination without
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 7
pro-ration, (D) a pro-rated payment, based on the Company's results through the
most recent fiscal quarter as of the Date of Termination under the Company's
performance based long-term incentive program for the long-term performance
period that next ends following the Date of Termination, and (E) a pro-rated
payment, based on the Company's results as of the Date of Termination, of any
other bonus due under any other Bonus Plans;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Company shall pay as
severance pay to you within thirty (30) days following the Date of Termination a
lump sum cash amount equal to 2.99 times the sum of (A) the amount of your
annual base salary at the highest rate in effect during the twelve (12) months
immediately preceding the Date of Termination, and (B) the average annual
bonus received by you with respect to the three (3) years immediately preceding
the Date of Termination, and (C)(x) the most recent amount earned by you
(whether in stock or cash or a combination thereof) under the Company's
performance based long-term incentive program established under the Company's
Executive Incentive Compensation Plan or, (y) if the Date of Termination
giving rise to your right to benefits hereunder occurs before the end of the
initial Long-Term Performance Period established under the long-term incentive
program so that benefits have not yet accrued under the long-term incentive
program, the target amount established for you under the program for the
Long-Term Performance Period next ending; and
(iii) the Company shall maintain in full force and
effect, for your continued benefit until the earlier of (A) three (3) years
after the Date of Termination or (B) you obtain substantially the same coverage
from a new employer, all life insurance, medical, health and accident, and
disability plans, programs or arrangements in which you were entitled to
participate immediately prior to the Date of Termination, provided that your
continued participation is possible under the general terms and provisions of
such plans and programs. In the event that your participation in any such plan
or program is barred, the Company shall use reasonable efforts to arrange to
provide you with benefits substantially similar to those which you are
entitled to receive under such plans and programs.
(b) If, after a change in control of the Company shall have
occurred, as defined in Section 2 above, you shall voluntarily terminate your
employment with the Company within the Trigger Period other than for Disability,
Retirement or death or in connection with an event of Constructive Termination,
then you shall be entitled to the benefits set forth below:
(i) the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given plus (A) credit for any vacation earned but not taken,
(B) the amount, if any, of any bonus or long-term incentive compensation for
a past fiscal year which has been earned but not yet been paid to you, (C) the
amount, if any, of any bonus for the current year to be paid as a percentage
of Company profit based on the Company's results through the most recent fiscal
quarter as of the Date of Termination without
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 8
pro-ration, (D) a pro-rated payment, based on the Company's results through the
most recent fiscal quarter as of the Date of Termination under the Company's
performance based long-term incentive program for the long-term performance
period that next ends following the Date of Termination, and (E) a pro-rated
payment, based on the Company's results as of the Date of Termination, of any
other bonus due under any other Bonus Plans;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Company shall pay as
severance pay to you within thirty (30) days following the Date of Termination a
lump sum cash amount equal to the sum of (A) the amount of your annual base
salary at the highest rate in effect during the twelve (12) months
immediately preceding the Date of Termination, and (B) the average annual
bonus received by you with respect to the three (3) years immediately preceding
the Date of Termination, and (C) (x) the most recent amount earned by you
(whether in stock or cash or a combination thereof) under the Company's
performance based long-term incentive program established under the Company's
Executive Incentive Compensation Plan or, (y) if the Date of Termination giving
rise to your right to benefits hereunder occurs before the end of the initial
Long-Term Performance Period established under the long-term incentive program
so that benefits have not yet accrued under the long-term incentive program,
the target amount established for you under the program for the Long-Term
Performance Period next ending; and
(iii) the Company shall maintain in full force and
effect, for your continued benefit until the earlier of (A) the first
anniversary of the Date of Termination or (B) you obtain substantially the
same coverage from a new employer, all life insurance, medical, health and
accident, and disability plans, programs or arrangements in which you were
entitled to participate immediately prior to the Date of Termination, provided
that your continued participation is possible under the general terms and
provisions of such plans and programs. In the event that your participation in
any such plan or program is barred, the Company shall use reasonable efforts
to arrange to provide you with benefits substantially similar to those which you
are entitled to receive under such plans and programs.
(c) You shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 4 be reduced by
any compensation earned by you as the result of employment by another employer
after the Date of Termination, or otherwise. In the event that you voluntarily
terminate your employment with the Company and are paid the benefits
contemplated by paragraph (b) of this Section 4 and, at any time within five (5)
years following the receipt of such payment, you are reemployed by the Company
or any subsidiary thereof in a position where your duties or responsibilities
with the Company or such subsidiary are commensurate with those of your position
with the Company immediately prior to the original termination of your
employment which gave rise to the Company's payment of benefits under this
Section 4, you shall, on the date of such reemployment, be obligated to repay to
the Company, in cash, an amount equal to the benefit paid to you under paragraph
(b) of this Section 4, plus any amounts paid to you under Section 5 hereof
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 9
in connection with the payments to you pursuant to paragraph (b) of this Section
4 (and not previously repaid by you pursuant to the terms of Section 5).
5. Tax Gross-Up.
(a) If you become entitled to any payments or benefits whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a change in
control or any person affiliated with the Company or such persons (in the
aggregate, "Payments" or singularly, "Payment") which are subject to taxes under
Section 4999 (or any successor provision thereto) of the Code (the "Excise
Tax"), the Company shall pay to you an additional amount ("Gross-Up Payment")
such that the net amount retained by you, after deduction of (A) any Excise Tax
on Payments, (B) any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section, and (C) any interest and penalties imposed
because the Excise Tax is not paid during the period beginning with the earlier
of the date (i) the IRS issues a notice stating that an Excise Tax is due with
respect to a Payment, (ii) you deliver to the Company an opinion of tax counsel
selected by you and reasonably acceptable to the Company that all or a portion
of the Payment is subject to the Excise Tax and setting forth the estimated
amount of the Excise Tax on the Payment, and (iii) the Company delivers to you
an opinion of tax counsel selected by the Company and reasonably acceptable to
you that all or a portion of the payment is subject to the Excise Tax and
setting forth the estimated amount of the Excise Tax on the Payment (the "Excise
Tax Imposition Date") and ending ten (10) days after the Excise Tax Imposition
Date, shall be equal to the full amount of the Payments. For purposes of
determining the amount of the Gross-Up Payment, you shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation in the state and
locality of your residence on the date the Gross-Up Payment is to be made, net
of the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes.
(b) The Gross-Up Payment for any Payment made shall be paid to
you within ten (10) days after the Excise Tax Imposition Date, unless the
Company undertakes to indemnify you as provided in Section 5 (c).
(c) In lieu of paying the Gross-Up Payment for any Payment,
the Company may elect to undertake, at its sole expense, the defense and
settlement of any assessment by the IRS of the Excise Tax on any Payment. In the
alternative, the Company may elect to pay the Gross-Up Payment and seek to
recover the Excise Tax by pursuing a claim for a refund. If the Company so
elects to undertake the defense or settlement of any assessment by the IRS of
the Excise Tax on any Payment or the recovery of the Excise Tax through a claim
for refund, the Company shall protect, defend, indemnify and hold you forever
harmless from and against the Excise Tax on such Payment and payments pursuant
to this Section 5(c) and any federal, state and local income tax (determined
pursuant to the last sentence of Section 5(a)) upon payments pursuant to this
Section 5(c) and any
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 10
and all liabilities, demands, claims, actions, causes of action, assessments,
losses, costs, damages or expenses, including attorneys' and accountants' fees
in connection with any thereof, and any interest and penalties sustained by you
as a result of or arising out of or by virtue of the Company's undertaking. You
shall cooperate with the Company as reasonably requested by the Company in the
conduct of such defense, settlement or refund claim.
