U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9792
CAVALIER HOMES, INC.
(Exact name of Registrant as specified in Its Charter)
Delaware 63-0949734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Highway 41 N. and Cavalier Road,
Addison, Alabama 35540
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (205) 747-0044
Securities registered pursuant to Section 12(b) of the Act:
Name of
Each Exchange
Title of Each class on Which Registered
------------------- -------------------
Common Stock, par value $.10 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant ( 1 ) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on the New
York Stock Exchange as of March 23, 1998, was $202,128,797.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 23, 1998.
19,944,670
Common, $0.10 par value
Documents Incorporated by Reference
Part III of this report incorporates by reference certain portions of the
Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held
May 20, 1998.
<PAGE>
CAVALIER HOMES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS
General
Cavalier Homes, Inc., incorporated in 1984, is a Delaware corporation with its
executive offices located at Highway 41 North and Cavalier Road, Addison,
Alabama 35540. The Company also maintains administrative offices at 719 Scott
Avenue, Suite 600, Wichita Falls, Texas 76301. Unless otherwise indicated by the
context, references in this report to the "Company" or to "Cavalier" include the
Company, its subsidiaries, divisions of its subsidiaries and their respective
predecessors, if any.
Effective December 31, 1997, the Company completed a merger (the "Merger")
involving Belmont Homes, Inc. ("Belmont"), whose shares were traded on The
Nasdaq National Market under the symbol "BHIX". In the Merger, Belmont became a
wholly owned subsidiary of the Company, and each Belmont share issued and
outstanding immediately prior to the effective time of the Merger was converted
into the right to receive 0.80 shares of the common stock of Cavalier. The
Company issued 7,555,121 shares of its common stock in the Merger in exchange
for the outstanding shares of Belmont common stock. The Merger was accounted for
as a pooling of interests and, accordingly, the Company's financial statements
have been restated to include the financial position, results of operations and
cash flows of Belmont for all periods presented. The information herein is
presented on a combined basis.
The Company designs and manufactures a wide range of high quality manufactured
homes and markets its homes primarily in the southeast, southwest and midwest
regions of the United States, with a focus on serving the low- to medium-priced
manufactured housing market. During 1997, approximately 80% of the Company's
revenues were generated from sales in its core markets of Alabama, Texas, North
Carolina, South Carolina, Georgia, Arkansas, Louisiana, Missouri and
Mississippi. At December 31, 1997, the Company operated twenty-two home
manufacturing facilities. Seven are located in Alabama, four in Mississippi,
three each in Texas and Georgia, two each in North Carolina and Arkansas and one
in Pennsylvania.
The Company's homes are sold under 68 brand names. As of December 31, 1997, the
Company markets its homes through approximately 800 independent dealers located
in 30 states, with over 1,000 sales centers. In addition, the Company has an
independent Exclusive Dealer Program and currently has 132 participating dealer
locations selling only the Company's homes. The Company's homes are normally
fully furnished, including appliances, and are comprised of one or more floor
sections.
Through its financial services segment, the Company purchases qualifying retail
installment sales contracts for manufactured homes sold through the Company's
independent exclusive dealer network and sells various commissioned insurance
products to certain retail and wholesale purchasers of its homes including both
personal and commercial lines of insurance.
Revenues, operating profits and other financial data of the Company's industry
segments for the three year ended December 31, 1997 are set forth in Note II of
Notes to Consolidated Financial Statements in Part II.
Home Manufacturing Operations
At December 31, 1997, the Company, through five wholly owned subsidiaries,
operated twenty-two manufacturing facilities engaged in the production of
manufactured homes. At the beginning of 1997, the Company reorganized its
operating subsidiaries and merged them into and combined them with two new
operating subsidiaries, Cavalier Industries, Inc. ("CII"), a Delaware
corporation (formerly Brigadier Homes of North Carolina, Inc., Astro Mfg. Co.,
Inc., Mansion Homes, Inc. and Homestead Homes, Inc.), and Cavalier
Manufacturing, Inc. ("CMI"), a Delaware corporation (formerly Cavalier Homes of
Alabama, Inc., Buccaneer Homes of Alabama, Inc., Riverchase Homes, Inc. and
Cavalier Town & Country of Texas, Inc.). The former operating subsidiaries
continue their operations as divisions of CII and CMI. The divisions of CII are
Brigadier Homes of North Carolina (one facility), Astro Homes (one facility),
Mansion Homes (one facility) and Homestead Homes (one facility). The divisions
of CMI are Cavalier Homes of Alabama (three facilities), Buccaneer Homes (three
facilities), Riverchase Homes (one facility) and Town & Country Homes (three
facilities). At the end of 1997, in conjunction with the Belmont Merger, the
Company acquired three subsidiaries operating eight plants: Belmont Homes, Inc.
(four facilities), Spirit Homes, Inc. (two facilities) and Bellcrest Homes, Inc.
(two facilities). The management of each of the Company's manufacturing units
typically consists of a president or general manager, a production manager, a
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general sales manager, a controller, a service manager, a purchasing manager and
a quality control manager. These mid-level management personnel manage the
Company's manufacturing facilities, and typically participate in an incentive
compensation system based upon their respective operation's profitability.
The Company has experienced significant growth in manufacturing capacity during
the past six years, expanding from four manufactured housing production
facilities in 1992 to twenty-two facilities at the end of 1997. The Company's
facilities normally operate on a single-shift, five-day week basis. The
approximate current annual capacity of the respective manufacturing units is
shown below:
Approximate
Number of Annual Capacity
Manufacturing Unit Facilities in Floors (1)
Belmont Homes, Inc. 4 10,000
Cavalier Homes of Alabama 3 6,000
Buccaneer Homes 3 5,500
Town & Country Homes 3 5,000
Spirit Homes, Inc. 2 6,500
Bellcrest Homes, Inc. 2 3,500
Brigadier Homes of North Carolina 1 3,000
Homestead Homes 1 2,500
Mansion Homes 1 1,500
Riverchase Homes 1 1,500
Astro Homes 1 1,500
------------- -------------
22 46,500
============= =============
(1) Estimated capacity is based on one shift per day, five days per week,
48 weeks per year.
Additionally, the following table sets forth certain production information for
1997, 1996 and 1995:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- ----------------------
Number of Homes Sold:
<S> <C> <C> <C> <C> <C> <C>
Single-Section Homes 13,576 58% 16,738 65% 13,627 69%
Multi-Section Homes 10,026 42% 8,914 35% 6,040 31%
---------- ---------- --------- --------- --------- --------
Total Homes 23,602 100% 25,652 100% 19,667 100%
Number of Floors Sold 33,646 34,581 25,717
</TABLE>
Construction of a home begins by welding steel frame members together. The frame
is then moved through the plant, stopping at a number of work stations where
various components and sub-assemblies are attached. Certain sub-assemblies, such
as plumbing, cabinets, ceilings and wall systems, are assembled at off-line work
stations. The completed home is usually sold fully furnished and is ready for
connection to customer-supplied water, sewage and electrical systems.
The principal raw materials purchased by the Company are steel, lumber, plywood,
sheetrock, aluminum, galvanized pipe, insulating materials, electrical supplies
and plastics. The Company purchases axles, wheels, tires, kitchen appliances,
laminated wallboard, roof trusses, plumbing fixtures, furniture, carpet, vinyl
floor covering, windows and decorator accessories. Currently, the Company
maintains approximately two to three weeks' inventory of raw materials. The
Company is not dependent on any single source of supply and believes that the
materials and parts necessary for the construction and assembly of its homes are
readily available from other sources.
The Company's component manufacturing subsidiaries provide laminated wallboards,
exterior doors, cabinet doors and certain other supply products for some of its
manufacturing facilities. Additionally, certain of the Company's manufacturing
facilities currently purchase roof trusses from a joint venture in which the
Company owns an interest. The Company believes prices obtained by the Company
for these products from this joint venture are competitive with the Company's
other sources of supply.
Because the cost of transporting a manufactured home is significant, there is a
limit to the distance between a manufacturing facility and the dealers it can
service. The Company believes that the location of its manufacturing facilities
in multiple states allows it to serve more dealers in more markets. The Company
generally arranges, at the dealer's expense, for the transportation of finished
homes to dealers using independent trucking companies. One of the Company's
subsidiaries employs drivers who own their own trucks to deliver its homes.
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Dealers or other independent installers are responsible for placing the home on
site, making utility connections and providing and installing certain accessory
items and appurtenances, such as decks, carports and foundations.
Products
The Company's homes include both single-section and multi-section models, with
the substantial majority of such products being "HUD Code Homes" which are
manufactured homes that meet the specifications of the National Manufactured
Home Construction and Safety Act of 1974, as amended, and administered by the
U.S. Department of Housing and Urban Development ("HUD"). Single-section homes
are 14 to 16 feet wide, vary in length from 40 to 80 feet and contain between
560 and 1,280 square feet. The multi-section models consist of two or more floor
sections that are joined at the home site, vary in length from 40 to 80 feet and
contain between 960 and 2,432 square feet.
The Company currently produces over 600 different models of manufactured homes
with a variety of decors that are marketed under 68 brand names. The homes
typically include a living room, dining area, kitchen, one to four bedrooms and
one or more bathrooms. Each home contains a cooking range and oven,
refrigerator, water heater and central heating. Depending on the customer's
preferences, most homes are sold fully furnished. Customers may also choose many
available options including fireplaces, ceiling fans, dishwashers, garbage
disposals, microwave ovens, stereos, bay windows, composition shingle roofs,
vinyl siding and sliding glass patio doors.
During 1995, the Company began manufacturing a series of homes intended to be
located in subdivisions or residential communities and marketed by real estate
developers. These "Developer" homes differ from the Company's traditional
manufactured homes as they have sheetrock walls that have been taped and
textured and residential style roof-lines. These upscale homes can be set on a
permanent foundation and may include garages, porches, decks and other
site-built amenities not found in traditional manufactured homes.
Modular homes are homes designed to meet building codes administered by states
and local authorities, as opposed to the national HUD guidelines. Four of the
Company's manufacturing facilities currently manufacture a limited number of
modular homes meeting applicable regulatory standards.
The Company's product development and engineering personnel design homes in
consultation with operating management, sales representatives and dealers. They
also evaluate new materials and construction techniques and use computer-aided
and other design methods in a continuous program of product development, design
and enhancement. The Company's product development activities do not require
significant capital investments or expenditures.
Independent Dealer Network, Sales and Marketing
As of December 31, 1997, the Company markets its homes through approximately
800 independent dealers located in 30 states, with over 1,000 sales centers. In
addition, the Company has an independent Exclusive Dealer Program and currently
has 132 participating dealer locations selling only the Company's homes.
Approximately 80% of the Company's sales in 1997 were to dealers operating sales
centers in the Company's core markets as follows: Alabama - 13%, Texas - 13%,
North Carolina - 10%, South Carolina - 9%, Georgia - 8%, Arkansas - 8%,
Louisiana - 7%, Missouri - 6% and Mississippi - 6%.
The Company has written agreements with most of its independent dealers
requiring each dealer to maintain qualified service staff to perform day-to-day
repair work on the Company's homes sold by the dealer and requiring prompt
payment by the dealer for homes purchased. These agreements generally may be
terminated at any time by either party, with or without cause, after a short
notice period. The Company does not have any control over the operations of, or
financial interests in, any of its independent dealers, including any of its
independent exclusive dealers. The Company is not dependent on any single
dealer, and in 1997, the Company's largest dealer accounted for approximately
2.5% of sales.
The Company believes that its independent dealer network enables the Company to
avoid the substantial investment in management, capital and overhead associated
with company owned sales centers. To enable dealers to maximize retail market
penetration and enhance customer service, typically only one dealer within a
given market area distributes a particular product line of the Company. The
Company believes its strategy of selling its homes through independent dealers
helps to ensure that the Company's homes are competitive with those of other
manufacturers in terms of consumer acceptability, product design, quality and
price. Accordingly, a component of the Company's business strategy is to
continually strengthen its dealer relations. The Company believes its relations
with its independent dealers, including its independent exclusive dealers, are
good. *
Since 1991, the Company has been developing an independent exclusive dealer
network. The Company's independent exclusive dealers market and sell only homes
4
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manufactured by the Company, while the Company's independent non-exclusive
dealers typically will choose to offer the products of other manufacturers in
addition to those of the Company. The growth in the Company's number of
exclusive dealers and percentage of total Company sales represented by them is
summarized in the following table:
For the Year Ended December 31,
--------------------------------------
1997 1996 1995
----------- ------------ -----------
Number of Exclusive Dealers 132 115 93
Percentage of Manufactured Home Sales 30% 27% 26%
The industry has recently been experiencing a trend of increasing competition
for quality independent dealers, and many manufacturers, which had previously
not owned their own retail sales centers, have begun purchasing independent
dealers and/or establishing their own retail outlets. Although the Company
intends to continue to focus on distribution through independent dealers, it may
broaden its programs in response to these trends to allow for other methods of
retail distribution or to purchase and/or establish its own retail sales centers
as a complement to its independent dealer network. *
Through its finance subsidiary Cavalier Acceptance Corporation ("CAC"), the
Company purchases qualifying retail installment sales contracts for manufactured
homes sold through the Company's independent exclusive dealer network and
provides its exclusive dealers with other services and support.
Each of the Company's manufacturing divisions typically employs a general sales
manager and its own respective sales representatives who are compensated on a
commission basis. The plant-level sales representatives are charged with the
day-to-day servicing of the needs of the Company's independent dealers,
including its independent exclusive dealers. The Company markets its homes
through product promotions, participation in regional manufactured housing shows
and advertisements in local media. As of December 31, 1997, the Company
maintained a sales force of 76 full-time salesmen and 11 full-time general sales
managers.