(d) If the Excise Tax is determined to be less than the amount
taken into account in determining the Gross-Up Payment paid pursuant to Section
5(a), you shall repay to the Company within ten (10) days after the time that
the amount of such reduction in Excise Tax is finally determined the portion of
the Gross-Up Payment attributable to such reduction plus interest on the amount
of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code for
debt instruments with a maturity after issuance equal to the period beginning on
the date the Gross-Up Payment was made and ending on the date of repayment
required by this sentence, or in the case of a refund, plus interest paid on
such refund. If the Excise Tax is determined to exceed the amount taken into
account in determining the Gross-Up Payment paid pursuant to Section 5(a) (the
"Excise Tax Deficit"), the Company within ten (10) days after the time that the
amount of the Excise Tax Deficit is finally determined shall make an additional
payment to you in an amount equal to (i) the Excise Tax Deficit, plus (ii) an
amount equal to any interest and penalties payable to the IRS with respect to
the Excise Tax Deficit, plus (iii) any federal, state and local income tax and
Excise Tax (determined pursuant to the last sentence of Section 5(a)) upon
payments made pursuant to this sentence.
6. Term of Agreement. This Agreement shall become effective on the
date hereof and, subject to the first sentence of the second paragraph of this
Section 6, shall continue in effect until the earliest of the following:
(i) a Date of Termination in accordance with Section 3(e) or
other termination of your employment with the Company shall have
occurred prior to a change in control of the Company; or
(ii) if a Payment Trigger shall have occurred during the term
of this Agreement, the performance by the Company of all its
obligations, and the satisfaction by the Company of all its obligations
and liabilities, under this Agreement;
(iii)the date that is the fifth (5th) anniversary of the date
of this Agreement; provided, however, that if a change in control of
the Company occurs prior to such fifth (5th) anniversary, the Company's
obligation to you under this Agreement due to such change in control
shall not lapse upon the fifth (5th) anniversary, but shall continue
through the final day of the Trigger Period that begins
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 11
with such change in control if such final day of the Trigger Period is
later than such fifth (5th) anniversary.
Any change in control of the Company during the term of this
Agreement that for any reason ceases to constitute a change in control or is not
followed by a Payment Trigger shall not effect a termination or lapse of this
Agreement, and, in such event, this Agreement shall continue to apply to the
event of any subsequent change in control of the Company occurring prior to the
end of the term of this Agreement. Any transfer of your employment from the
Company to a subsidiary, from a subsidiary to the Company, or from one
subsidiary to another subsidiary shall not constitute a termination of your
employment for purposes of this Agreement.
7. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to you, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and, if such failure occurs
subsequent to a change in control of the Company, shall constitute an event of
Constructive Termination and entitle you to compensation from the Company in
accordance with Section 4 hereof, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement provided for in
this Section 7 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or, if there be no such designee, to your estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered personally or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
President of the Company with a copy to the Secretary of the Company, or to such
other address as either party may have
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 12
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by you and such officer as may be authorized by the Board of
Directors of the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement; provided,
however, that this Agreement shall not supersede or in any way limit the rights,
duties or obligations you may have under any other written agreement with the
Company. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Alabama without regard
to principles regarding conflicts of laws.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. Enforcement; Expenses. The provisions of this Agreement shall be
regarded as divisible, and if any of said provisions or any part thereof are
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remainder of such provisions or parts hereof
and the applicability thereof shall not be affected thereby. The Company shall
pay all fees, costs and expenses (including, without limitation, reasonable
attorneys' fees and the costs of investigating any potential claim) (herein,
collectively, "Costs") incurred by you in connection with any dispute arising
under or relating to this Agreement or any action(s) or proceeding(s) to enforce
your rights under this Agreement, should you prevail in such action or
proceeding, and, in addition to paying your Costs, the Company shall pay to you
(i) interest on such Costs and on the aggregate amount of the benefits due to
you under Section 4 above (said benefits being referred to in this Section 11 as
the "Termination Benefits") from your Date of Termination to the date such Costs
and Termination Benefits are paid to you at an annual rate equal to the prime
lending rate charged by First Commercial Bank, or the successor thereto, in
effect on the Date of Termination, and (ii) liquidated and agreed compensatory
damages in an amount equal to twenty-five percent (25%) of the Termination
Benefits.
12. Jurisdiction; Service of Process. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against either party only in the courts of the state
and county in which you are employed by the Company and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or
<PAGE>
Mr. Barry Donnell
August 26, 1998
Page 13
proceeding referred to in the preceding sentence may be served on either party
anywhere in the world.
If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter
which will then constitute our agreement on this subject.
CAVALIER HOMES, INC.
/s/ DAVID A. ROBERSON
-----------------------------------------
Its President and Chief Executive Officer
AGREED TO THIS 26TH DAY OF AUGUST, 1998.
/s/ BARRY B. DONNELL
-----------------------------------------
Barry B. Donnell
August 26, 1998
Mr. David A. Roberson
Cavalier Homes, Inc.
Highway 41 North and Cavalier Road
Addison, AL 35540
Re: Retention and Severance Agreement
Dear Mr. Roberson:
Cavalier Homes, Inc., a Delaware corporation (the "Company"), considers
the establishment and maintenance of a sound and vital senior management team to
be essential to protecting and enhancing the best interests of the Company and
its stockholders. In this connection, the Company recognizes that the
possibility of a change in control may exist in the future, and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders. Accordingly, the Board of
Directors of the Company (the "Board") has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's senior management, including yourself, to
their assigned duties without distraction in the face of the potentially
disturbing circumstances arising from the possibility of a change in control of
the Company. The Board has also determined that appropriate steps should be
taken to encourage senior management's participation, in the event of a proposed
change of control, in the successful completion of the change of control
transaction while maintaining their focus on business performance and strategy
execution.
In order to induce you to remain in the employ of the Company and in
consideration of your agreeing to remain in the employ of the Company subject to
the terms and conditions set forth below, this letter agreement sets forth the
benefits which the Company agrees will be provided to you in the event your
employment with the Company is terminated subsequent to a change in control of
the Company (as defined in Section 2 of this letter agreement) under the
circumstances described below.
1. Company's Right to Terminate. You acknowledge that this Agreement
does not operate as an employment contract nor establish any right of continued
employment with the Company and that the Company may terminate your employment
at any time, subject to providing the benefits hereinafter specified, if
applicable, in accordance with the terms hereof.
<PAGE>
Mr. David Roberson
August 26, 1998
Page 2
2. Change in Control. No benefits shall be payable hereunder unless
there shall have been a change in control of the Company, as set forth below and
such change of control occurs prior to the termination of your employment. For
purposes of this Agreement, a "change in control of the Company" means with
respect to the Company, if subsequent to the date of this Agreement:
(a) Any person, entity or "group" (within the meaning of Rules
13d-1 through 13d-6 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (other than any subsidiary or affiliate as of the date hereof
of the Company or any employee benefit plan of the Company) (i) has acquired or
agreed to acquire beneficial ownership of 20% or more of the voting and/or
economic interest in the capital stock of the Company, or (ii) has obtained or
agreed to obtain the power (whether or not exercised) to elect a majority of the
board of directors of the Company; or
(b) A majority of the board of directors of the Company shall
consist at such time of individuals other than (x) members of the board of
directors on the date hereof and (y) other members of such board of directors
nominated, recommended, elected, or approved to succeed or become a director by
a majority of such members referred to in clause (x) or a nominating committee
elected or appointed by such members referred to in clause (x) or by members so
nominated, recommended, elected or approved (such directors described in clauses
(x) and (y) above being hereinafter sometimes referred to as "Continuing
Directors"); or
(c) The approval by the stockholders of the Company of (i) a
merger or consolidation of the Company, statutory share exchange, or other
similar transaction with another corporation, partnership, or other entity or
enterprise in which either the Company is not the surviving or continuing
corporation (other than such a transaction that is solely for the purpose of
changing the domicile of the Company) or shares of common stock of the Company
are to be converted into or exchanged for cash, securities other than common
stock of the Company, or other property, (ii) a sale or disposition of all or
substantially all of the assets of the Company, or (iii) the dissolution of the
Company; or
(d) Any transaction or event relating to the Company occurs
which is (or which would be if the Company had a class of equity securities
registered under Section 12 of the Exchange Act) required to be described
pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act.
3. Termination Following Change in Control. If any of the events
described in Section 2 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 4
hereof upon the subsequent voluntary or involuntary termination of your
employment, whether by you or by the Company, if such termination occurs within
the period beginning on the date that the change of control is completed (the
"Change of Control Date") and ending on the second anniversary of the Change of
Control Date (the "Trigger
<PAGE>
Mr. David Roberson
August 26, 1998
Page 3
Period") unless such termination is (i) because of your death or Retirement,
(ii) by the Company for Cause or (iii) by the Company or you for Disability
(such termination within such period, as limited by clauses (i) through (iii),
being sometimes referred to hereinafter as a "Payment Trigger"). In the event
your employment is terminated within the Trigger Period, whether by you or the
Company, following the occurrence of any of the events set forth at paragraph
(c) below, such termination of your employment shall be deemed to be an
involuntary termination of your employment by the Company and shall entitle you
to the benefits provided in Section 4 hereof.
(a) Disability; Retirement.
(i) "Disability" shall mean a disability which
entitles you to a disability benefit under a disability program
sponsored or maintained by the Company; provided, that if no such
program is applicable to you, then "Disability" shall mean that, based
on medical evidence reasonably satisfactory to the Compensation
Committee of the Board, you are totally and permanently unable to
engage in any occupation or gainful employment for which you are
reasonably suited by background, training, education or experience.
(ii) Termination by the Company or you of your
employment based on "Retirement" shall mean termination in accordance
with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
(b) Cause. Termination by the Company of your employment for
"Cause" shall mean termination based upon on any of the following:
(i) dishonesty or fraud by you in connection with
your employment;
(ii) appropriation (or attempted appropriation) by
you of a material business opportunity of the Company, including
attempting to secure or securing any personal profit in connection with
any transaction entered into on behalf of the Company;
(iii) misappropriation by you (or attempted
misappropriation) of any of the Company's funds or property;
(iv) your conviction of, or indictment for (or its
procedural equivalent) or entering of a guilty plea or plea of no
contest with respect to, a felony or any other criminal offense
involving moral turpitude (other than traffic offenses); or
<PAGE>
Mr. David Roberson
August 26, 1998
Page 4
(v) willful misconduct by you in the performance of
your duties with the Company, as determined by the good faith judgment
of the Compensation Committee of the Board.
For purposes of this paragraph, no act, or failure to act, on your part shall be
considered "willful" unless done, or omitted to be done, by you not in good
faith and without any reasonable belief that your action or omission was in the
best interest of the Company. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a Notice of Termination (as defined below) from the
Chief Executive Officer of the Company or the Compensation Committee of the
Board, after reasonable notice to you and an opportunity for you, together with
your counsel, to be heard before the Compensation Committee of the Board (or, if
there be no such committee or such committee delivers the Notice of Termination,
the Board of Directors), finding that in the good faith opinion of such
committee (or the Board) you were guilty of conduct set forth above in clauses
(i), (ii), (iii), (iv) or (v) of the first sentence of this paragraph and
specifying the particulars thereof in detail.
(c) Constructive Termination. Your employment will be deemed
to have been involuntarily terminated by the Company upon the termination of
your employment, whether by you or by the Company, following the occurrence of
any of the following without your prior written consent (any such event being
sometimes referred to hereinafter as your "Constructive Termination"):
(i) subsequent to a change in control of the Company,
any reduction in your title, duties, responsibilities or authority with
the Company immediately prior to the change in control, except in
connection with the termination of your employment for Cause,
Disability, Retirement or as a result of your death or voluntarily by
you; or
(ii) subsequent to a change in control of the
Company, a reduction by the Company in your base salary as in effect
immediately prior to the change in control; or
(iii) subsequent to a change in control of the
Company, a failure by the Company to continue any bonus plans in which
you are presently entitled to participate as the same may be modified
from time to time prior to (but not in anticipation of) such change in
control, or as the same may be modified following such change in
control as may be required by or desirable for the Company due to
changes to (x) the Internal Revenue Code of 1986, as amended (the
"Code"), (y) applicable accounting rules or principles or (z)
applicable laws or regulations, including, without limitation, the
Employee Retirement Income and Security Act of 1974, as amended, (the
"Bonus Plans") or a failure by the Company to continue you
<PAGE>
Mr. David Roberson
August 26, 1998
Page 5
as a participant in the Bonus Plans on at least the same basis as you
are participating in accordance with the Bonus Plans immediately prior
to the change in control; or
(iv) subsequent to a change in control of the
Company, the failure by the Company to continue in effect any benefit
or compensation plan, life insurance plan, health-and-accident plan or
disability plan in which you are participating immediately prior to the
change in control of the Company (or plans providing you with
substantially similar benefits), the taking of any action by the
Company which would materially adversely affect your participation in
or materially reduce your benefits under any of such plans or deprive
you of any material fringe benefit enjoyed by you immediately prior to
the change in control, or the failure by the Company to provide you
with the number of paid vacation days to which you are then entitled in
accordance with the Company's normal vacation policy in effect
immediately prior to the change in control; or
(v) subsequent to a change in control of the Company,
the failure by the Company to obtain the assumption of or the agreement
to perform this Agreement by any successor as contemplated in Section 7
hereof; or
(vi) subsequent to a change in control of the
Company, a change in the location of your employment greater than fifty
(50) miles from your office location immediately prior to the change in
control; or
(vii) subsequent to a change in control of the
Company, any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (d) below (and, if applicable, paragraph (b)
above); or
(viii) subsequent to a change in control of the
Company, (A) at the direction or with the concurrence of members of the
Board or management of the Company who became such members following
the change in control, a material business strategic plan, direction,
policy or program of the Company is altered in a material manner
(hereinafter a "Policy Change"), and (B) you disagree in good faith
with such Policy Change and believe in good faith that such Policy
Change will have a material adverse effect on the Company and so state
in a written notice delivered to the Board within thirty (30) days of
becoming aware (or thirty (30) days after you, exercising reasonable
diligence, should have become aware) of such Policy Change, and (C) the
Policy Change is not reversed within thirty (30) days of the date on
which your written notice is received by the Board, and (D) you
terminate your employment with the Company as a result of such
disagreement and belief.
1/0388171.03
<PAGE>
Mr. David Roberson
August 26, 1998
Page 6
(d) Notice of Termination. Any purported termination by the
Company pursuant to your Disability or Retirement, as defined in paragraph (a)
above, or for Cause, as defined in paragraph (b) above, or by you pursuant to
your Disability or Retirement, as defined in paragraph (a) above or by you or
the Company based on an event of Constructive Termination, as defined in
paragraph (c) above, shall be communicated by written Notice of Termination to
the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of your
employment under the provision so indicated.
(e) Date of Termination. "Date of Termination" shall mean (A)
if your employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), (B) if you employment is terminated due to your death, the date of your
death, (C) if your employment is terminated pursuant to paragraph (b) above, the
date specified in the Notice of Termination, (D) if your employment is
terminated for Retirement, the date specified in the Notice of Termination, and
(E) if your employment is terminated for any other reason, the date on which a
Notice of Termination is given; provided that if within thirty (30) days after
any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected);
provided further, however, that if such disputed termination constitutes a
Payment Trigger, the Trigger Period shall not run pending resolution of the
dispute but shall recommence upon the date that the dispute is finally
determined (as set forth in the preceding proviso).