Retail Financing Activities
A significant factor affecting sales of manufactured homes is the availability
and terms of financing. CAC purchases qualifying retail installment sales
contracts for manufactured homes sold through the Company's independent
exclusive dealer network. In addition, the Company's goal is for CAC's
activities to provide the Company with a source of consistent earnings which
may, to a certain extent, be insulated from fluctuating manufactured home sales
volumes. *
CAC seeks to provide highly competitive financing terms to customers of the
Company's independent exclusive dealers. CAC currently offers various
conventional loan programs which require a down-payment ranging from 0% to 20%
of the purchase price, in cash, trade-in value of a previously-owned
manufactured home and/or appraised value of equity in any real property pledged
as collateral. Repayment terms generally range from 84 to 240 months, depending
upon the type of home and amount financed, the amount of the down payment and
the customer's creditworthiness. CAC's loans are secured by a purchase money
security interest in the manufactured home and, in certain instances, a mortgage
on real property pledged as additional collateral. As of December 31, 1997, all
of CAC's outstanding loans were secured. Loans purchased by CAC normally provide
a fixed rate of interest with equal monthly payments and are non-recourse to the
dealer. All of CAC's loans outstanding at December 31, 1997 provided for a
predetermined fixed rate of interest. The interest rates applicable to CAC's
loans as of such date generally ranged from 9.25% to 14.00%, and the approximate
weighted average annual percentage interest rate was 10.9%. Currently, CAC
operates in each of the 15 states in which the Company has independent exclusive
dealers.
For those retail customers who meet CAC's lending standards, CAC provides prompt
credit approvals and funding of loans. CAC has established a standardized credit
scoring system to facilitate such prompt decision-making on loan applications.
The most important criteria in the scoring system are the income, employment
stability and credit worthiness of the borrower. The system requires a minimum
score before CAC will consider funding the installment sale contract.
In the event an installment sale contract becomes delinquent, CAC normally
contacts the customer within 10 to 25 days thereafter in an effort to cure the
delinquency. CAC generally repossesses the home after payments have become 60 to
90 days delinquent. After repossession, CAC normally has the home delivered to
one of the Company's independent dealer's sales center where CAC attempts to
resell the home or contracts with an independent party to remarket the home. To
a limited extent, CAC sells repossessed homes at wholesale.
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The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CAC to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. * Amounts credited to the reserve were $1.3, $0.8 and $0.3 million
in 1997, 1996 and 1995, respectively. Additionally, as a result of defaults and
repossessions the reserve was charged $1.0, $0.3 and $0.1 million in 1997, 1996
and 1995, respectively. The reserve for credit losses at December 31, 1997 was
$1.3 million as compared to $0.9 million at December 31, 1996, and $0.6 million
at December 31, 1995.
In fiscal 1997, 1996 and 1995, CAC repossessed 92, 41 and 13 homes,
respectively. The Company's inventory of repossessed homes was 50 homes at
December 31, 1997, as compared to 6 homes at December 31, 1996, and 6 homes at
December 31, 1995. The Company's net losses resulting from repossessions on CAC
purchased loans as a percentage of the average principal amount of such loans
outstanding for fiscal 1997, 1996 and 1995 was 2.24%, 1.40% and .76%,
respectively.
At December 31, 1997 and December 31, 1996, delinquencies expressed as a
percentage of the total number of installment sale contracts which CAC owned
were as follows:
<TABLE>
<CAPTION>
Delinquency Percentage
Total Number December 31,1997
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1,712 1.46% 0.93% 0.12% 2.51%
Delinquency Percentage
Total Number December 31,1996
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
1,292 1.16% 0.08% 0.00% 1.24%
</TABLE>
At December 31, 1997 and December 31, 1996, delinquencies expressed as a
percentage of the total outstanding principal balance of installment sale
contracts which CAC owned were as follows:
<TABLE>
<CAPTION>
Delinquency Percentage
Total Value December 31,1997
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 49,146,000 1.59% 0.95% 0.05% 2.59%
Delinquency Percentage
Total Value December 31,1996
-------------------------------------------------------------------------
of Contracts 30 Days 60 Days 90 Days Total
- --------------------------------- ---------------- --------------- ---------------- ----------------
$ 36,425,000 1.13% 0.09% 0.00% 1.22%
</TABLE>
There can be no assurance that the Company's future results with respect to
delinquencies and repossessions will be consistent with its past experience as
reflected above.
Certain operating data relating to CAC are set forth in the following table:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995
---------------- --------------- ----------------
<S> <C> <C> <C>
Total loans receivable $ 49,146,000 $ 36,425,000 $ 19,209,000
Allowance for credit losses $ 1,272,000 $ 941,000 $ 551,000
Number of loans outstanding 1,712 1,292 758
Number of delinquencies 43 16 5
Net loss ratio on average
outstanding principal balance 2.24% 1.40% 0.76%
Weighted average annual
percentage rate 10.9% 10.9% 11.3%
</TABLE>
CAC presently has 6 part-time and 30 full-time employees.
Although the level of CAC's future activities cannot presently be determined,
the Company expects to utilize internally generated working capital, borrowings
under the Company's revolving, warehouse and term loan agreement with its
primary lender (described below under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources") and amounts generated from sales of loans under the Retail
Finance Agreement discussed in the following paragraph to fund the purchase of
retail installment sale contracts on homes sold by the Company's independent
exclusive dealers and to develop a portfolio of such installment sale contracts.
* The Company believes that its relationships with its exclusive dealers will
assist the development of this portfolio. *
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Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on conservative underwriting standards, the availability of
working capital and funds borrowed under its credit line with its primary
lender. In February 1998, CAC entered into an agreement (the "Retail Finance
Agreement") with another lender providing for the periodic resale of a portion
of CAC's loans that meet established criteria. On March 13, 1998, CAC sold loans
to this lender having an outstanding principal amount of approximately $25
million for cash in the approximate amount of $26 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations/Financial Services." The Company believes the periodic
sale of installment contracts receivable under the Retail Finance Agreement will
reduce requirements for both working capital and borrowings, increase the
Company's liquidity, reduce the Company's exposure to interest rate fluctuations
and enhance the ability of CAC to increase its volume of loan purchases. * There
can be no assurance, however, that additional sales will be made under this
agreement, or that CAC and the Company will be able to realize the expected
benefits from such agreement. *
Retail Insurance Activities
Through its wholly-owned insurance agency, Quality Certified Insurance Services,
Inc. ("QCIS"), the Company sells commissioned insurance products to retail
purchasers of the Company's homes including physical damage and extended home
warranties. QCIS also sells commercial lines of insurance products, including
general liability and property insurance, to the Company's independent exclusive
dealers and others. At December 31, 1997, QCIS had 13 full-time employees and 2
part-time employees.
Wholesale Dealer Financing and Repurchase Obligations
In accordance with manufactured housing industry practice, substantially all of
the Company's dealers finance their purchases of manufactured homes through
wholesale "floor plan" financing arrangements. Under a typical floor plan
financing arrangement, a financial institution provides the dealer with a loan
for the purchase price of the home and maintains a security interest in the home
as collateral. The financial institution which provides financing to the dealer
customarily requires the Company to enter into a separate repurchase agreement
with the financial institution under which the Company is obligated, upon
default by the dealer, to repurchase the financed homes at a declining price
based upon the Company's original invoice price plus, in specific cases, certain
administrative expenses. A portion of purchases by dealers are pre-sold to
retail customers and are paid through retail financing commitments.
The risk of loss under such repurchase agreements is mitigated by the fact that
(i) sales of the Company's manufactured homes are spread over a relatively large
number of independent dealers, the largest of which accounted for approximately
2.5% of sales in 1997, (ii) the repurchase obligation expires on individual
homes after a reasonable period of time (generally 12 to 18 months from invoice
date) and also declines during such period based on predetermined amounts and
(iii) the Company is in many cases able to sell homes repurchased from credit
sources in the ordinary course of business without incurring significant losses.
As of December 31, 1997, the Company's contingent liability under these
repurchase and other similar recourse agreements was an amount estimated to be
approximately $158 million. The Company has provided an allowance for possible
repurchase losses of $1.2 million as of December 3l, 1997, based on prior
experience and current market conditions. Management currently expects no
material loss in excess of the allowance. *
Quality Control, Warranties and Service
The Company believes the quality in materials and workmanship, continuous
refinement in design and production procedures as well as price and other market
factors, are important elements in the market acceptance of manufactured homes.
The Company maintains a rigorous quality control inspection program at all
production stages. The Company's manufacturing facilities and the plans and
specifications of its manufactured homes have been approved by a HUD-designated
inspection agency. An independent, HUD-approved third-party inspector checks
each of the Company's manufactured homes for compliance during construction.
The Company provides the initial home buyer with a one-year limited warranty
against manufacturing defects in the home's construction. Warranty services
after sale are performed, at the expense of the Company, by local plant
personnel, by independent dealers or, in certain cases, local independent
contractors. In addition to the warranty by the Company, direct warranties often
are provided by the manufacturers of specific components and appliances.
The Company maintains a full-time service manager at most of its manufacturing
facilities. In addition, the Company has 186 full-time service personnel to
provide on-site service and correct production deficiencies that are
attributable to the manufacturing process. Warranty service constitutes a
significant cost to the Company, and management of the Company has placed
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<PAGE>
emphasis on diagnosing potential problem areas to help minimize costly field
repairs. The Company also has focused on reducing response time to customer
service requests. At December 31, 1997, the Company had established a reserve
for future warranty claims of $11.7 million relating to homes sold, based upon
management's assessment of historical experience factors and current industry
trends. *
Competition
The manufactured housing industry is highly competitive, characterized by low
barriers to entry and severe price competition. Competition is based on price,
product features and quality, reputation for service quality, depth of field
inventory, delivery capabilities, warranty repair service, dealer promotions,
merchandising and terms of dealer and retail consumer financing. The Company
also competes with other manufacturers, some of which maintain their own retail
sales centers, for quality independent dealers. In addition, the Company's
manufactured homes compete with other forms of low-cost housing, including
site-built, prefabricated, modular homes, apartments, townhouses and
condominiums. The selection by retail buyers of a manufactured home rather than
an apartment or other alternative forms of housing is significantly affected by
their ability to obtain satisfactory financing. The Company faces direct
competition from numerous manufacturers, many of which possess greater
financial, manufacturing, distribution and marketing resources.
The Company's growth strategy currently includes the continued expansion of
financial services provided through CAC. * The Company believes that operations
of CAC will have a positive impact on the Company's efforts to sell its products
and enhance its competitive ability within the industry. * However, due to
strong competition in the retail finance segment of the industry from companies
much larger than CAC, combined with the limited operating history of CAC, there
can be no assurance that CAC will be able to expand its operations or that it
will have a positive impact on the Company's ability to compete.
Regulation
The Company's business is subject to a number of federal, state and local laws,
regulations and codes. Construction of manufactured housing is governed by the
National Manufactured Home Construction and Safety Standards Act of 1974, as
amended, and regulations issued thereunder by HUD, which have established
comprehensive national construction standards. The HUD regulations cover all
aspects of manufactured home construction, including structural integrity, fire
safety, wind loads, thermal protection and ventilation. Such regulations preempt
state and local regulations on such matters. The Company cannot presently
determine what, if any, legislation may be adopted by Congress or the effect any
such legislation may have on the Company or the manufactured housing industry as
a whole.
The Company's manufacturing facilities and the plans and specifications of its
manufactured homes have been approved by a HUD-designated inspection agency.
Furthermore, an independent, HUD-approved third-party inspector regularly checks
the Company's manufactured homes for compliance during construction. Failure to
comply with the HUD regulations could expose the Company to a wide variety of
sanctions, including closing the Company's manufacturing facilities. The Company
believes its manufactured homes meet or surpass all present HUD requirements. *
HUD has promulgated regulations with respect to structural design, wind loads
and energy conservation. The Company's operations were not materially affected
by the regulations; however, HUD has these matters under continuous review and
the Company cannot predict what effect (if any) additional regulations
promulgated by HUD would have on the Company or the manufactured industry as a
whole.
Certain components of manufactured and modular homes are subject to regulation
by the U.S. Consumer Product Safety Commission ("CPSC"), which is empowered to
ban the use of component materials believed to be hazardous to health and to
require the repair of defective components. The CPSC, the Environmental
Protection Agency and other governmental agencies are evaluating the effects of
formaldehyde. Regulations of the Federal Trade Commission also require
disclosure of a manufactured home's insulation specifications. Manufactured,
modular and site-built homes are all built with particle board, paneling and
other products that contain formaldehyde resins. Since February 1985, HUD has
regulated the allowable concentration of formaldehyde in certain products used
in manufactured homes and required manufacturers to warn purchasers concerning
formaldehyde associated risks. The Company currently uses materials in its
manufactured homes that it believes meet HUD standards for formaldehyde
emissions and otherwise comply with HUD regulations in this regard. *
The transportation of manufactured homes on highways is subject to regulation by
various federal, state and local authorities. Such regulation may prescribe size
and road use limitations and impose lower than normal speed limits and various
other requirements.
8
<PAGE>
The Company's manufactured homes are subject to local zoning and housing
regulations. A number of states require manufactured home producers to post
bonds to ensure the satisfaction of consumer warranty claims. A number of states
have adopted procedures governing the installation of manufactured homes.
Utility connections are subject to state and local regulation.
The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission
Improvement Act, which regulates the descriptions of warranties on products. The
description and substance of the Company's warranties are also subject to a
variety of state laws and regulations.
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. The Company
currently does not believe it will be required under existing environmental laws
and enforcement policies to expend amounts which will have a material adverse
effect on its results of operations or financial condition.* However, the
requirements of such laws and enforcement policies have generally become more
strict in recent years. Accordingly, the Company is unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.