4. Certain Benefits Upon Termination. (a) If, after a change in control
of the Company shall have occurred, as defined in Section 2 above, your
employment with the Company shall be terminated (including a Constructive
Termination) within the Trigger Period by the Company or you other than for
Cause, Disability, Retirement or death, and other than by your voluntarily
terminating your employment with the Company, then you shall be entitled to the
benefits provided below:
(i) the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given plus (A) credit for any vacation earned but not taken,
(B) the amount, if any, of any bonus or long-term incentive compensation for a
past fiscal year which has been earned but not yet been paid to you, (C) the
amount, if any, of any bonus for the current year to be paid as a percentage
of Company profit based on the Company's results through the most recent fiscal
quarter as of the Date of Termination without
<PAGE>
Mr. David Roberson
August 26, 1998
Page 7
pro-ration, (D) a pro-rated payment, based on the Company's results through the
most recent quarter as of the Date of Termination, with respect to the long-term
incentive compensation payable under the Company's performance based long-term
incentive program for the long-term performance period that next ends following
the Date of Termination, and (E) a pro-rated payment, based on the Company's
results as of the Date of Termination, of any other bonus due under any other
Bonus Plans;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Company shall pay as
severance pay to you within thirty (30) days following the Date of Termination a
lump sum cash amount equal to 2.99 times the sum of (A) the amount of your
annual base salary at the highest rate in effect during the twelve (12) months
immediately preceding the Date of Termination, and (B) the average annual
bonus received by you with respect to the three (3) years immediately preceding
the Date of Termination, or with respect to the period beginning January 1,
1996 and ending December 31 of the calendar year immediately preceding on the
Date of Termination, if such period is less than three years at the Date of
Termination, and (C) (x) the most recent amount earned by you (whether in stock
or cash or a combination thereof) under the Company's performance based
long-term incentive program established under the Company's Executive Incentive
Compensation Plan or, (y) if the Date of Termination giving rise to your right
to benefits hereunder occurs before the end of the initial Long-Term
Performance Period established under the long-term incentive program so that
benefits have not yet accrued under the long-term incentive program, the target
amount established for you under the program for the Long-Term Performance
Period next ending; and
(iii) the Company shall maintain in full force and
effect, for your continued benefit until the earlier of (A) three (3) years
after the Date of Termination or (B) you obtain substantially the same coverage
from a new employer, all life insurance, medical, health and accident, and
disability plans, programs or arrangements in which you were entitled to
participate immediately prior to the Date of Termination, provided that your
continued participation is possible under the general terms and provisions of
such plans and programs. In the event that your participation in any such plan
or program is barred, the Company shall use reasonable efforts to arrange to
provide you with benefits substantially similar to those which you are entitled
to receive under such plans and programs.
(b) If, after a change in control of the Company shall have
occurred, as defined in Section 2 above, you shall voluntarily terminate your
employment with the Company within the Trigger Period other than for Disability,
Retirement or death or in connection with an event of Constructive Termination,
then you shall be entitled to the benefits set forth below:
(i) the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given plus (A) credit for any vacation earned but not taken,
(B) the amount, if any, of any bonus or long-term incentive
<PAGE>
Mr. David Roberson
August 26, 1998
Page 8
compensation for a past fiscal year which has been earned but not yet been paid
to you, (C) the amount, if any, of any bonus for the current year to be paid as
a percentage of Company profit based on the Company's results through the most
recent fiscal quarter as of the Date of Termination without pro-ration, (D) a
pro-rated payment, based on the Company's results through the most recent
quarter as of the Date of Termination, with respect to the long-term incentive
compensation payable under the Company's performance based long-term incentive
program for the long-term performance period that next ends following the Date
of Termination, and (E) a pro-rated payment, based on the Company's results as
of the Date of Termination, of any other bonus due under any other Bonus Plans;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Company shall pay as
severance pay to you within thirty (30) days following the Date of Termination
a lump sum cash amount equal to 2.99 times the sum of (A) the amount of your
annual base salary at the highest rate in effect during the twelve (12) months
immediately preceding the Date of Termination, and (B) the average annual bonus
received by you with respect to the three (3) years immediately preceding the
Date of Termination, or with respect to the period beginning January 1, 1996
and ending December 31 of the calendar year immediately preceding on the Date
of Termination, if such period is less than three years at the Date of
Termination, and (C) (x) the most recent amount earned by you (whether in stock
or cash or a combination thereof) under the Company's performance based
long-term incentive program established under the Company's Executive Incentive
Compensation Plan or, (y) if the Date of Termination giving rise to your right
to benefits hereunder occurs before the end of the initial Long-Term Performance
Period established under the long-term incentive program so that benefits have
not yet accrued under the long-term incentive program, the target amount
established for you under the program for the Long-Term Performance Period next
ending; and
(iii) the Company shall maintain in full force and
effect, for your continued benefit until the earlier of (A) the first
anniversary of the Date of Termination or (B) you obtain substantially the
same coverage from a new employer, all life insurance, medical, health and
accident, and disability plans, programs or arrangements in which you were
entitled to participate immediately prior to the Date of Termination, provided
that your continued participation is possible under the general terms and
provisions of such plans and programs. In the event that your participation in
any such plan or program is barred, the Company shall use reasonable efforts
to arrange to provide you with benefits substantially similar to those which you
are entitled to receive under such plans and programs.
(c) You shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 4 be reduced by
any compensation earned by you as the result of employment by another employer
after the Date of Termination, or otherwise. In the event that you voluntarily
terminate your employment with the Company and are paid the benefits
contemplated by paragraph (b) of this Section 4 and, at any time within five (5)
years following the receipt of such
<PAGE>
Mr. David Roberson
August 26, 1998
Page 9
payment, you are reemployed by the Company or any subsidiary thereof in a
position where your duties or responsibilities with the Company or such
subsidiary are commensurate with those of your position with the Company
immediately prior to the original termination of your employment which gave rise
to the Company's payment of benefits under this Section 4, you shall, on the
date of such reemployment, be obligated to repay to the Company, in cash, an
amount equal to the benefit paid to you under paragraph (b) of this Section 4,
plus any amounts paid to you under Section 5 hereof in connection with the
payments to you pursuant to paragraph (b) of this Section 4 (and not previously
repaid by you pursuant to the terms of Section 5).
5. Tax Gross-Up.
(a) If you become entitled to any payments or benefits whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a change in
control or any person affiliated with the Company or such persons (in the
aggregate, "Payments" or singularly, "Payment") which are subject to taxes under
Section 4999 (or any successor provision thereto) of the Code (the "Excise
Tax"), the Company shall pay to you an additional amount ("Gross-Up Payment")
such that the net amount retained by you, after deduction of (A) any Excise Tax
on Payments, (B) any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section, and (C) any interest and penalties imposed
because the Excise Tax is not paid during the period beginning with the earlier
of the date (i) the IRS issues a notice stating that an Excise Tax is due with
respect to a Payment, (ii) you deliver to the Company an opinion of tax counsel
selected by you and reasonably acceptable to the Company that all or a portion
of the Payment is subject to the Excise Tax and setting forth the estimated
amount of the Excise Tax on the Payment, and (iii) the Company delivers to you
an opinion of tax counsel selected by the Company and reasonably acceptable to
you that all or a portion of the payment is subject to the Excise Tax and
setting forth the estimated amount of the Excise Tax on the Payment (the "Excise
Tax Imposition Date") and ending ten (10) days after the Excise Tax Imposition
Date, shall be equal to the full amount of the Payments. For purposes of
determining the amount of the Gross-Up Payment, you shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation in the state and
locality of your residence on the date the Gross-Up Payment is to be made, net
of the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes.
(b) The Gross-Up Payment for any Payment made shall be paid to
you within ten (10) days after the Excise Tax Imposition Date, unless the
Company undertakes to indemnify you as provided in Section 5 (c).
(c) In lieu of paying the Gross-Up Payment for any Payment,
the Company may elect to undertake, at its sole expense, the defense and
settlement of any assessment by the IRS of the Excise Tax on any Payment. In the
alternative, the Company may elect to pay the Gross-Up
<PAGE>
Mr. David Roberson
August 26, 1998
Page 10
Payment and seek to recover the Excise Tax by pursuing a claim for a refund. If
the Company so elects to undertake the defense or settlement of any assessment
by the IRS of the Excise Tax on any Payment or the recovery of the Excise Tax
through a claim for refund, the Company shall protect, defend, indemnify and
hold you forever harmless from and against the Excise Tax on such Payment and
payments pursuant to this Section 5(c) and any federal, state and local income
tax (determined pursuant to the last sentence of Section 5(a)) upon payments
pursuant to this Section 5(c) and any and all liabilities, demands, claims,
actions, causes of action, assessments, losses, costs, damages or expenses,
including attorneys' and accountants' fees in connection with any thereof, and
any interest and penalties sustained by you as a result of or arising out of or
by virtue of the Company's undertaking. You shall cooperate with the Company as
reasonably requested by the Company in the conduct of such defense, settlement
or refund claim.
(d) If the Excise Tax is determined to be less than the amount
taken into account in determining the Gross-Up Payment paid pursuant to Section
5(a), you shall repay to the Company within ten (10) days after the time that
the amount of such reduction in Excise Tax is finally determined the portion of
the Gross-Up Payment attributable to such reduction plus interest on the amount
of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code for
debt instruments with a maturity after issuance equal to the period beginning on
the date the Gross-Up Payment was made and ending on the date of repayment
required by this sentence, or in the case of a refund, plus interest paid on
such refund. If the Excise Tax is determined to exceed the amount taken into
account in determining the Gross-Up Payment paid pursuant to Section 5(a) (the
"Excise Tax Deficit"), the Company within ten (10) days after the time that the
amount of the Excise Tax Deficit is finally determined shall make an additional
payment to you in an amount equal to (i) the Excise Tax Deficit, plus (ii) an
amount equal to any interest and penalties payable to the IRS with respect to
the Excise Tax Deficit, plus (iii) any federal, state and local income tax and
Excise Tax (determined pursuant to the last sentence of Section 5(a)) upon
payments made pursuant to this sentence.
6. Term of Agreement. This Agreement shall become effective on the date
hereof and, subject to the first sentence of the second paragraph of this
Section 6, shall continue in effect until the earliest of the following:
(i) a Date of Termination in accordance with Section 3(e) or
other termination of your employment with the Company shall have
occurred prior to a change in control of the Company; or
(ii) if a Payment Trigger shall have occurred during the term
of this Agreement, the performance by the Company of all its
obligations, and the satisfaction by the Company of all its obligations
and liabilities, under this Agreement;
<PAGE>
Mr. David Roberson
August 26, 1998
Page 11
(iii) the date that is the fifth (5th) anniversary of the date
of this Agreement; provided, however, that if a change in control of
the Company occurs prior to such fifth (5th) anniversary, the Company's
obligation to you under this Agreement due to such change in control
shall not lapse upon the fifth (5th) anniversary, but shall continue
through the final day of the Trigger Period that begins with such
change in control if such final day of the Trigger Period is later than
such fifth (5th) anniversary.
Any change in control of the Company during the term of this
Agreement that for any reason ceases to constitute a change in control or is not
followed by a Payment Trigger shall not effect a termination or lapse of this
Agreement, and, in such event, this Agreement shall continue to apply to the
event of any subsequent change in control of the Company occurring prior to the
end of the term of this Agreement. Any transfer of your employment from the
Company to a subsidiary, from a subsidiary to the Company, or from one
subsidiary to another subsidiary shall not constitute a termination of your
employment for purposes of this Agreement.
7. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to you, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall, if such failure occurs
subsequent to a change in control of the Company, constitute an event of
Constructive Termination and entitle you to compensation from the Company in
accordance with Section 4 hereof, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement provided for in
this Section 7 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or, if there be no such designee, to your estate.
<PAGE>
Mr. David Roberson
August 26, 1998
Page 12
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered personally or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Chairman of the Board of the Company with a copy to the Secretary of the
Company, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by you and such officer as may be authorized by the Board of
Directors of the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement; provided,
however, that this Agreement shall not supersede or in any way limit the rights,
duties or obligations you may have under any other written agreement with the
Company. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Alabama without regard
to principles regarding conflicts of laws.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. Enforcement; Expenses. The provisions of this Agreement shall be
regarded as divisible, and if any of said provisions or any part thereof are
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remainder of such provisions or parts hereof
and the applicability thereof shall not be affected thereby. The Company shall
pay all fees, costs and expenses (including, without limitation, reasonable
attorneys' fees and the costs of investigating any potential claim) (herein,
collectively, "Costs") incurred by you in connection with any dispute arising
under or relating to this Agreement or any action(s) or proceeding(s) to enforce
your rights under this Agreement, should you prevail in such action or
proceeding, and, in addition to paying your Costs, the Company shall pay to you
(i) interest on such Costs and on the aggregate amount of the benefits due to
you under Section 4 above (said benefits being referred to in this Section 11 as
the "Termination Benefits") from your Date of Termination to the date such Costs
and Termination Benefits are paid to you at an annual rate equal to the prime
lending rate charged by First Commercial Bank, or the successor thereto, in
effect on the Date of Termination, and (ii) liquidated and agreed compensatory
damages in an amount equal to twenty-five percent (25%) of the Termination
Benefits.
<PAGE>
Mr. David Roberson
August 26, 1998
Page 13
12. Jurisdiction; Service of Process. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against either party only in the courts of the state
and county in which you are employed by the Company and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter
which will then constitute our agreement on this subject.
CAVALIER HOMES, INC.
/s/ MICHAEL R. MURPHY
-----------------------------
Its Vice President
AGREED TO THIS 26TH DAY OF AUGUST, 1998.
/s/ DAVID A. ROBERSON
- -------------------------------
David A. Roberson
August 26, 1998
Mr. Michael R. Murphy
Cavalier Homes, Inc.
Highway 41 North and Cavalier Road
Addison, AL 35540
Re: Retention and Severance Agreement
Dear Mr. Murphy:
Cavalier Homes, Inc., a Delaware corporation (the "Company"), considers
the establishment and maintenance of a sound and vital senior management team to
be essential to protecting and enhancing the best interests of the Company and
its stockholders. In this connection, the Company recognizes that the
possibility of a change in control may exist in the future, and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders. Accordingly, the Board of
Directors of the Company (the "Board") has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's senior management, including yourself, to
their assigned duties without distraction in the face of the potentially
disturbing circumstances arising from the possibility of a change in control of
the Company. The Board has also determined that appropriate steps should be
taken to encourage senior management's participation, in the event of a proposed
change of control, in the successful completion of the change of control
transaction while maintaining their focus on business performance and strategy
execution.
In order to induce you to remain in the employ of the Company and in
consideration of your agreeing to remain in the employ of the Company subject to
the terms and conditions set forth below, this letter agreement sets forth the
benefits which the Company agrees will be provided to you in the event your
employment with the Company is terminated subsequent to a change in control of
the Company (as defined in Section 2 of this letter agreement) under the
circumstances described below.
1. Company's Right to Terminate. You acknowledge that this Agreement
does not operate as an employment contract nor establish any right of continued
employment with the Company and that the Company may terminate your employment
at any time, subject to providing the benefits hereinafter specified, if
applicable, in accordance with the terms hereof.
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 2
2. Change in Control. No benefits shall be payable hereunder unless
there shall have been a change in control of the Company, as set forth below and
such change of control occurs prior to the termination of your employment. For
purposes of this Agreement, a "change in control of the Company" means with
respect to the Company, if subsequent to the date of this Agreement:
(a) Any person, entity or "group" (within the meaning of Rules
13d-1 through 13d-6 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (other than any subsidiary or affiliate as of the date hereof
of the Company or any employee benefit plan of the Company) (i) has acquired or
agreed to acquire beneficial ownership of 20% or more of the voting and/or
economic interest in the capital stock of the Company, or (ii) has obtained or
agreed to obtain the power (whether or not exercised) to elect a majority of the
board of directors of the Company; or
(b) A majority of the board of directors of the Company shall
consist at such time of individuals other than (x) members of the board of
directors on the date hereof and (y) other members of such board of directors
nominated, recommended, elected, or approved to succeed or become a director by
a majority of such members referred to in clause (x) or a nominating committee
elected or appointed by such members referred to in clause (x) or by members so
nominated, recommended, elected or approved (such directors described in clauses
(x) and (y) above being hereinafter sometimes referred to as "Continuing
Directors"); or
(c) The approval by the stockholders of the Company of (i) a
merger or consolidation of the Company, statutory share exchange, or other
similar transaction with another corporation, partnership, or other entity or
enterprise in which either the Company is not the surviving or continuing
corporation (other than such a transaction that is solely for the purpose of
changing the domicile of the Company) or shares of common stock of the Company
are to be converted into or exchanged for cash, securities other than common
stock of the Company, or other property, (ii) a sale or disposition of all or
substantially all of the assets of the Company, or (iii) the dissolution of the
Company; or
(d) Any transaction or event relating to the Company occurs
which is (or which would be if the Company had a class of equity securities
registered under Section 12 of the Exchange Act) required to be described
pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act.