A variety of federal laws affect the financing of manufactured homes, including
the financing activities conducted by CAC. The Consumer Credit Protection Act
(Truth-in-Lending) and Regulation Z promulgated thereunder require substantial
disclosures to be made in writing to a consumer with regard to various aspects
of the particular transaction, including the amount financed, the annual
percentage rate, the total finance charge, itemization of the amount financed
and other matters and also set forth certain substantive limitations on
permissible contract terms. The Equal Credit Opportunity Act and Regulation B
promulgated thereunder prohibit credit discrimination against any credit
applicant based on certain prohibited bases, and also require that certain
specified notices be sent to credit applicants whose applications are denied.
The Federal Trade Commission has adopted or proposed various trade regulation
rules to specify and prohibit certain unfair credit and collection practices and
also to preserve consumers' claims and defenses. The Government National
Mortgage Association ("GNMA") specifies certain credit underwriting requirements
in order for installment manufactured home sale contracts to be eligible for
inclusion in a GNMA program. HUD also has promulgated substantial disclosure and
substantive regulations and requirements in order for a manufactured home
installment sale contract to qualify for insurance under the Federal Housing
Authority ("FHA") program, and the failure to comply with such requirements and
procedures can result in loss of the FHA guaranty protection. In addition, the
financing activities of CAC may also become subject to the disclosure
requirements of the Home Mortgage Disclosure Act. In addition to the extensive
federal regulation of consumer credit matters, many states have also adopted
consumer credit protection requirements that may impose significant requirements
for consumer credit lenders. For example, many states require that a consumer
credit finance company such as CAC obtain certain regulatory licenses or permits
in order to engage in such business in that state, and many states also set
forth a number of substantive contractual limitations regarding provisions that
permissibly may be included in a consumer contract, as well as limitations upon
the permissible interest rates, fees and other charges that may be imposed upon
a consumer. Failure by the Company or CAC to comply with the requirements of
federal or state law pertaining to consumer credit could result in the
unenforceability of the particular contract for the affected consumer, civil
liability to the affected customers, criminal liability and other adverse
results.
Employees
As of December 31, 1997, the Company had 5,051 employees, of whom 4,396 were
engaged in home manufacturing, 97 in sales, 186 in warranty and service, 279 in
general administration, 42 in delivery and 51 in retail finance and insurance
services. At year end, only Astro Homes' employees engaged in manufacturing (100
employees) were covered by a collective bargaining agreement. Management
considers its relations with its employees to be good. *
Risk Factors
In addition to the other information contained herein, persons interested in
making an investment in the Company should carefully consider the following
factors concerning the Company and its business:
Uncertainties in Integrating Business Operations and Achieving Benefits of
the Belmont Merger
On December 31, 1997, Crimson Acquisition Corp., a Mississippi corporation and a
wholly owned subsidiary of the Company, merged with and into Belmont Homes,
Inc., a Mississippi corporation and also a producer of manufactured housing
("Belmont"), and Belmont became a wholly owned subsidiary of the Company. For a
more detailed description of Belmont and this transaction, reference is made to
9
<PAGE>
the Company's Current Reports on Form 8-K dated August 20, 1997, December 11,
1997 and January 15, 1998 (as amended by Form 8-K/A dated March 16, 1998 and
Form 8-K/A dated March 17, 1998), and the Company's Registration Statement on
Form S-4 filed with the Commission on December 2, 1997 (Reg. No. 333-41319). The
acquisition of Belmont will require the consolidation of functions and the
integration of departments, systems and procedures, which will present
significant management challenges. There can be no assurance that such actions
will be successfully accomplished as rapidly as currently expected, if at all.
Moreover, although the primary purpose of such actions will be to realize direct
cost savings and other operating efficiencies, synergies and benefits, there can
be no assurance of the extent to which or whether such cost savings,
efficiencies, synergies or benefits will be achieved.
Cyclical and Seasonal Nature of the Manufactured Housing Industry
The manufactured housing industry is highly cyclical and seasonal and has
experienced wide fluctuations in aggregate sales in the past, resulting in the
failure of many manufacturing concerns. The market for manufactured homes is
affected by many of the same national and regional economic and demographic
factors that affect the broader housing industry. Historically, most sectors of
the home building industry, including the manufactured housing industry, have
been affected by, among other things, changes in general economic conditions,
inflation, levels of consumer confidence, employment and income levels, housing
demand, availability of alternative forms of housing, availability of financing
and the level and stability of interest rates. The Manufactured Housing
Institute ("MHI") reported that during the period from 1983 to 1991, aggregate
domestic shipments of manufactured homes declined 42.1% from 295,079 homes to
170,713 homes. According to industry statistics, after a ten-year low in
shipments of homes in 1991, the industry recovered significantly, posting
increases in shipments of 24%, 21%, 20%, 12% and 7% for 1992, 1993, 1994, 1995
and 1996, respectively. However, industry statistics reflect a decrease in home
shipments of approximately 2.8% for 1997 when compared to 1996. The manufactured
housing industry has, over the past several years, also experienced increases in
both the number of retail dealers and manufacturing capacity, which the Company
believes is currently resulting in slower retail turnover, higher dealer
inventories, lower order backlogs and increased price competition.
Sales in the manufactured housing industry are also seasonal in nature, with
sales of homes traditionally being stronger in April through October and weaker
during the first and last part of the calendar year. While seasonality was not a
significant factor in the Company's business during the period of 1992 through
1996 when industry shipments were steadily increasing, the recent decline in
shipments may signal a return to the industry's traditional seasonal patterns.
The duration and extent of the recent decrease in home shipments and the
tightening of competitive conditions, and their corresponding impact on the
future results of operations and financial condition of the combined companies,
is uncertain at this time. Furthermore, because of the cyclical and seasonal
nature of the manufactured housing industry and the recent increase in
competitive conditions, the Company can give no assurance that the industry is
not entering a change in its cycle or returning to traditional seasonal
patterns, either of which could have a material adverse effect on the Company's
results of operations or financial condition. *
Limitations on Ability to Pursue Growth Strategy
The Company's growth strategies are to (i) expand the financing activities of
its finance subsidiary, CAC, (ii) develop its independent exclusive dealer
network, (iii) expand its geographic presence and manufacturing capacity, (iv)
develop the production and distribution of component parts for manufactured
housing and (v) pursue additional acquisitions. Since 1991, the Company has
expanded manufacturing capacity to meet the increase in demand for its
manufactured homes. Downturns in shipments in the manufactured housing industry,
or a decline in the demand or growth in demand for the Company's homes, could
have a material adverse effect on the Company. The Company's ability to execute
its strategy will depend on a number of factors, including general economic and
industry conditions, its ability to sell to additional independent dealers, the
availability of semi-skilled workers in the areas in which the Company's
manufacturing facilities are located, the ability of CAC to be competitive and
other factors, many of which are beyond the control of the Company. There can be
no assurance that the Company's growth strategy will be successful. Further, if
the Company's growth strategy is unsuccessful, there can be no assurance that
such lack of success will not have a material adverse effect upon the Company's
results of operations or financial condition. *
Uncertainties Regarding Retail Financing Activities
The Company engages in the business of purchasing retail installment finance
loans that have been originated by the Company's independent exclusive dealers.
The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CAC to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. The establishment of appropriate reserves is an inherently
uncertain process, and there can be no assurance that the ultimate losses
10
<PAGE>
realized by CAC will not exceed the Company's loss reserves and have a material
adverse effect on the Company's results of operations and financial condition. *
There also can be no assurance that volatility or a significant change in
interest rates will not materially affect CAC's and the Company's business,
results of operations or financial condition. *
The Company's strategy currently includes the continued expansion of the
financial services segment of its business. Accordingly, the Company may incur
additional debt, or other forms of financing, in order to continue to fund such
growth. The Company may also engage in other transactions, such as selling or
securitizing portions of its installment loan portfolio, that are designed to
facilitate the ability of CAC to purchase and/or originate an increased volume
of loans and to reduce the Company's exposure to interest rate fluctuations and
installment loan losses. The Company has recently entered into such a
transaction pursuant to the Retail Finance Agreement discussed above under
"Retail Financing Activities" and on March 13, 1998, sold approximately $25
million of its loans. No assurance can be given that additional sales will
indeed be made under this agreement, however, or that CAC and the Company will
be able to realize the expected benefits from such agreement. Further, there can
be no assurance that possible additional financing, or the aforementioned
transactions involving the Company's installment loan portfolio, will be
available on terms acceptable to the Company. * If they are not, the Company may
be forced to curtail the expansion of its financial services business and to
alter its strategies. *
Limitations on Availability of Consumer and Dealer Financing
Consumer financing for manufactured home purchases is generally provided by
third-party lenders. The availability and cost of financing for manufactured
home purchasers and dealers is important to the Company's sales and is dependent
on financial institutions' lending practices, the strength of the credit markets
generally, governmental policies and other conditions, all of which are beyond
the Company's control. In addition, in most states, manufactured homes are
classified legally and by taxing authorities as personal property rather than
real estate. As a result, financing for the purchase of manufactured homes is
characterized by shorter loan maturities and higher interest rates, and in
certain periods such financing is more difficult to obtain than conventional
home mortgages. Unfavorable changes in these factors may have a material adverse
effect on the Company's results of operations or financial condition. *
Potential Unavailability and Increases in Prices of Raw Materials
The Company's operating costs may be significantly affected by the availability
and pricing of certain raw materials, particularly lumber, gypsum, particle
board and insulation. Sudden increases in demand for these construction
materials caused by natural disasters or other market forces can greatly
increase the costs of materials or limit the availability of such materials.
Increases in costs cannot always be reflected immediately in prices and,
consequently, may adversely impact profitability. Further, a reduction in the
availability of raw materials also may affect a company's ability to meet or
maintain production requirements.
Contingent Repurchase and Guaranty Obligations
It is a customary practice in the manufactured housing industry to enter into
repurchase and other recourse agreements with lending institutions which have
provided wholesale floor plan financing to dealers. Substantially all of the
Company's sales are made to dealers located primarily in the southeast,
southwest and midwest regions of the United States pursuant to repurchase
agreements with lending institutions. These agreements generally provide for
repurchase of the Company's products from the lending institutions for the
balance due them in the event of repossession upon a dealer's default. The risk
of loss under repurchase agreements is mitigated by the fact that (i) sales of
manufactured homes are spread over a relatively large number of independent
dealers; (ii) the price the Company is obligated to pay under such repurchase
agreements generally declines over the period of the agreement and also declines
during such period based on predetermined amounts; and (iii) the Company has
been in many cases able to resell homes repurchased from credit sources in the
ordinary course of business without incurring significant losses. While the
Company has established a reserve for possible repurchase losses, there can be
no assurance that the Company will not incur material losses in excess of such
reserves in the future. *
Competitive Nature of the Industry
The production and sale of manufactured homes is a highly competitive industry,
characterized by low barriers to entry and severe price competition. Competition
is based primarily on price, product features and quality, reputation for
service and quality, depth of field inventory, delivery capabilities, warranty
repair service, dealer promotions, merchandising and terms of dealer and retail
consumer financing. In addition, the Company competes with other manufacturers,
11
<PAGE>
some of which maintain their own retail sales centers, for quality independent
dealers. In addition, manufactured homes compete with other forms of low-cost
housing, including site-built, prefabricated and modular homes, apartments,
townhouses and condominiums. The Company faces direct competition from numerous
manufacturers, many of which possess greater financial, manufacturing,
distribution and marketing resources. As a result of these competitive
conditions, the Company may not be able to sustain past levels of sales or to
continue its sales growth or profitability. *
Reliance on Executive Officers
The success of the Company's business is highly dependent upon the personal
efforts and abilities of the current executive officers of the Company.
Specifically, the success of the Company is highly dependent on the efforts of
its Chairman of the Board, Barry B. Donnell, its President and Chief Executive
Officer, David A. Roberson, and its Vice President, Chief Financial Officer and
Secretary-Treasurer, Michael R. Murphy. The loss of the services of one or more
of these individuals could have a material adverse effect upon the Company's
business. The Company does not have employment or non-competition agreements
with any of its executive officers. The Company's continued growth, including
the expansion of CAC's business, will depend upon its ability to attract and
retain additional experienced management personnel.
Dependence on Independent Dealers
The Company depends on independent dealers for substantially all retail sales of
its manufactured homes. Typically only one dealer within a given market area
distributes a particular product line of the Company. The Company's
relationships with its dealers are cancelable on short notice by either party.
The industry has recently been experiencing a trend of increasing competition
for quality independent dealers, and many manufacturers, some of which had
previously not owned their own retail sales centers, have begun aggressive
programs to purchase independent dealers, including some of the Company's
independent dealers, and/or establishing their own retail sales centers. While
the Company believes that its relations with its independent dealers are
generally good, there can be no assurance that the Company will be able to
maintain these relations, that these dealers will continue to sell the Company's
homes or that the Company will be able to attract and retain quality independent
dealers. *
Potential Adverse Effects of Regulations
The Company is subject to a variety of federal, state and local laws and
regulations affecting the production, sale and financing of manufactured
housing. The National Manufactured Home Construction and Safety Standards Act of
1974, as amended, and regulations promulgated by the U.S. Department of Housing
and Urban Development ("HUD") thereunder, impose comprehensive national
construction standards for manufactured homes and preempt conflicting state and
local regulations. Failure to comply with such regulations could expose the
Company to a wide variety of sanctions, including closing one or more
manufacturing facilities. HUD has promulgated regulations with respect to
structural design, wind loads and energy conservation. The Company's operations
were not materially affected by the regulations; however, HUD has these matters
under continuous review and it cannot be predicted what effect (if any)
additional regulations promulgated by HUD would have on the Company or the
manufactured housing industry as a whole. In addition, certain components of
manufactured homes are subject to regulation by the U.S. Consumer Product Safety
Commission. The Company's manufactured homes are also subject to local zoning
and housing regulations. A number of states require manufactured home producers
to post bonds to ensure the satisfaction of consumer warranty claims. A number
of states have adopted procedures governing the installation of manufactured
homes. Utility connections are subject to state and local regulation.