3. Termination Following Change in Control. If any of the events
described in Section 2 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 4
hereof upon the subsequent voluntary or involuntary termination of your
employment, whether by you or by the Company, if such termination occurs within
the period beginning on the date that the change of control is completed (the
"Change of Control Date") and ending on the second anniversary of the Change of
Control Date (the "Trigger
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 3
Period") unless such termination is (i) because of your death or Retirement,
(ii) by the Company for Cause or (iii) by the Company or you for Disability
(such termination within such period, as limited by clauses (i) through (iii),
being sometimes referred to hereinafter as a "Payment Trigger"). In the event
your employment is terminated within the Trigger Period, whether by you or the
Company, following the occurrence of any of the events set forth at paragraph
(c) below, such termination of your employment shall be deemed to be an
involuntary termination of your employment by the Company and shall entitle you
to the benefits provided in Section 4 hereof.
(a) Disability; Retirement.
(i) "Disability" shall mean a disability which
entitles you to a disability benefit under a disability program
sponsored or maintained by the Company; provided, that if no such
program is applicable to you, then "Disability" shall mean that, based
on medical evidence reasonably satisfactory to the Compensation
Committee of the Board, you are totally and permanently unable to
engage in any occupation or gainful employment for which you are
reasonably suited by background, training, education or experience.
(ii) Termination by the Company or you of your
employment based on "Retirement" shall mean termination in accordance
with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
(b) Cause. Termination by the Company of your employment for
"Cause" shall mean termination based upon on any of the following:
(i) dishonesty or fraud by you in connection with
your employment;
(ii) appropriation (or attempted appropriation) by
you of a material business opportunity of the Company, including
attempting to secure or securing any personal profit in connection with
any transaction entered into on behalf of the Company;
(iii) misappropriation by you (or attempted
misappropriation) of any of the Company's funds or property;
(iv) your conviction of, or indictment for (or its
procedural equivalent) or entering of a guilty plea or plea of no
contest with respect to, a felony or any other criminal offense
involving moral turpitude (other than traffic offenses); or
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 4
(v) willful misconduct by you in the performance of
your duties with the Company, as determined by the good faith judgment
of the Compensation Committee of the Board.
For purposes of this paragraph, no act, or failure to act, on your part shall be
considered "willful" unless done, or omitted to be done, by you not in good
faith and without any reasonable belief that your action or omission was in the
best interest of the Company. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a Notice of Termination (as defined below) from the
Chief Executive Officer of the Company or the Compensation Committee of the
Board, after reasonable notice to you and an opportunity for you, together with
your counsel, to be heard before the Compensation Committee of the Board (or, if
there be no such committee or such committee delivers the Notice of Termination,
the Board of Directors), finding that in the good faith opinion of such
committee (or the Board) you were guilty of conduct set forth above in clauses
(i), (ii), (iii), (iv) or (v) of the first sentence of this paragraph and
specifying the particulars thereof in detail.
(c) Constructive Termination. Your employment will be deemed
to have been involuntarily terminated by the Company upon the termination of
your employment, whether by you or by the Company, following the occurrence of
any of the following without your prior written consent (any such event being
sometimes referred to hereinafter as your "Constructive Termination"):
(i) subsequent to a change in control of the Company,
any reduction in your title, duties, responsibilities or authority with
the Company immediately prior to the change in control, except in
connection with the termination of your employment for Cause,
Disability, Retirement or as a result of your death or voluntarily by
you; or
(ii) subsequent to a change in control of the
Company, a reduction by the Company in your base salary as in effect
immediately prior to the change in control; or
(iii) subsequent to a change in control of the
Company, a failure by the Company to continue any bonus plans in which
you are presently entitled to participate as the same may be modified
from time to time prior to (but not in anticipation of) such change in
control, or as the same may be modified following such change in
control as may be required by or desirable for the Company due to
changes to (x) the Internal Revenue Code of 1986, as amended (the
"Code"), (y) applicable accounting rules or principles or (z)
applicable laws or regulations, including, without limitation, the
Employee Retirement Income and Security Act of 1974, as amended, (the
"Bonus Plans") or a failure by the Company to continue you
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 5
as a participant in the Bonus Plans on at least the same basis as you
are participating in accordance with the Bonus Plans immediately prior
to the change in control; or
(iv) subsequent to a change in control of the
Company, the failure by the Company to continue in effect any benefit
or compensation plan, life insurance plan, health-and-accident plan or
disability plan in which you are participating immediately prior to the
change in control of the Company (or plans providing you with
substantially similar benefits), the taking of any action by the
Company which would materially adversely affect your participation in
or materially reduce your benefits under any of such plans or deprive
you of any material fringe benefit enjoyed by you immediately prior to
the change in control, or the failure by the Company to provide you
with the number of paid vacation days to which you are then entitled in
accordance with the Company's normal vacation policy in effect
immediately prior to the change in control; or
(v) subsequent to a change in control of the Company,
the failure by the Company to obtain the assumption of or the agreement
to perform this Agreement by any successor as contemplated in Section 7
hereof; or
(vi) subsequent to a change in control of the
Company, a change in the location of your employment greater than fifty
(50) miles from your office location immediately prior to the change in
control; or
(vii) subsequent to a change in control of the
Company, any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (d) below (and, if applicable, paragraph (b)
above); or
(viii) subsequent to a change in control of the
Company, (A) at the direction or with the concurrence of members of the
Board or management of the Company who became such members following
the change in control, a material business strategic plan, direction,
policy or program of the Company is altered in a material manner
(hereinafter a "Policy Change"), and (B) if the individual who was
serving as President and Chief Executive Officer of the Company at the
time of the change in control is continuing to serve in such capacity,
said officer disagrees with such Policy Change in a written notice
delivered to the Board within thirty (30) days of his becoming aware of
such Policy Change, and (C) you disagree in good faith with such Policy
Change and believe in good faith that such Policy Change will have a
material adverse effect on the Company and so state in a written notice
delivered to the Board within thirty (30) days of becoming aware (or
thirty (30) days after you, exercising reasonable diligence, should
have become aware) of such Policy Change, and (D) the Policy Change is
not reversed within thirty (30) days of the date on which
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 6
your written notice is received by the Board, and (E) you terminate
your employment with the Company as a result of such disagreement and
belief.
(d) Notice of Termination. Any purported termination by the
Company pursuant to your Disability or Retirement, as defined in paragraph (a)
above, or for Cause, as defined in paragraph (b) above, or by you pursuant to
your Disability or Retirement, as defined in paragraph (a) above or by you or
the Company based on an event of Constructive Termination, as defined in
paragraph (c) above, shall be communicated by written Notice of Termination to
the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of your
employment under the provision so indicated.
(e) Date of Termination. "Date of Termination" shall mean (A)
if your employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), (B) if you employment is terminated due to your death, the date of your
death, (C) if your employment is terminated pursuant to paragraph (b) above, the
date specified in the Notice of Termination, (D) if your employment is
terminated for Retirement, the date specified in the Notice of Termination, and
(E) if your employment is terminated for any other reason, the date on which a
Notice of Termination is given; provided that if within thirty (30) days after
any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected);
provided further, however, that if such disputed termination constitutes a
Payment Trigger, the Trigger Period shall not run pending resolution of the
dispute but shall recommence upon the date that the dispute is finally
determined (as set forth in the preceding proviso).