The Company is also subject to the Magnuson-Moss Warranty Federal Trade
Commission Improvement Act, which regulates the descriptions of warranties on
products. The description and substance of the Company's warranties are also
subject to a variety of state laws and regulations.
A variety of federal laws affect the financing of manufactured homes, including
the financing activities conducted by CAC. For a discussion of these regulations
and certain risks associated with them, see discussion above under the heading
"Regulation."
There can be no assurance that the Company will not be adversely affected by a
failure to comply with any laws or regulations applicable to or affecting the
Company. *
Compliance with Environmental Laws
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
12
<PAGE>
transportation and discharge of materials into the environment. In addition,
third parties and governmental agencies in some cases have the power under such
laws and regulations to require remediation of environmental conditions and, in
the case of governmental agencies and entities, to impose fines and penalties.
The requirements of such laws and enforcement policies have generally become
more strict in recent years. Accordingly, the Company can give no assurance that
it will not be required to incur response costs, remediation expenses, fines,
penalties or other similar damages, expenses or liabilities, or to incur
operational shut-downs, business interruptions or similar losses, associated
with compliance with environmental laws and enforcement policies that either
individually or in the aggregate would have a material adverse effect on the
Company's results of operations or financial condition.
Litigation
For description of certain risk factors associated with litigation, see "Legal
Proceedings", below.
Volatility of Stock Price
The Company's Common Stock is traded on the NYSE. The market price of the
Company's Common Stock may be subject to significant fluctuations in response to
variations in the Company's operating results and other factors affecting the
Company specifically and the stock market and the manufactured housing industry
generally.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 2. PROPERTIES
The following table sets forth the location and approximate square footage for
each principal facility of the Company, separated by segment, as of December 31,
1997. Except as indicated in footnotes to the table, all the facilities are
owned by the Company.
<TABLE>
<CAPTION>
Approximate
Location Use (Number of Facilities) Square Footage
<S> <C> <C> <C>
Belmont Homes, Inc.
Belmont Mississippi Manufacturing facilities (3) 354,000
Clarksdale, Mississippi Manufacturing facility (1) 91,000
Cavalier Homes of Alabama
Addison, Alabama Manufacturing facilities (3) 329,000 (1)
Buccaneer Homes
Hamiliton, Alabama Manufacturing facility (1) 195,000
Winfield, Alabama Manufacturing facilities (2) 205,000 (5)
Town & Country Homes
Fort Worth, Texas Manufacturing facility (1) 101,000 (2)
Mineral Wells, Texas Manufacturing facility (1) 81,000 (4)
Graham, Texas Manufacturing facility (1) 103,000 (6)
13
<PAGE>
(continued) Approximate
Location Use (Number of Facilities) Square Footage
Manufacturing
Spirit Homes, Inc.
Conway, Arkansas Manufacturing facilities (2) 220,000
Bigelow, Arkansas Manufacturing facility (1) 80,000
Bellcrest Homes, Inc.
Millen, Georgia Manufacturing facilities (2) 164,000
Brigadier Homes of North Carolina
Nashville, North Carolina Manufacturing facility (1) 130,000
Homestead Homes
Cordele, Georgia Manufacturing facility (1) 110,000
Mansion Homes
Robbins, North Carolina Manufacturing facility (1) 99,000 (4)
Riverchase Homes
Haleyville, Alabama Manufacturing facility (1) 78,000
Astro Homes
Shippenville, Pennsylvania Manufacturing facility (1) 134,000
Quality Housing Supply, LLC
Hamiliton, Alabama Manufacturing facility (1) 50,000 (7)
Winfield, Alabama Manufacturing facility (1) 30,000 (2)
Winfield, Alabama Distribution facility (1) 48,000 (7)
Financial Services
Hamilton, Alabama Administrative Office 7,000
Haleyville, Alabama Administrative Office 1,000
General Corporate
Addison, Alabama Administrative Office 8,000 (8)
Wichita Falls, Texas Administrative Office 1,000 (3)
(1) Lease expires on one facility in 1998 and one in 2001.
(2) Lease expires in 1999.
(3) Lease expires in 1998.
(4) Lease expires in 2006.
(5) Lease expires on one facility in 1999.
(6) Lease expires in 2017.
(7) Lease expires in 2000.
(8) Lease expires in 2001.
</TABLE>
In general, the manufacturing facilities are in good condition and are operated
at capacities which range from approximately 57% to 95%, excluding the idle
facility in Bigelow, Arkansas.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are engaged in various legal proceedings that
are incidental to and arise in the course of its business. Certain of the cases
filed against the Company and its subsidiaries and companies engaged in
businesses similar to it allege, among other things, breach of contract and
warranty, product liability, personal injury and fraudulent, deceptive or
collusive practices in connection with their businesses. These kinds of suits
are typical of suits that have been filed in recent years, and they sometimes
seek certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. Courts have certified
several of these types of cases as class actions recently, and many of these
types of cases have resulted in large damage awards, especially large punitive
damage awards. The outcome of many of the cases in which the Company is involved
or may in the future become involved cannot be predicted with any degree of
reliability, and the potential exists for unanticipated material adverse
judgments against the Company and its respective subsidiaries.
In addition, a suit has been filed by three former shareholders (the
"Plaintiffs") of Belmont Homes, Inc., an Alabama corporation which originally
owned the initial Belmont manufacturing facility ("BHIA"), in the Circuit Court
of Madison County, Alabama (Case Number CV 97-2297) against BHIA, Belmont (as a
successor in interest of BHIA), certain other corporate entities (collectively,
the "Other Corporations"), the Estate of Jerold Kennedy (the former President
and Chief Executive Officer of Belmont), J. M. Page, and certain other unnamed
and unidentified individual officers, employees, agents and directors of BHIA,
Belmont and the Other Corporations, alleging breach of fiduciary duties,
misrepresentation, deceit, suppression and civil conspiracy. The Plaintiffs
state that they owned a majority of the stock in BHIA and sold such stock in
February of 1989. In addition to certain other allegations, the Plaintiffs claim
that Mr. Kennedy, along with others who allegedly conspired with him,
misrepresented and omitted certain facts to them regarding his attempts to hire
a production manager, that Belmont later hired the production manager, and that
the Plaintiffs would not have sold their stock in BHIA in the absence of these
alleged misrepresentations and omissions. In their complaint, the Plaintiffs
request an unspecified amount of compensatory and punitive damages and/or
equitable relief, including a constructive trust. The Company is aware that
these same plaintiffs have also filed a separate claim against the Estate of Mr.
Kennedy in the probate court of Franklin County, Alabama (Case Number 97-051),
alleging essentially the same facts and seeking substantial compensatory damages
and punitive damages and a constructive trust over the stock in the various
Belmont entities owned by Mr. Kennedy's estate. The Company believes that the
Plaintiffs' claims against Belmont are without merit and intends to vigorously
contest such claims. The outcome of this litigation and its effect on the
Company cannot presently be determined, however, and the possibility exists for
an adverse resolution of the litigation which could have a material adverse
effect on the results of operations and financial condition of the Company in
the quarter and year in which any such adverse resolution occurs. *
________________________________________
* See Safe Harbor Statement on page 49.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 31, 1997, the Company held a Special Meeting of Stockholders to vote
on a proposal for the share issuance of Cavalier common stock pursuant to the
Agreement and Plan of Merger, dated as of August 14, 1997, as amended, by and
among Cavalier Homes, Inc., Belmont Homes, Inc. and Crimson Acquisition Corp., a
wholly-owned subsidiary of Cavalier. The results of the vote were as follows:
Votes Number
Votes For 7,233,696
Votes Against 153,490
Votes Withheld / Abstentions 51,076
Nonvotes 0
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK
HOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CAV". The following table sets forth, for each of the periods
indicated, the reported high and low closing sale prices per share on the NYSE
for the Company's common stock and the cash dividends paid per share in such
periods. The amounts have been adjusted for all stock splits through November of
1996. All adjusted prices of the Company's common stock have been rounded to the
nearest one-eighth of one dollar.
Closing Sales Price
----------------------------
High Low Dividends
------------ ------------- -------------
Year ended December 31, 1997
Fourth Quarter 10 7/8 9 1/4 $ 0.018
Third Quarter 11 1/2 9 1/2 0.019
Second Quarter 11 7/8 9 3/8 0.019
First Quarter 12 1/4 9 3/4 0.018
Year ended December 31, 1996
Fourth Quarter 17 3/8 10 1/2 $ 0.018
Third Quarter 19 1/8 12 7/8 0.015
Second Quarter 18 3/4 12 1/8 0.014
First Quarter 12 3/8 9 3/8 0.014
As of March 23, 1998, the Company had approximately 360 shareholders of record
and 8,400 beneficial holders of its common stock, based upon information in
securities position listings by registered clearing agencies upon request of the
Company's transfer agent.
The Company intends to continue to pay regular quarterly dividends. * However,
the payment of dividends on the Company's common stock is determined by the
Board of Directors of the Company in light of conditions then existing,
including the earnings of the Company and its subsidiaries, their funding
requirements and financial conditions, certain loan restrictions and applicable
laws and governmental regulations. The Company's present loan agreement contains
restrictive covenants which, among other things, limit the aggregate dividend
payments and purchases of treasury stock to 50% of the Company's aggregate net
income for the two most recent fiscal years.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data regarding
the Company for the periods indicated. The statement of income data, the balance
sheet data, and other data of the Company for each of the five years ended
December 31, 1997, have been derived from the consolidated financial statements
of the Company. The Company's audited financial statements as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, including the notes thereto and the related report of Deloitte &
Touche LLP, independent auditors, are included elsewhere in this report. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements (including the Notes thereto) and the other
financial information contained elsewhere in this report, and with the Company's
consolidated financial statements and the notes thereto appearing in the
Company's previously filed Annual Reports on Form 10-K.
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- ------------- -------------- -------------
(in thousands, except per share amounts)
Statement of Income Data
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales $ 555,842 $ 573,838 $ 420,790 $ 312,268 $ 225,700
Financial services 5,346 3,333 1,764 703 230
------------- -------------- ------------- -------------- -------------
Total revenues 561,188 577,171 422,554 312,971 225,930
Cost of sales 466,749 482,302 354,811 265,943 193,411
Selling, general and administrative 69,999 54,022 39,035 28,109 20,847
Non-recurring merger and related
costs 7,359
------------- -------------- ------------- -------------- -------------
Operating profit 17,081 40,847 28,708 18,919 11,672
Life insurance proceeds 1,500 1,750
Other income (expense) - net (242) 1,589 90 (612) (813)
------------- -------------- ------------- -------------- -------------
Income before taxes $ 18,339 $ 44,186 $ 28,798 $ 18,307 $ 10,859
============= ============== ============= ============== =============
Net income $ 10,247 $ 27,479 $ 17,630 $ 11,458 $ 6,642
============= ============== ============= ============== =============
Basic net income per share 1 $ .52 $ 1.42 $ 1.06 $ .83 $ .55
============= ============== ============= ============== =============
Diluted net income per share 1 $ .51 $ 1.39 $ 1.03 $ .82 $ .54
============= ============== ============= ============== =============
Cash dividend per share 1 $ .073 $ .061 $ .036 $ .021 $ .018
============= ============== ============= ============== =============
Weighted average number of shares
outstanding 1 19,835 19,363 16,630 13,824 12,084
============= ============== ============= ============== =============
Weighted average number of shares
outstanding, assuming 20,028 19,799 17,057 14,036 12,292
dilution 1 ============= ============== ============= ============== =============
Other Data
Capital expenditures $ 10,186 $ 16,106 $ 13,482 $ 7,665 $ 4,747
============= ============== ============= ============== =============
December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- ------------- -------------- -------------
Balance Sheet Data
Working capital $ 28,484 $ 24,746 $ 22,157 $ 18,095 $ 6,217
Total assets $ 211,554 $ 196,387 $ 132,694 $ 86,859 $ 48,222
Long-term debt $ 15,808 $ 6,227 $ 11,233 $ 13,057 $ 10,878
Stockholders' equity $ 133,551 $ 122,652 $ 75,119 $ 41,767 $ 15,560
1 All per share data has been adjusted for all stock splits.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The principal business of the Company since its inception in 1984 has been the
design, production and sale of manufactured homes. In the first quarter of 1992,
the Company, through its wholly owned subsidiary, CAC, commenced retail
installment sale financing operations, and by the end of 1993, these operations
had become significant enough to require segment reporting by the Company.
Effective December 31, 1997, the Company completed a merger (the "Merger")
involving Belmont Homes, Inc. ("Belmont"), whose shares were traded on The
Nasdaq National Market under the symbol "BHIX". In the Merger, Belmont became a
wholly owned subsidiary of the Company, and each Belmont share issued and
outstanding immediately prior to the effective time of the Merger was converted
into the right to receive 0.80 shares of the common stock of Cavalier. The
Company issued 7,555,121 shares of its common stock in the Merger in exchange
for the outstanding shares of Belmont common stock. The Merger was accounted for
as a pooling of interests and, accordingly, the Company's financial statements
have been restated to include the financial position, results of operations and
cash flows of Belmont for all periods presented. The information herein is
presented on a combined basis.
The Company's business is cyclical and seasonal and is influenced by many of the
same economic and demographic factors that affect the housing market as a whole.
According to the Manufactured Housing Institute ("MHI"), the manufactured
housing industry posted gains in shipments from 1992 through 1996, with
approximate total annual shipments of 211,000 (1992) increasing to 363,000
(1996), and with the greatest gains occurring in the southeastern United States.
16
<PAGE>
The Company conducts a substantial portion of its business in the southeastern
United States and attributes past years' strong shipment growth to a reduction
of alternative housing, increased availability of retail financing, increased
consumer confidence and continuing strength in the national economy. However,
the manufactured housing industry has, over the past several years, also
experienced increases in both the number of retail dealers and manufacturing
capacity, which the Company believes is currently resulting in slower retail
turnover, higher dealer inventories, lower order backlogs and increased price
competition. According to MHI, industry statistics reflect a decrease in home
shipments of 2.8% in 1997 as compared to 1996, with approximate shipments of
353,000 (1997) compared to 363,000 (1996), and with large declines occurring in
Alabama, Mississippi and South Carolina, all substantial markets for the
Company. It is possible that these developments may signal a return to
seasonality in the Company's manufacturing business, which was not a significant
factor during the period from 1992 through 1996, with sales of homes being
stronger in April through October and weaker during the first and last part of
the calendar year. * It is also possible that these developments could mean that
the industry is entering a downturn in its cycle. * The Company is uncertain at
this time as to the extent and duration of these developments and as to what
effect these factors will have on the Company's future sales and earnings. *
Over the last several years, the Company has increased its production capacity
to take advantage of the growth being experienced in the industry until
recently, increasing the number of operating manufacturing facilities from four
at the end of 1992 to twenty-two at December 31, 1997. The fourteenth
manufacturing facility was acquired in June 1997, when the Company purchased
substantially all of the assets and assumed certain existing liabilities of
Pacer Homes, Inc., a manufacturer in Texas. Eight operating home manufacturing
facilities (two in Georgia, four in Mississippi and two in Arkansas) were added
with the Belmont Merger.
Results of Operations
The following tables summarize, for the periods and dates indicated, certain
financial, operating and balance sheet data including, as applicable, the
percentage of net sales or total revenue:
<TABLE>
<CAPTION>
STATEMENT OF INCOME SUMMARY For the Year Ended December 31,
-------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
---------------------------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 555,842 100.0% $ 573,838 100.0% $ 420,790 100.0%
Cost of Sales 466,749 84.0% 482,302 84.0% 354,811 84.3%
------------ ------------ ------------- ------------- ------------ ------------
Gross Profit on Sales $ 89,093 16.0% $ 91,536 16.0% $ 65,979 15.7%
============ ============= ============
Net Sales $ 555,842 $ 573,838 $ 420,790
Financial Services 5,346 3,333 1,764
------------ ------------- ------------
Total Revenue $ 561,188 100.0% $ 577,171 100.0% $ 422,554 100.0%
============ ============= ============
Selling, General and Administrative $ 69,999 12.5% $ 54,022 9.4% $ 39,035 9.2%
Non-recurring Merger and Related Costs $ 7,359 1.3%
Operating Profit $ 17,081 3.0% $ 40,847 7.1% $ 28,708 6.8%
Other Income (Expense) $ 1,258 0.2% $ 3,339 0.6% $ 90 0.0%
Net Income $ 10,247 1.8% $ 27,479 4.8% $ 17,630 4.2%
OPERATING DATA SUMMARY For the Year Ended December 31,
---------------------------------------------
(Dollars in Thousands) 1997 1996 1995
------------- -------------- ------------
Installment Loan Purchases $ 18,013 $ 19,932 $ 10,721
Capital Expenditures $ 10,186 $ 16,106 $ 13,482
Home Shipments 23,602 25,652 19,667
Floor Shipments 33,646 34,581 25,717
Independent Exclusive Dealers 132 115 93
Home Manufacturing Facilities 22 24 16
BALANCE SHEET SUMMARY Balances as of December 31,
---------------------------------------------
(Dollars in Thousands) 1997 1996 1995
------------- ------------- ------------
Cash and Cash Equivalents $ 37,276 $ 29,751 $ 23,060
Working Capital $ 28,484 $ 24,746 $ 22,157
Current Ratio 1.5 to 1 1.4 to 1 1.5 to 1
Long-Term Debt $ 15,808 $ 6,227 $ 11,233
Ratio of Long-Term Debt to Equity 1 to 8 1 to 20 1 to 7
Installment Loan Portfolio $ 49,146 $ 36,425 $ 19,209
</TABLE>
Net Sales. Net sales for 1997 as compared to 1996 decreased by 3%, or $18
million, with home shipments declining by 8%. However, sales of multi-section
homes increased during the year, resulting in only a 3% decline in the number of
floors sold. The Company believes the decline in net sales is primarily
17
<PAGE>
attributable to increased competition in the industry related to an increase in
manufacturing capacity, higher dealer inventories and slower retail inventory
turnover. Net sales for 1997 included approximately $51 million from Bellcrest
Homes, Inc. ("Bellcrest"), which was acquired by Belmont in October 1996.
Net sales for 1996 increased $153 million, or 36%, as compared to 1995, while
shipments of homes rose 30% and shipments of floors increased by 34%. The
Company believes that the increase in net sales for the period primarily
resulted from continuing improvement in industry conditions, combined with the
increase in manufacturing facilities and a shift in product mix toward
multi-section homes. Net sales for 1996 included approximately $65 million from
Spirit Homes, Inc., which was acquired by Belmont in October 1995.
Actual shipments of homes during the three years ended December 31, 1997, 1996
and 1995 were 23,602, 25,652 and 19,667, respectively. During the three-year
period ended December 31, 1997, the average price of homes sold rose to $23,600
in 1997 from $22,400 (1996) and $21,400 (1995). The increase in the average
selling price was primarily due to price increases instituted by the Company
during all three years associated with rising prices in raw materials and an
increase in the shipment of multi-section homes. During the three-year period,
the percentage of multi-section homes sold was 42%, 35% and 31% of total homes
sold in 1997, 1996 and 1995, respectively.
Gross Profit on Sales. Gross profit on sales is derived by deducting cost of
sales from net sales. Gross profit on sales for the three years ended December
31, 1997, 1996 and 1995 was $89.1, $91.5 and $66.0 million, respectively. Gross
profit for 1997 was negatively impacted by a reduction in net sales and $0.8
million charged to warranty expense in connection with conforming Belmont's
contractual warranty arrangements to Cavalier's. The increase in gross profit on
sales from 1995 to 1996 was primarily attributable to increased sales volume due
to industry growth and the Company's increased number of manufacturing
facilities. Gross profit as a percentage of net sales has remained relatively
stable at 16.0%, 16.0% and 15.7% for the years ended December 31, 1997, 1996 and
1995, respectively
Financial Services Revenue. Financial services revenue is derived primarily from
interest on installment sale contracts held by CAC and the sale of commissioned
insurance products by the Company's wholly owned insurance agency, Quality
Certified Insurance Services, Inc. ("QCIS"). Financial services revenue for the
years ended December 31, 1997, 1996 and 1995 was approximately $5.3, $3.3 and
$1.8 million, respectively. The increase in financial services revenue was due
to the continued growth in the Company's loan portfolio to $49, $36 and $19
million at the end of 1997, 1996 and 1995, respectively.
Selling, General and Administrative. Selling, general and administrative
expenses during the three years ended December 31, 1997, 1996 and 1995 were $70,
$54 and $39 million, respectively, and as a percentage of total revenue was
12.5%, 9.4% and 9.2% for the years ended December 31, 1997, 1996 and 1995,
respectively. During 1997, selling, general and administrative expense increased
$16 million as compared to 1996 due primarily to the costs related to new or
expanded manufacturing facilities of $9.1 million, a $1.9 million increase in
selling and administrative salaries and commissions, a $1.1 million increase in
CAC's administrative costs consistent with its growth and expenses related to
the Company's expanded marketing programs of $0.9 million, partially offset by a
reduction in executive incentive compensation of $1.5 million. Additionally, the
Company charged to selling, general and administrative expense $0.3 million in
connection with conforming Belmont's contractual repurchase arrangements to its
own. Selling, general and administrative expense increased $15 million from 1995
to 1996 due in part to the costs related to new or expanded manufacturing
facilities of $10.5 million and a $1 million increase in CAC's administrative
costs consistent with its growth.
Non-recurring Merger and Related Costs. In connection with the Belmont Merger,
the Company recorded charges of $7.4 million in the quarter ended December 31,
1997. These charges were non-recurring and included $2.5 million from the
earn-out provision contained in the Stock Purchase Agreement between Belmont and
the shareholders of Bellcrest, $0.9 million for severance costs associated with
the consolidation of certain administrative functions, $3.1 million for
printing, investment banking, legal, accounting and other fees and $0.9 million
for other costs associated with combining and realigning the operations of the
two companies.
Operating Profit. Operating profit is derived by deducting cost of sales,
selling, general and administrative expense and non-recurring merger and related
costs from total revenue. Operating profit declined from 1996 to 1997 primarily
due to the reduction in net sales, the increase in costs associated with new or
expanded manufacturing facilities of $9.1 million and the non-recurring merger
and related costs associated with the Belmont Merger of $7.4 million, offset by
a $2.2 million increase in operating profit of the financial services business.
The increase in operating profit from 1995 to 1996 is consistent with the
increase in net sales during the period.
18
<PAGE>
Other Income (Expense):
Interest Expense. Manufacturing interest expense for 1997 increased by $0.3
million as compared to 1996 due primarily to additional borrowings to support
the purchase of Bellcrest, which debt was paid in full in September 1997, and
interest on two new industrial development bond issues. Manufacturing interest
expense for 1996 declined by $0.5 million as compared to 1995 due primarily to
the effect of debt reduction from the use of proceeds of Belmont's public
offering of stock in January 1996. The increase in financial services interest
expense for 1997 of $0.3 million as compared to 1996 reflects the additional
borrowings incurred to support the level of purchases of retail installment
sales contracts by CAC.
Life Insurance Proceeds. The Company experienced non-recurring gains on life
insurance proceeds during 1996 of $1.75 million as a result of the death of
Cavalier's President and Chief Executive Officer, Jerry F. Wilson, and during
1997 of $1.5 million as a result of the death of Belmont's President and Chief
Executive Officer, Jerold Kennedy.
Other, Net. Other, net, during the years ended December 31, 1997, 1996 and 1995
was $1.3, $2.4 and $1.4 million, respectively. Other, net, is primarily
comprised of interest income (unrelated to financial services), gains or losses
on sales of assets, equity earnings in investments accounted for on the equity
basis of accounting and applicable allocation of minority interest. The decline
of $1.2 million in 1997 as compared to 1996 was primarily due to a $0.3 million
loss on property disposals recorded in 1997 in connection with the closing of a
leased facility and a $0.4 million decline in equity earnings. The increase in
other, net, of $1.0 million in 1996 as compared to 1995 was mainly due to a $0.5
million increase in gain on sales of investments.
Net Income. Net income declined from 1996 to 1997 primarily due to the reduction
in net sales, the increase in certain selling, general and administrative
expenses and the non-recurring charges associated with the Belmont Merger of
$1.1 million recorded in connection with conforming Belmont's contractual
warranty and repurchase arrangements to Cavalier's and $7.4 million of
non-recurring merger and related costs (a total of $6.5 million net of taxes).
The increase in net income from 1995 to 1996 is consistent with the increase in
net sales during the period.
Financial Services. The Company purchases qualifying retail installment sales
contracts for manufactured homes sold through the Company's independent
exclusive dealer network and sells various commissioned insurance products
through CAC and QCIS, respectively. The following table summarizes the
operations of CAC and QCIS:
<TABLE>
For the Year Ended December 31,
<CAPTION>
---------------------------------------------
<S> <C> <C> <C>
(Dollars in Thousands) 1997 1996 1995
---------------------------------------------
Installment Loan Portfolio $ 49,146 $ 36,425 $ 19,209
Installment Loan Purchases $ 18,013 $ 19,932 $ 10,721
Financial Services Revenues - CAC $ 4,849 $ 2,991 $ 1,682
Financial Services Revenues - QCIS $ 497 $ 342 $ 82
Principal Collections $ 5,293 $ 2,716 $ 1,337
Number of Loans Outstanding 1,712 1,292 758
Weighted Average Interest Rate 10.9% 10.9% 11.3%
</TABLE>
During the three years ended December 31, 1997, 1996 and 1995, CAC purchased
contracts totaling $18.0, $19.9 and $10.7 million, respectively, and collected
principal amounts under such installment contracts of $5.3, $2.7 and $1.3
million, respectively. At the end of 1997, 1996 and 1995, CAC held $49.1, $36.4
and $19.2 million of installment contracts receivable, respectively, and had
established allowances for credit losses of $1.3, $0.9 and $0.6 million,
respectively.