4. Certain Benefits Upon Termination. (a) If, after a change in control
of the Company shall have occurred, as defined in Section 2 above, your
employment with the Company shall be terminated (including a Constructive
Termination) within the Trigger Period by the Company or you other than for
Cause, Disability, Retirement or death, and other than by your voluntarily
terminating your employment with the Company, then you shall be entitled to the
benefits provided below:
(i) the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given plus (A) credit for any vacation earned but not taken,
(B) the amount, if any, of any bonus or long-term incentive
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 7
compensation for a past fiscal year which has been earned but not yet been paid
to you, (C) the amount, if any, of any bonus for the current year to be paid as
a percentage of Company profit based on the Company's results through the most
recent fiscal quarter as of the Date of Termination without pro-ration, (D) a
pro-rated payment, based on the Company's results through the most recent fiscal
quarter as of the Date of Termination under the Company's performance based
long-term incentive program for the long-term performance period that next ends
following the Date of Termination, and (E) a pro-rated payment, based on the
Company's results as of the Date of Termination, of any other bonus due under
any other Bonus Plans;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Company shall pay as
severance pay to you within thirty (30) days following the Date of Termination
a lump sum cash amount equal to 2.00 times the sum of (A) the amount of your
annual base salary at the highest rate in effect during the twelve (12) months
immediately preceding the Date of Termination, and (B) the average annual bonus
received by you with respect to the three (3) years immediately preceding the
Date of Termination, or with respect to the period beginning January 1, 1997
and ending on December 31 of the calendar year immediately preceding the Date
of Termination, if such period is less than three years at the Date of
Termination, and (C) (x) the most recent amount earned by you (whether in stock
or cash or a combination thereof) under the Company's performance based
long-term incentive program established under the Company's Executive Incentive
Compensation Plan or, (y) if the Date of Termination giving rise to your right
to benefits hereunder occurs before the end of the initial Long-Term Performance
Period established under the long-term incentive program so that benefits have
not yet accrued under the long-term incentive program, the target amount
established for you under the program for the Long-Term Performance Period next
ending; and
(iii) the Company shall maintain in full force and
effect, for your continued benefit until the earlier of (A) three (3) years
after the Date of Termination or (B) you obtain substantially the same coverage
from a new employer, all life insurance, medical, health and accident, and
disability plans, programs or arrangements in which you were entitled to
participate immediately prior to the Date of Termination, provided that your
continued participation is possible under the general terms and provisions of
such plans and programs. In the event that your participation in any such plan
or program is barred, the Company shall use reasonable efforts to arrange to
provide you with benefits substantially similar to those which you are entitled
to receive under such plans and programs.
(b) If, after a change in control of the Company shall have
occurred, as defined in Section 2 above, you shall voluntarily terminate your
employment with the Company within the Trigger Period other than for Disability,
Retirement or death or in connection with an event of Constructive Termination,
then you shall be entitled to the benefits set forth below:
(i) the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 8
Termination at the rate in effect at the time Notice of Termination is given
plus (A) credit for any vacation earned but not taken, (B) the amount, if any,
of any bonus or long-term incentive compensation for a past fiscal year which
has been earned but not yet been paid to you, (C) the amount, if any, of any
bonus for the current year to be paid as a percentage of Company profit based on
the Company's results through the most recent fiscal quarter as of the Date of
Termination without pro-ration, (D) a pro-rated payment, based on the Company's
results through the most recent fiscal quarter as of the Date of Termination
under the Company's performance based long-term incentive program for the
long-term performance period that next ends following the Date of Termination,
and (E) a pro-rated payment, based on the Company's results as of the Date of
Termination, of any other bonus due under any other Bonus Plans;
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of Termination, the Company shall pay as
severance pay to you within thirty (30) days following the Date of Termination
a lump sum cash amount equal to the sum of (A) the amount of your annual base
salary at the highest rate in effect during the twelve (12) months
immediately preceding the Date of Termination, and (B) the average annual
bonus received by you with respect to the three (3) years immediately preceding
the Date of Termination, or with respect to the period beginning January 1, 1997
and ending on December 31 of the calendar year immediately preceding the Date of
Termination, if such period is less than three years at the Date of Termination,
and (C) (x) the most recent amount earned by you (whether in stock or cash or a
combination thereof) under the Company's performance based long-term incentive
program established under the Company's Executive Incentive Compensation Plan
or, (y) if the Date of Termination giving rise to your right to benefits
hereunder occurs before the end of the initial Long-Term Performance Period
established under the long-term incentive program so that benefits have not yet
accrued under the long-term incentive program, the target amount established
for you under the program for the Long-Term Performance Period next ending; and
(iii) the Company shall maintain in full force and
effect, for your continued benefit until the earlier of (A) the first
anniversary of the Date of Termination or (B) you obtain substantially the
same coverage from a new employer, all life insurance, medical, health and
accident, and disability plans, programs or arrangements in which you were
entitled to participate immediately prior to the Date of Termination, provided
that your continued participation is possible under the general terms and
provisions of such plans and programs. In the event that your participation in
any such plan or program is barred, the Company shall use reasonable efforts to
arrange to provide you with benefits substantially similar to those which you
are entitled to receive under such plans and programs.
(c) You shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 4 be reduced by
any compensation earned by you as the result of employment by another employer
after the Date of Termination, or otherwise. In the event that you voluntarily
terminate your employment with the Company and are paid the benefits
contemplated
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 9
by paragraph (b) of this Section 4 and, at any time within five (5) years
following the receipt of such payment, you are reemployed by the Company or any
subsidiary thereof in a position where your duties or responsibilities with the
Company or such subsidiary are commensurate with those of your position with the
Company immediately prior to the original termination of your employment which
gave rise to the Company's payment of benefits under this Section 4, you shall,
on the date of such reemployment, be obligated to repay to the Company, in cash,
an amount equal to the benefit paid to you under paragraph (b) of this Section
4, plus any amounts paid to you under Section 5 hereof in connection with the
payments to you pursuant to paragraph (b) of this Section 4 (and not previously
repaid by you pursuant to the terms of Section 5).
5. Tax Gross-Up.
(a) If you become entitled to any payments or benefits whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a change in
control or any person affiliated with the Company or such persons (in the
aggregate, "Payments" or singularly, "Payment") which are subject to taxes under
Section 4999 (or any successor provision thereto) of the Code (the "Excise
Tax"), the Company shall pay to you an additional amount ("Gross-Up Payment")
such that the net amount retained by you, after deduction of (A) any Excise Tax
on Payments, (B) any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section, and (C) any interest and penalties imposed
because the Excise Tax is not paid during the period beginning with the earlier
of the date (i) the IRS issues a notice stating that an Excise Tax is due with
respect to a Payment, (ii) you deliver to the Company an opinion of tax counsel
selected by you and reasonably acceptable to the Company that all or a portion
of the Payment is subject to the Excise Tax and setting forth the estimated
amount of the Excise Tax on the Payment, and (iii) the Company delivers to you
an opinion of tax counsel selected by the Company and reasonably acceptable to
you that all or a portion of the payment is subject to the Excise Tax and
setting forth the estimated amount of the Excise Tax on the Payment (the "Excise
Tax Imposition Date") and ending ten (10) days after the Excise Tax Imposition
Date, shall be equal to the full amount of the Payments. For purposes of
determining the amount of the Gross-Up Payment, you shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation in the state and
locality of your residence on the date the Gross-Up Payment is to be made, net
of the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes.
(b) The Gross-Up Payment for any Payment made shall be paid to
you within ten (10) days after the Excise Tax Imposition Date, unless the
Company undertakes to indemnify you as provided in Section 5 (c).