Since its inception, CAC has been restricted in the amounts of loans it could
purchase based on restricted underwriting standards, the availability of working
capital and funds borrowed under its credit line with its primary lender. In
February 1998, CAC entered into an agreement (the "Retail Finance Agreement"),
with another lender providing for the periodic resale of a portion of CAC's
loans that meet established criteria. On March 13, 1998, CAC sold loans to this
lender having an outstanding principal amount of approximately $25 million for
cash in the approximate amount of $26 million, of which $14 million was used to
retire debt. The effect of this transaction on net income would be to reduce the
amount of financial services revenue for interest income on this portion of the
portfolio, offset by reduced interest expense on retired debt and earnings on
the remaining proceeds. The Company believes the periodic sale of installment
contracts receivable under the Retail Finance Agreement will reduce requirements
for both working capital and borrowings, increase the Company's liquidity,
reduce the Company's exposure to interest rate fluctuations and enhance the
ability of CAC to increase its volume of loan purchases. * There can be no
assurance, however, that additional sales will be made under this agreement, or
that CAC and the Company will be able to realize the expected benefits from such
agreement. *
19
<PAGE>
Liquidity and Capital Resources
As of December 31, 1997, 1996 and 1995, the Company had working capital of
$28.5, $24.7 and $22.2 million, respectively. The 1997 working capital increase
of $3.8 million was due primarily to net long-term borrowings of $2.8 million,
$2.1 million proceeds from the sale of common stock, installment loan
collections of $5.3 million and net cash provided by operating activities of
$23.2 million for the year, reduced by $10.2 million in capital expenditures and
$18.0 million in installment loan purchases. Working capital during 1996
increased $2.5 million due primarily to net cash provided by operating
activities of $33.7 million, $2.7 million in installment loan collections, $12.0
million of proceeds from the sale of common stock and $4.5 million from the
exercise of stock options, reduced by capital expenditures of $16.1 million,
installment loan purchases of $19.9 million, net long-term debt repayments of
$3.0 million and $8.5 million for the purchase of Bellcrest. Capital
expenditures included normal property, plant and equipment additions and
replacements. In addition to the Bellcrest purchase, the Company opened four
additional facilities in 1996, one each located in Mineral Wells, Texas and
Hamilton, Alabama, and two in Conway, Arkansas. During 1997, the Company
acquired a facility in Graham, Texas.
The ratio of current assets to current liabilities for the three years ended
December 31, 1997, 1996, and 1995 was 1.5 to 1, 1.4 to 1 and 1.5 to 1,
respectively.
The Company entered into a credit agreement (the "Credit Facility") with its
primary lender in February 1994 and later amended it in March of 1996. The
facility presently consists of a $23 million revolving, warehouse and term-loan
agreement. The Credit Facility contains a revolving line of credit which
provides for borrowings (including letters of credit) of up to 80% and 50% of
the Company's eligible (as defined) accounts receivable and inventories,
respectively, up to a maximum of $5 million. Interest is payable under the
revolving line of credit at the bank's prime rate. The warehouse and term-loan
agreements contained in the Credit Facility provide for borrowings of up to 80%
of the Company's eligible (as defined) installment sales contracts, up to a
maximum of $18 million. Interest on the term notes is fixed for a period of five
years from issuance at a rate based on the weekly average yield on five-year
treasury securities averaged over the preceding 13 weeks, plus 2%, with a
floating rate for the remaining two years (subject to certain limits) equal to
the bank's prime rate plus .75%. The warehouse component of the Credit Facility
provides for borrowings of up to $2 million with interest payable at the bank's
prime rate plus 1%. Under the Credit Facility, $12.7 million was outstanding at
December 31, 1997, and $3.9 million was outstanding at December 31, 1996. The
Credit Facility contains certain restrictive covenants which limit, among other
things, the Company's ability to (i) make dividend payments and purchases of
treasury stock in an aggregate amount which exceeds 50% of consolidated net
income for the two most recent years, (ii) mortgage or pledge assets which
exceed, in the aggregate, $1 million without written notice to the lender, (iii)
incur additional indebtedness, including lease obligations, which exceed in the
aggregate $2.5 million and (iv) make capital expenditures in excess of $6
million. In addition, the Credit Facility contains certain financial covenants
requiring the Company to maintain on a consolidated basis certain defined levels
of net working capital (at least $3.5 million), tangible net worth (which must
increase at least $2 million per year, subject to a carryover for increases in
excess of $2 million in the prior year), debt to equity ratio (not to exceed 2
to 1) and cash flow to debt service ratio (not less than 1.5 to 1). The Credit
Facility also requires CAC to comply with certain specified restrictions and
financial covenants.
The Company has received a commitment from its primary lender for a two-year
renewal amendment to the Credit Facility, which currently expires in April 1998,
providing for borrowings of up to $35 million. The renewal provides for a
revolving line of credit with a maximum of $10 million (an increase from $5
million) and a warehouse line of $25 million (an increase from $18 million) and
includes a fixed rate term-loan feature. The Company currently does not expect a
material change to the restrictive and financial covenants included in the
Credit Facility. *
The Company's growth strategy currently includes the continued expansion of
financial services, component supply operations, and its independent dealer
network and the pursuit of additional acquisitions. The Company may also utilize
funds in the acquisition or establishment of retail sales centers. Accordingly,
it is likely that the Company will incur additional debt, or other forms of
financing, in order to continue to fund the pursuit of such growth strategies. *
The Company currently believes existing cash and investment balances (which
include proceeds from the sale of a portion of its installment loan portfolio
described above) and funds available under the Credit Facility, together with
cash provided by operations, will be adequate to fund the Company's operations
and plans for the next twelve months. * In order to provide additional funds for
continued pursuit of the Company's growth strategies and for operations, the
Company may incur, from time to time, additional short and long-term bank
indebtedness and may issue, in public or private transactions, its equity and
debt securities, the availability and terms of which will depend upon market and
other conditions. * The Company may continue to engage in other transactions,
such as selling or securitizing all or portions of its installment loan
portfolio, that are designed to facilitate the ability of the Company to
20
<PAGE>
originate an increased volume of loans and to reduce the Company's exposure to
interest rate fluctuations. * The Company has recently entered into such a
transaction pursuant to the Retail Finance Agreement described above under
"Results of Operations--Financial Services." There can be no assurance that such
possible additional financing, or the aforementioned potential transactions
involving the Company's installment loan portfolio, will be available on terms
acceptable to the Company. It is possible that a future lack of financing or a
prolonged downturn in industry conditions could cause the Company to curtail the
expansion of financial services or otherwise alter its growth strategies. *
Impact of Inflation
The Company generally has been able to increase its selling prices to offset
increased costs, including the costs of raw materials. Sudden increases in costs
as well as price competition can affect the ability of the Company to increase
its selling prices. The Company believes that the relatively moderate rate of
inflation over the past several years has not had a significant impact on its
sales or profitability, but can give no assurance that this trend will continue
in the future. *
Impact of Accounting Statements
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
adoption of the provisions of this Statement is expected to result only in
increased disclosures on segment information and will not impact the amounts in
the financial statements.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
Company plans on completing the testing process of all significant applications
by December 31, 1998. In addition, the Company has initiated communcations with
others with whom it does significant business to determine their Year 2000
Compliance readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues.
The total cost to the Company of these Year 2000 Compliance activities is not
expected to exceed $0.3 million in any given year. * These costs and the date on
which the Company plans to complete the Year 2000 modification and testing
processes are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
________________________________________
* See Safe Harbor Statement on page 49.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Selected Quarterly Financial Data (Unaudited)
The table contained on the following page sets forth certain unaudited quarterly
financial data for the two years ended December 31, 1997 and 1996. The Company
believes that the following quarterly financial data includes all adjustments
necessary for a fair presentation, in accordance with generally accepted
accounting principles. The following quarterly financial data should be read in
conjunction with the other financial information contained elsewhere in this
report. The operating results for any interim period are not necessarily
indicative of results for a complete year or for any future period.
21
<PAGE>
<TABLE>
<CAPTION>
Fourth Quarter Third Quarter Second Quarter First Quarter Total
----------------- -------------- ----------------- ------------------ -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1997
Revenues:
Net sales $ 131,865 $ 138,276 $ 159,629 $ 126,072 $ 555,842
Financial services 1,526 1,382 1,296 1,142 5,346
--------------- -------------- --------------- --------------- ---------------
Total revenues 133,391 139,658 160,925 127,214 561,188
Gross profit 22,985 23,598 26,662 21,194 94,439
Net income (4,165) b 3,639 6,880 a 3,893 10,247 a,b
Basic net income per share (.21) b .18 .35 a .20 .52 a,b
Diluted net income per share (.21) b .18 .34 a .19 .51 a,b
1996
Revenues:
Net sales $ 152,436 $ 145,264 $ 151,065 $ 125,073 $ 573,838
Financial services 1,074 867 772 620 3,333
--------------- -------------- --------------- --------------- ---------------
Total revenues 153,510 146,131 151,837 125,693 577,171
Gross profit 25,098 24,341 24,980 20,450 94,869
Net income 7,938 c 6,964 7,064 5,513 27,479 c
Basic net income per share d .40 c .35 .37 .30 1.42 c
Diluted net income per share d .40 c .35 .36 .29 1.39 c
The sum of quarterly amounts may not equal the annual amounts due to rounding.
a Includes a non-recurring gain of $1,500 or $.08 per share Basic, and $.07 Diluted from life insurance proceeds.
b Includes non-recurring charges of $8,447, comprised of $1,088 recorded in connection with conforming Belmont's
contractual warranty and repurchase arrangements to Cavalier's and $7,359 of non-recurring merger and related
costs ($6,526 net of taxes, or $.33 per share Basic and Diluted.)
c Includes a non-recurring gain of $1,750 or $.09 per share Basic and Diluted from life insurance proceeds.
d Adjusted for all applicable stock splits.
</TABLE>
Prior amounts have been restated due to the December 31, 1997 Belmont Merger,
which was accounted for as a pooling of interests. Previously reported amounts
for the individual companys' net sales, total revenues and gross profit have
been adjusted for the effect of former equity investments in unconsolidated
joint ventures which are now consolidated subsidiaries and for reclassification
of certain Belmont amounts to conform to Cavalier's presentation.
22
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Consolidated Financial Statements and Schedule
Page Numbers
Independent Auditor's Report 24
Consolidated Balance Sheets 25
Consolidated Statements of Income 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30
Schedule -
II - Valuation and Qualifying Accounts 43
Schedules I, III, IV and V have been omitted because they are either not
required or are inapplicable.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Cavalier Homes, Inc.:
We have audited the consolidated balance sheets of Cavalier Homes, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the index at Item 8. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. The
consolidated financial statements give retroactive effect to the merger of the
Company and Belmont Homes, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. We
did not audit the consolidated balance sheet of Belmont Homes, Inc. as of
December 31, 1996, or the related consolidated statements of income,
stockholders' equity, and cash flows of Belmont Homes, Inc. for the years
ended December 31, 1996 and 1995, which statements reflect total assets of
$79,355,000 as of December 31, 1996, and total revenues of $227,817,000 and
$148,304,000 for the years ended December 31, 1996 and 1995, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Belmont
Homes, Inc. for 1996 and 1995, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cavalier Homes, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Birmingham, Alabama
February 17, 1998 (March 13, 1998 as to the amendment to the Credit Facility
described in Note 5)
24
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 37,276 $ 29,751
Certificates of deposit, maturing within one year 4,000 8,243
Marketable securities available for sale 1,097
Accounts receivable, less allowance for losses of
$1,175 (1997) and $837 (1996) (Notes 5 and 10) 8,449 11,361
Notes and installment contracts receivable - current
(Notes 4 and 5) 1,561 1,086
Inventories (Note 5) 29,697 28,172
Deferred income taxes (Note 8) 7,240 6,482
Other current assets 1,292 3,390
----------- ----------
Total current assets 89,515 89,582
----------- ----------
PROPERTY, PLANT AND EQUIPMENT (Note 5):
Land 2,159 1,921
Buildings and improvements 37,011 30,726
Machinery and equipment 32,213 29,255
----------- ----------
71,383 61,902
Less accumulated depreciation and amortization 17,949 12,048
----------- ----------
Total property, plant and equipment, net 53,434 49,854
----------- ----------
INSTALLMENT CONTRACTS RECEIVABLE, less
allowance for credit losses of $1,272 (1997) and
$941 (1996) (Notes 4 and 5) 46,614 34,504
----------- ----------
GOODWILL, less accumulated amortization
of $3,102 (1997) and $1,947 (1996) (Note 3) 19,551 20,706
----------- ----------
OTHER ASSETS 2,440 1,741
----------- ----------
TOTAL $ 211,554 $ 196,387
=========== ==========
See notes to consolidated financial statements.
</TABLE>
25
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 3,271 $ 10,046
Accounts payable 9,575 12,063
Amounts payable under dealer incentive programs 14,614 13,853
Accrued compensation and related withholdings 4,294 6,037
Estimated warranties 11,700 10,566
Accrued merger and related costs (Note 1) 5,178
Other accrued expenses 12,399 12,271
--------- --------
Total current liabilities 61,031 64,836
--------- --------
DEFERRED INCOME TAXES (Note 8) 297 1,942
--------- --------
LONG-TERM DEBT (Note 5) 15,808 6,227
--------- --------
OTHER LONG-TERM LIABILITIES 867 730
--------- --------
STOCKHOLDERS' EQUITY (Notes 5, 6 and 7):
Series A Junior Participating Preferred Stock, $.01 par value; 200,000 shares
authorized, none issued
Preferred stock, $.01 par value; 300,000 shares authorized,
none issued
Common stock, $.10 par value; authorized 50,000,000 shares,
issued 19,941,357 (1997) and 19,742,328 (1996) shares 1,994 1,974
Additional paid-in capital 57,228 55,126
Retained earnings 74,329 65,552
---------- ---------
Total stockholders' equity 133,551 122,652
---------- ---------
TOTAL $ 211,554 $ 196,387
========== =========
See notes to consolidated financial statements.