(c) In lieu of paying the Gross-Up Payment for any Payment,
the Company may elect to undertake, at its sole expense, the defense and
settlement of any assessment by the IRS of
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 10
the Excise Tax on any Payment. In the alternative, the Company may elect to pay
the Gross-Up Payment and seek to recover the Excise Tax by pursuing a claim for
a refund. If the Company so elects to undertake the defense or settlement of any
assessment by the IRS of the Excise Tax on any Payment or the recovery of the
Excise Tax through a claim for refund, the Company shall protect, defend,
indemnify and hold you forever harmless from and against the Excise Tax on such
Payment and payments pursuant to this Section 5(c) and any federal, state and
local income tax (determined pursuant to the last sentence of Section 5(a)) upon
payments pursuant to this Section 5(c) and any and all liabilities, demands,
claims, actions, causes of action, assessments, losses, costs, damages or
expenses, including attorneys' and accountants' fees in connection with any
thereof, and any interest and penalties sustained by you as a result of or
arising out of or by virtue of the Company's undertaking. You shall cooperate
with the Company as reasonably requested by the Company in the conduct of such
defense, settlement or refund claim.
(d) If the Excise Tax is determined to be less than the amount
taken into account in determining the Gross-Up Payment paid pursuant to Section
5(a), you shall repay to the Company within ten (10) days after the time that
the amount of such reduction in Excise Tax is finally determined the portion of
the Gross-Up Payment attributable to such reduction plus interest on the amount
of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code for
debt instruments with a maturity after issuance equal to the period beginning on
the date the Gross-Up Payment was made and ending on the date of repayment
required by this sentence, or in the case of a refund, plus interest paid on
such refund. If the Excise Tax is determined to exceed the amount taken into
account in determining the Gross-Up Payment paid pursuant to Section 5(a) (the
"Excise Tax Deficit"), the Company within ten (10) days after the time that the
amount of the Excise Tax Deficit is finally determined shall make an additional
payment to you in an amount equal to (i) the Excise Tax Deficit, plus (ii) an
amount equal to any interest and penalties payable to the IRS with respect to
the Excise Tax Deficit, plus (iii) any federal, state and local income tax and
Excise Tax (determined pursuant to the last sentence of Section 5(a)) upon
payments made pursuant to this sentence.
6. Term of Agreement. This Agreement shall become effective on the date
hereof and, subject to the first sentence of the second paragraph of this
Section 6, shall continue in effect until the earliest of the following:
(i) a Date of Termination in accordance with Section 3(e) or
other termination of your employment with the Company shall have
occurred prior to a change in control of the Company; or
(ii) if a Payment Trigger shall have occurred during the term
of this Agreement, the performance by the Company of all its
obligations, and the satisfaction by the Company of all its obligations
and liabilities, under this Agreement;
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 11
(iii) the date that is the fifth (5th) anniversary of the date
of this Agreement; provided, however, that if a change in control of
the Company occurs prior to such fifth (5th) anniversary, the Company's
obligation to you under this Agreement due to such change in control
shall not lapse upon the fifth (5th) anniversary, but shall continue
through the final day of the Trigger Period that begins with such
change in control if such final day of the Trigger Period is later than
such fifth (5th) anniversary.
Any change in control of the Company during the term of this
Agreement that for any reason ceases to constitute a change in control or is not
followed by a Payment Trigger shall not effect a termination or lapse of this
Agreement, and, in such event, this Agreement shall continue to apply to the
event of any subsequent change in control of the Company occurring prior to the
end of the term of this Agreement. Any transfer of your employment from the
Company to a subsidiary, from a subsidiary to the Company, or from one
subsidiary to another subsidiary shall not constitute a termination of your
employment for purposes of this Agreement.
7. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to you, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and, if such failure occurs
subsequent to a change in control of the Company, shall constitute an event of
Constructive Termination and entitle you to compensation from the Company in
accordance with Section 4 hereof, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement provided for in
this Section 7 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or, if there be no such designee, to your estate.
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 12
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered personally or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
President of the Company with a copy to the Secretary of the Company, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by you and such officer as may be authorized by the Board of
Directors of the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement; provided,
however, that this Agreement shall not supersede or in any way limit the rights,
duties or obligations you may have under any other written agreement with the
Company. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Alabama without regard
to principles regarding conflicts of laws.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. Enforcement; Expenses. The provisions of this Agreement shall be
regarded as divisible, and if any of said provisions or any part thereof are
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remainder of such provisions or parts hereof
and the applicability thereof shall not be affected thereby. The Company shall
pay all fees, costs and expenses (including, without limitation, reasonable
attorneys' fees and the costs of investigating any potential claim) (herein,
collectively, "Costs") incurred by you in connection with any dispute arising
under or relating to this Agreement or any action(s) or proceeding(s) to enforce
your rights under this Agreement, should you prevail in such action or
proceeding, and, in addition to paying your Costs, the Company shall pay to you
(i) interest on such Costs and on the aggregate amount of the benefits due to
you under Section 4 above (said benefits being referred to in this Section 11 as
the "Termination Benefits") from your Date of Termination to the date such Costs
and Termination Benefits are paid to you at an annual rate equal to the prime
lending rate charged by First Commercial Bank, or the successor thereto, in
effect on the Date of Termination, and (ii) liquidated and agreed compensatory
damages in an amount equal to twenty-five percent (25%) of the Termination
Benefits.
<PAGE>
Mr. Michael Murphy
August 26, 1998
Page 13
12. Jurisdiction; Service of Process. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against either party only in the courts of the state
and county in which you are employed by the Company and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter
which will then constitute our agreement on this subject.
CAVALIER HOMES, INC.
/s/ DAVID A. ROBERSON
---------------------------
Its President and Chief
Executive Officer
AGREED TO THIS 21ST DAY OF AUGUST, 1998.
/s/ MICHAEL R. MURPHY
- ----------------------------
Michael R. Murphy
<TABLE>
<CAPTION>
PART II. - EXHIBIT 11
CAVALIER HOMES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------- ----------------------------------
September 25, September 26, September 25, September 26,
1998 1997 1998 1997
--------------- ---------------- ---------------- ----------------
BASIC & DILUTED
<S> <C> <C> <C> <C>
Net Income $ 5,220,000 $ 3,639,000 $ 13,331,000 $ 14,412,000
=============== ================ ================ ================
SHARES:
Weighted average common shares 20,072,336 19,869,210 20,029,432 19,813,209
outstanding (basic)
Dilutive effect if stock options
were exercised 235,521 186,064 275,272 198,456
--------------- ---------------- ---------------- ----------------
Weighted average common shares
outstanding, assuming dilution (diluted) 20,307,857 20,055,274 20,304,704 20,011,665
=============== ================ ================ ================
Basic net income per share $ 0.26 $ 0.18 0.67 $ 0.73
=============== ================ ================ ================
Diluted net income per share $ 0.26 $ 0.18 0.66 $ 0.72
=============== ================ ================ ================
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
This schedule contains summary financial information
extracted from the Cavalier Homes, Inc. Consolidated
Condensed Balance Sheets as of September 25, 1998, and the
Consolidated Condensed Statements of Income and Cash Flows
for the Thirteen Weeks ended September 25, 1998 and
September 26, 1997, in each case unaudited, and is qualified
in its entirety by reference to such financial statements.
<S> <C> <C>
<PERIOD-TYPE> 9-mos 9-mos
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1997
<PERIOD-END> Sep-25-1998 Sep-26-1997
<CASH> 41304 19169
<SECURITIES> 0 0
<RECEIVABLES> 36641 35407
<ALLOWANCES> 1190 860
<INVENTORY> 39399 31833
<CURRENT-ASSETS> 129684 96797
<PP&E> 80900 69310
<DEPRECIATION> 23051 16382
<TOTAL-ASSETS> 236964 216705
<CURRENT-LIABILITIES> 84836 66289
<BONDS> 0 0
0 0
0 0
<COMMON> 2025 1988
<OTHER-SE> 141409 135560
<TOTAL-LIABILITY-AND-EQUITY> 234964 216705
<SALES> 446085 423977
<TOTAL-REVENUES> 450690 427797
<CGS> 365772 354512
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (517) 279
<INTEREST-EXPENSE> 661 1120
<INCOME-PRETAX> 22388 22851
<INCOME-TAX> 9057 8439
<INCOME-CONTINUING> 13331 14412
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13331 14412
<EPS-PRIMARY> 0.67 0.73
<EPS-DILUTED> 0.66 0.72
</TABLE>