</TABLE>
26
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
REVENUES:
Net sales $ 555,842 $ 573,838 $ 420,790
Financial services 5,346 3,333 1,764
---------------- ---------------- ----------------
561,188 577,171 422,554
---------------- ---------------- ----------------
COST OF SALES (Note 10) 466,749 482,302 354,811
SELLING, GENERAL AND ADMINISTRATIVE (Notes 7 and 9):
Manufacturing 66,825 51,946 37,909
Financial services 3,174 2,076 1,126
NON-RECURRING MERGER AND RELATED COSTS (Note 1) 7,359
---------------- ---------------- ----------------
544,107 536,324 393,846
---------------- ---------------- ----------------
OPERATING PROFIT 17,081 40,847 28,708
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense:
Manufacturing (699) (353) (832)
Financial services (812) (492) (501)
Life insurance proceeds 1,500 1,750
Other, net 1,269 2,434 1,423
---------------- ---------------- ----------------
1,258 3,339 90
---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 18,339 44,186 28,798
INCOME TAXES (Note 8) 8,092 16,707 11,168
---------------- ---------------- ----------------
NET INCOME $ 10,247 $ 27,479 $ 17,630
================ ================ ================
BASIC NET INCOME PER SHARE (Notes 2 and 6) $ 0.52 $ 1.42 $ 1.06
================ ================ ================
DILUTED NET INCOME PER
SHARE (Notes 2 and 6) $ 0.51 $ 1.39 $ 1.03
================ ================ ================
WEIGHTED AVERAGE SHARES
OUTSTANDING (Notes 2 and 6) 19,834,942 19,362,944 16,629,523
================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING,
ASSUMING DILUTION (Notes 2 and 6) 20,028,181 19,799,492 17,056,945
================ ================ ================
See notes to consolidated financial statements.
</TABLE>
27
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Treasury
Additional Stock - At
Common Paid-in Retained Average
Stock Capital Earnings Cost Total
BALANCE, JANUARY 1, 1995 $ 1,663 $ 17,719 $ 22,435 $ (50) $ 41,767
Sale of common stock to public 157 15,126 15,283
Treasury stock reissued and common stock issued
in connection with a purchase option 1 413 50 464
Stock options exercised (Note 7) 9 689 698
Income tax benefits attributable to exercise
of stock options (Note 7) 281 281
Other (215) (215)
Cash dividends paid ($.04 per share) (637) (637)
Dividends on preferred stock (152) (152)
Net income 17,630 17,630
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 1,830 34,013 39,276 $ - 75,119
Sale of common stock to public 64 11,661 =========== 11,725
Stock options exercised (Note 7) 73 4,419 4,492
Income tax benefits attributable to exercise of
stock options (Note 7) 3,692 3,692
Sale of common stock under Employee Stock
Purchase Plan (Note 7) 2 238 240
Common stock issued in connection with
acquisitions 5 887 892
Accrued compensation 216 216
Cash dividends paid ($.06 per share) (1,203) (1,203)
Net income 27,479 27,479
---------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1996 1,974 55,126 65,552 122,652
Stock options exercised (Note 7) 7 7
Sale of common stock under Employee Stock
Purchase Plan (Note 7) 5 425 430
Sale of common stock under Dividend
Reinvestment Plan (Note 7) 17 1,653 1,670
Accrued compensation 172 172
Cash dividends paid ($.07 per share) (1,470) (1,470)
Retirement of common stock (2) (155) (157)
Net income 10,247 10,247
---------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1997 $ 1,994 $ 57,228 $ 74,329 $ 133,551
========== ========== ========== =========
See notes to consolidated financial statements.
</TABLE>
28
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
OPERATING ACTIVITIES:
Net income $ 10,247 $ 27,479 $ 17,630
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,492 5,760 3,757
Provision for credit losses and repurchase commitments 669 389 301
(Gain) loss on sale of property, plant and equipment 340 (144) 23
Equity in net income of unconsolidated affiliates (98) (289) (237)
Minority interest in net income (loss) of consolidated subsidiaries 137 (20)
Compensation related to issuance of stock options 172 216
Changes in assets and liabilities provided (used) cash, net of
effects of acquisitions:
Accounts receivable 2,574 (672) (1,437)
Inventories (488) (8,021) (1,366)
Accounts payable (3,310) (146) 1,669
Amounts payable under dealer incentive programs 761 4,508 2,174
Accrued compensation and related withholdings (1,743) 1,188 929
Estimated warranties 1,134 1,744 1,897
Other assets and liabilities 5,361 1,695 1,944
---------- ---------- ----------
Net cash provided by operating activities 23,248 33,687 27,284
---------- ---------- ----------
INVESTING ACTIVITIES:
Net cash paid in connection with acquisitions (871) (8,515) (2,592)
Proceeds from sale of property, plant and equipment 122 228 63
Capital expenditures (10,186) (16,106) (13,482)
Purchases of certificates of deposit (8,000) (16,114) (8,717)
Maturities of certificates of deposit 12,243 14,588 2,000
Purchases of marketable securities (1,004)
Proceeds from sale or maturity of marketable securities 1,097 2,479 3,210
Purchases and originations of notes and installment contracts (19,562) (19,932) (10,721)
Principal collected on notes and installment contracts 6,015 2,716 1,337
Cash restricted for construction 521 1,548
Other 133 95 38
---------- ---------- ----------
Net cash used in investing activities (19,009) (40,040) (28,320)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 25,263 9,650 2,000
Payments on long-term debt (22,456) (12,610) (13,562)
Net proceeds from sales of common stock 2,099 11,965 15,283
Proceeds from exercise of stock options 7 4,492 698
Cash dividends paid (1,470) (1,203) (637)
Retirement of preferred stock, including dividends (1,052)
Retirement of common stock (157)
Other 750
---------- ---------- ----------
Net cash provided by financing activities 3,286 13,044 2,730
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,525 6,691 1,694
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,751 23,060 21,366
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 37,276 $ 29,751 $ 23,060
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
29
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. BUSINESS COMBINATION AND BASIS OF PRESENTATION
On December 31, 1997, Belmont Homes, Inc. ("Belmont") was merged with and
into a subsidiary of Cavalier Homes, Inc. ("Cavalier"), and 7,555,121
shares of Cavalier's common stock were issued in exchange for all of the
outstanding common stock of Belmont. The merger was accounted for as a
pooling of interests, and, accordingly, the accompanying financial
statements have been restated to include the financial position, results
of operations and cash flows of Belmont for all periods presented.
Revenues and net income for the separate companies, and the combined
amounts presented in the consolidated financial statements are as follows
(in thousands, excluding non-recurring merger and related costs in 1997):
1997 1996 1995
Revenues:
Cavalier $ 336,343 $ 349,354 $ 274,250
Belmont 224,845 227,817 148,304
-------------- --------------- --------------
Combined $ 561,188 $ 577,171 $ 422,554
============== =============== ==============
Net income:
Cavalier $ 10,428 $ 15,366 $ 9,020
Belmont 5,688 12,113 8,610
-------------- -------------- --------------
Combined $ 16,116 $ 27,479 $ 17,630
============== =============== ==============
Certain amounts from Belmont's prior financial statements have been
reclassified to conform to Cavalier's presentation.
In connection with the merger, Cavalier recorded charges of $7.4 million
in the quarter ended December 31, 1997. These charges are nonrecurring and
include $2.5 million from the earn-out provision contained in the Stock
Purchase Agreement between Belmont and the shareholders of Bellcrest, $0.9
million for severance costs associated with the consolidation of certain
administrative functions, $3.1 million for printing, investment banking,
legal, accounting and other fees, and $0.9 million for other costs
associated with combining and realigning the operations of the two
companies. Of the merger and related costs of $7.4 million, $5.2 million
is recorded as an accrued liability in the consolidated balance sheet at
December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Cavalier Homes, Inc. and its wholly-owned and
majority-owned subsidiaries (hereinafter collectively referred to as the
"Company"). The Company's minority ownership interests in various joint
ventures are accounted for using the equity method and are included in
other assets in the accompanying consolidated balance sheets. Intercompany
profits, transactions and balances have been eliminated in consolidation.
Nature of Operations - The Company designs and manufactures a wide range
of high quality manufactured homes which are sold to a network of
independent dealers located primarily in the southeast, southwest and
midwest regions of the United States. In addition, through its financial
services segment, the Company offers retail installment sale financing and
related insurance products for manufactured homes sold through the
Company's independent exclusive dealer network.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
30
<PAGE>
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingencies at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from
those estimates.
Fair Value of Financial Instruments - The carrying value of the Company's
cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short-term maturity of
those instruments. Additional information concerning the fair value of
other financial instruments is disclosed in Notes 4 and 5.
Cash Equivalents - The Company considers all highly liquid investments
with original maturities of 90 days or less to be cash equivalents.
Marketable Securities - Marketable securities have been classified as
available for sale in the consolidated balance sheet according to
management's intent. Marketable securities are stated at fair value of
$1,097 at December 31, 1996. The Company had no amounts invested in
marketable securities at December 31, 1997.
Inventories - Inventories consist primarily of raw materials and are
stated at the lower of cost (first-in, first-out method) or market. During
1997, 1996, and 1995, the Company purchased raw materials of approximately
$10,573, $11,645 and $7,900, respectively, from certain joint ventures
referred to previously.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost and depreciated primarily over the estimated useful lives of the
related assets using the straight-line method. Maintenance and repairs are
expensed as incurred. The Company paid or accrued $270, $73 and $690 in
1997, 1996 and 1995, respectively, for construction of plant facilities to
a company in which a stockholder and director of the Company is also a
stockholder.
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired and is being amortized over 15 to 25
years using the straight-line method.
If facts and circumstances indicate that goodwill may be impaired, an
assessment will be made by the Company to determine if a writedown is
required or if its estimated useful life should be revised. The assessment
will be based primarily on forecasted operating income, including interest
expense, depreciation and amortization other than goodwill; supplemented
if necessary by an independent appraisal of fair value. The Company
believes that no impairment of goodwill has occurred and that no revision
of its estimated useful life is required.
Revenue Recognition - Sales of manufactured homes to independent dealers
are recorded as of the date the home is shipped to the dealer, with the
exception of one of the Company's subsidiaries which employs drivers to
deliver its homes; accordingly, sales are recorded upon delivery (at which
time title passes) by this subsidiary. All sales are final and without
recourse except for the contingency described in Note 10. Interest income
on installment contracts receivable is recognized using the interest
method.
Product Warranties - The Company provides a one-year limited warranty
covering defects in material or workmanship in home structure, plumbing
and electrical systems. A liability is provided for estimated future
warranty costs relating to homes sold, based upon management's assessment
of historical experience factors and current industry trends.
Allowance for Losses on Installment Contracts - The Company has provided
an allowance for estimated future losses resulting from retail financing
activities of Cavalier Acceptance Corporation ("CAC"), a wholly-owned
subsidiary, primarily based upon management's assessment of historical
experience and current industry trends.
Insurance - The Company's workmen's compensation, product liability and
general liability insurance coverages (with the exception of Belmont whose
insurance is provided under fully insured policies) are provided under
incurred loss, retrospectively rated premium plans. Under this plan, the
Company incurs insurance expense based upon various rates applied to
current payroll costs and sales. Annually, such insurance expense is
adjusted by the carrier for loss experience factors subject to minimum and
maximum premium calculations. Refunds or additional premiums are estimated
when sufficiently reliable data is available in accordance with the
consensus reached in Emerging Issues Task Force Issue No. 93-14,
Accounting for Multiple-Year Retrospectively Rated Insurance Contracts by
Insurance Enterprises and Other Enterprises.
31
<PAGE>
Net Income Per Share - During February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings per Share, which is effective for all
financial statements issued for periods ending after December 15, 1997,
including interim periods. In accordance with this Standard, the Company
is now required to report two separate earnings per share numbers, basic
and diluted. Both are computed by dividing net income by the weighted
average common shares outstanding (basic EPS) or weighted average common
shares outstanding assuming dilution (diluted EPS) as detailed below (in
thousands of shares):
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Weighted average common shares outstanding 19,835 19,363 16,630
Dilutive effect of stock options and warrants 193 436 427
------------ ----------- -----------
Weighted average common shares outstanding,
assuming dilution 20,028 19,799 17,057
============ =========== ===========
</TABLE>
Accounting Standard Not Yet Adopted - In June 1997, the FASB issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 1997. The adoption of the
provisions of this Statement is expected to result only in increased
disclosures on segment information and will not impact the amounts in the
financial statements.
Reclassifications - Certain amounts from the prior periods have been
reclassified to conform to the 1997 presentation.
3. ACQUISITIONS
On October 24, 1996, in a transaction accounted for using the purchase
method of accounting, the Company completed its purchase of 100% of the
stock of Bellcrest Homes, Inc. ("Bellcrest") through the cash payment of
$9,500.
The effects of the acquisition at the purchase date were as follows:
Decrease in cash, net $ 7,145
Increase in other current assets 3,422
Increase in property, plant and equipment 3,525
Increase in goodwill and other assets 6,762
Increase in current liabilities 4,756
Increase in long-term debt and deferred income taxes 1,808
The following unaudited pro forma data is provided for comparative
purposes and are not necessarily indicative of actual results that would
have been achieved had the acquisition of Bellcrest been consummated at
an earlier date and are not necessarily indicative of future results.
Assuming that the acquisition was consummated on January 1, 1995,
unaudited pro forma revenues, net income and diluted net income per
share, after giving effect to certain adjustments, including
amortization of goodwill and other assets, increased interest expense on
debt related to the acquisition, increased depreciation expense, and
related income tax effects, for the years ended December 31, 1996 and
1995 follow:
1996 1995
Revenues $ 607,056 $ 450,718
Net income 27,570 17,756
Diluted net income per share 1.39 1.04
Under the terms of the Bellcrest Stock Purchase Agreement, the Company
was required to pay the former Bellcrest shareholders additional
consideration in an amount not to exceed $3,500 in the aggregate in the
32
<PAGE>
event Bellcrest attained certain stated levels of earnings before income
taxes for the three-month period ended December 31, 1996 and for each of
the years ending December 31, 1997 and 1998. During 1997, the Company
paid $1,000, the amount earned and accrued for 1996, to the former
shareholders. In addition, in connection with the merger described in
Note 1, the Company paid the remaining $2,500 to the former
shareholders.
In conjunction with this acquisition, a former Bellcrest shareholder was
issued warrants for the purchase of 75,000 shares of Belmont common
stock. The warrants, which expire in October 2001, are exercisable at
$14.66 per share and their fair value at the issue date was estimated to
be negligible. None of these warrants have been exercised as of December
31, 1997. In connection with the merger, these warrants were converted
to warrants to purchase 60,000 shares of Cavalier common stock at an
exercise price of $18.34 per share.
In October 1995 the Company acquired, in a transaction accounted for
using the purchase method of accounting, all the outstanding common
stock of Spirit Homes, Inc. ("Spirit") for $9,800, consisting of cash of
$2,450 and debt of $7,350.
The following unaudited pro forma data are provided for comparative
purposes and are not necessarily indicative of actual results that would
have been achieved had the acquisition of Spirit been consummated at an
earlier date and are not necessarily indicative of future results.
Assuming that the acquisition was consummated on January 1, 1995,
unaudited pro forma revenues, net income and diluted net income per
share, after giving effect to certain adjustments, including
amortization of goodwill and other assets, increased interest expense on
debt related to the acquisition, increased depreciation expense, and
related income tax effects, for the year ended December 31, 1995 follow:
Revenues $460,378
Net income 18,618
Diluted net income per share 1.09
4. INSTALLMENT CONTRACTS RECEIVABLE
CAC does not exclusively finance sales for any dealer; all dealers have
other financing sources available to offer to their retail customers.
Standard loan programs require minimum down payments, ranging from 0% to
20% of the purchase price of the home, on all installment contracts based
on the creditworthiness of the borrower. In addition, CAC requires the
borrower to maintain adequate insurance on the home throughout the life of
the contract. Contracts are secured by the home which is subject to
repossession by CAC upon default by the borrower.
CAC's portfolio consists of fixed rate contracts with interest rates
generally ranging from 9.25% to 14.0% at December 31, 1997 and 1996. The
average original term of the portfolio was approximately 217 and 208
months at December 31, 1997 and 1996, respectively.
Estimated principal payments under installment contracts receivable are as
follows:
Year Ending December 31,
1998 $ 1,254
1999 1,398
2000 1,559
2001 1,738
2002 1,938
Thereafter 41,259
---------
Total $ 49,146
=========
33
<PAGE>
Activity in the allowance for losses on installment contracts was as
follows:
1997 1996 1995
Balance, beginning of year $ 941 $ 551 $ 350
Provision for losses 1,329 778 311
Charge-offs, net (998) (388) (110)
------- ------- -------
Balance, end of year $ 1,272 $ 941 $ 551
======= ======= =======
On February 17, 1998, the Company reached an agreement to sell
approximately $25 million of its existing loan portfolio at a premium.
At December 31, 1997 and 1996, the estimated fair value of installment
contracts receivable was $50,103 and $36,205, respectively. These fair
values were estimated using current market value for the $25,000
previously noted and discounted cash flows and interest rates offered by
CAC on similar contracts at the time for the remaining portfolio.
5. CREDIT ARRANGEMENTS
The Company has a $23,000 revolving, warehouse and term-loan agreement
(the "Credit Facility") with its primary bank, whose president is a
director of the Company. The Credit Facility contains a revolving line of
credit which provides for borrowings (including letters of credit) of up
to 80% and 50% of the Company's eligible (as defined) accounts receivable
and inventories, respectively, up to a maximum of $5,000. Interest is
payable under the revolving line of credit at the bank's prime rate (8.50%
and 8.25% at December 31, 1997 and 1996, respectively). No amounts were
outstanding under the revolving line of credit at December 31, 1997 or
1996.
The warehouse and term-loan agreement contained in the Credit Facility
provide for borrowings of up to 80% of the Company's eligible (as defined)
installment sale contracts, up to a maximum of $18,000. Interest on term
notes is fixed for a period of five years from issuance at a rate based on
the weekly average yield on five-year treasury securities averaged over
the preceding 13 weeks, plus 2%, and floats for the remaining two years at
a rate (subject to certain limits) equal to the bank's prime rate plus
.75%. The warehouse component of the Credit Facility provides for
borrowings of up to $2,000 with interest payable at the bank's prime rate
plus 1%. However, in no event may the aggregate outstanding borrowings
under the warehouse and term-loan agreement exceed $18,000. Under the
Credit Facility, $50 was outstanding under the warehouse component at
December 31, 1997, and $12,694 and $3,866 was outstanding under the term
loan portion at December 31, 1997 and 1996, respectively.
The Credit Facility contains certain restrictive and financial covenants,
which, among other things, limit the aggregate of dividend payments and
purchases of treasury stock to 50% of consolidated net income for the two
most recent years, contain restrictions on the Company's ability to pledge
assets, incur additional indebtedness and make capital expenditures, and
require the Company to maintain certain defined financial ratios. Amounts
outstanding under the Credit Facility are secured by the accounts
receivable and inventories of the Company, loans purchased and originated
by CAC, and the capital stock of certain of the Company's consolidated
subsidiaries. The bank's commitment under the Credit Facility will expire
in April 1998.
On March 13, 1998, the Company reached an agreement with its primary bank
to extend its Credit Facility for an additional two years and to increase
available borrowings to $35,000. The renewal provides for a revolving line
of credit with a maximum of $10,000 (an increase from $5,000) and a
warehouse line of $25,000 (an increase from $18,000) which includes a
fixed rate term-loan feature. Terms and restrictive covenants are
substantially the same as the expiring agreement.
The Company has other lines of credit with banks totaling $9,000 which
expire at various dates through July, 1998. Amounts outstanding under
these facilities totaled $1,000 and $8,600 at December 31, 1997 and 1996,
respectively. Interest rates under these lines range from prime to prime
plus 2%.
The Company has amounts outstanding under three Industrial Development
Revenue Bond issues ("Bonds") of $4,442 and $1,044 at December 31, 1997
and 1996, respectively. Two of the bond issues bear interest at variable
rates ranging from 4.0% to 5.4% and mature at various dates through
November 2007. One of the bond issues is payable in equal monthly
installments and bears interest at 75% of the prime rate. The bonds are
collateralized by certain plant facilities.
34
<PAGE>
The Company has a term-loan with a balance of $887 and $960 at December
31, 1997 and 1996, respectively, bearing interest at 7.95%, payable in
equal monthly installments through April, 2006.
At December 31, 1996, the Company's other long-term debt, with an
outstanding balance of $1,796, consisted of various fixed and variable
rate term loans bearing interest at rates ranging from 8.25% to 9.25%.
These notes were paid in 1997.
Principal repayment requirements on long-term debt are as follows:
Year Ending December 31,
1998 $ 3,271
1999 2,452
2000 2,648
2001 2,594
2002 2,332
Thereafter 5,782
-------
Total 19,079
Less current portion 3,271
-------
Long-term debt $ 15,808
========
The estimated fair value of outstanding borrowings was $19,261 and $16,111
at December 31, 1997 and 1996, respectively. These estimates were
determined using rates at which the Company believes it could have
obtained similar borrowings at that time.
Cash paid for interest during the years ended December 31, 1997, 1996 and
1995 was $1,445, $910 and $1,619, respectively.
The Company and certain of its equity partners have jointly and severally
guaranteed revolving notes for two companies and a letter of credit for
one company in which the Company owns various equity interests. The
guarantees are limited to various percentages of the outstanding debt up
to a maximum guaranty of $1,500. At December 31, 1997, $3,000 was
outstanding under the various guarantees, of which the Company had
guaranteed $720.
6. STOCKHOLDERS' EQUITY
During the years ended December 31, 1996 and 1995, the Company's Board of
Directors declared the following stock splits of the Company's common
stock. All applicable share and per share data have been restated to give
effect to all stock splits.
Declaration Stock Record Distribution
Date Split Date Date
July 17, 1995 5 for 4 July 31, 1995 August 15, 1995
January 22, 1996 3 for 2 January 31, 1996 February 15, 1996
October 16, 1996 5 for 4 October 31, 1996 November 15, 1996
The Company has adopted a Stockholder Rights Plan. The terms and
conditions of the plan are set forth in a Rights Agreement dated October
23, 1996 between the Company and its Rights Agent. Pursuant to the plan,
the Board of Directors of the Company declared a dividend of one Right (as
defined in the Rights Agreement) for each share of the Company's
outstanding common stock to stockholders of record on November 6, 1996.
The Rights, when exercisable, entitle the holder to purchase a unit of
0.80 one-hundredth share of Series A Junior Participating Preferred Stock,
par value $.01, at a purchase price of $80 per share. Upon certain events
relating to the acquisition of, or right to acquire, beneficial ownership
of 20% or more of the Company's outstanding common stock by a third party,
or a change in control of the Company, the Rights entitle the holder to
acquire, after the Rights are no longer redeemable by the Company, shares
of common stock of the Company (or, in certain cases, securities of an
acquiring person) for each Right held at a significant discount. The
Rights will expire on November 6, 2006, unless redeemed earlier by the
35
<PAGE>
Company at $.01 per Right under certain circumstances. In connection with
the merger, Belmont shareholders received one Right (as defined in the
Rights Agreement) with respect to each Cavalier share received pursuant to
the Merger Agreement.
In June 1995, Belmont completed an initial public offering of
approximately 1,570,000 (before stock split) shares of common stock. The
net proceeds of approximately $15,283 were used to retire debt and
preferred stock and for working capital. In January 1996, Belmont
completed another public offering of approximately 640,000 (before stock
split) shares of common stock. The net proceeds of approximately $11,725
were used to retire debt and for working capital.
Supplemental diluted net income per share for 1996 and 1995, based on net
income after adjustment for dividends on preferred stock and the after tax
effect of interest expense on debt repaid with proceeds of the above
offerings, and on the weighted average shares of common stock outstanding
for 1996 and 1995, giving effect to the number of shares sold in the
offerings, the proceeds of which were used to repay such preferred stock
and debt, is as follows assuming the transactions were effective on
January 1, 1995:
1996 1995
Net income, as adjusted $ 27,526 $ 18,072
========== ==========
Diluted net income per share $ 1.39 $ 0.98
========== ==========
Weighted average shares outstanding,
assuming dilution 19,868,292 18,364,945
========== ==========
7. STOCK PLANS
Dealership Stock Option Plan -
- During 1995, the Company's Board of Directors approved the
Dealership Stock Option Plan of Cavalier Homes, Inc. (the "Dealer
Plan"), under which an aggregate of 562,500 shares of the Company's
common stock may be issued to the eligible independent dealerships
(as defined in the Dealer Plan) at a price equal to the fair market
value of the Company's common stock as of a date during the calendar
quarter determined by the plan administrator for which such option is
to be granted. Options granted under the Dealer Plan are immediately
exercisable and expire three years from the grant date. Since these
options have been granted to persons other than employees, the
Company adopted the recognition and measurement provisions of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), for Dealer Plan options
granted after December 15, 1995.
Employee and Director Plans:
- The Company adopted and the shareholders approved the 1996 Key
Employee Stock Incentive Plan (the "1996 Plan") which provides for
both incentive stock options and non-qualified stock options.
Additionally, the 1996 Plan provides for stock appreciation rights
and awards of both restricted stock and performance shares. Options
are granted at prices and terms determined by the compensation
committee (or, in certain circumstances, a separate sub-committee) of
the Board of Directors. As of December 31, 1997, the aggregate number
of shares available under the 1996 Plan was 1,461,701 (including
57,965 shares canceled from the Company's 1993 Non-qualified Stock
Option Plan and 471,200 shares made available in connection with the
Belmont merger). On January 1 of each year, an additional 1.5% of the
then outstanding common stock becomes available for grant. Options
granted under the 1996 Plan generally expire ten years from the date
of grant.
- During 1996, the Company further amended the 1993 Amended and
Restated Non-employee Directors Plan (the "1993 Non-employee
Directors Plan") to provide for the issuance of stock options, at
fair market value on the date of grant, to non-employee directors to
acquire up to 625,000 shares of common stock. Options are generally
granted upon a directors initial election to the Board and
automatically on an annual basis thereafter. Options granted under
this plan are generally exercisable after six months from the date of
grant and must be exercised within ten years from such date, except
under certain conditions.
- During 1996, the Company adopted the Cavalier Homes, Inc. Employee
Stock Purchase Plan under which an aggregate of 625,000 shares of the
36
<PAGE>
Company's common stock may be issued to eligible employees (as
defined) at a price equal to the lesser of 85% of the market price of
the stock as of the first day (January 1 or July 1) or last day (June
30 or December 31) of the Payment Periods (as defined). Employees may
elect to have a portion of their compensation withheld, subject to
certain limits, to purchase the Company's common stock.
Compensation expense recorded in connection with these plans for the years
ended December 31, 1997 and 1996 was not material.
On July 25, 1996, substantially all employee stock options granted in 1996
at prices between $15.40 and $16.60 were repriced to an exercise price of
$13.60. On January 17, 1997, substantially all employee stock options then
exerciseable at a price of $12.00 or higher were repriced to an exercise
price of $10.625. In addition, on January 17, 1997, an option issued under
the 1993 Non-employee Director's Plan to purchase 25,000 shares at $15.40
per share was canceled and reissued for 17,250 shares at $10.625 per
share.
The Company has adopted the Cavalier Homes, Inc. Dividend Reinvestment and
Stock Purchase Plan, under which the Company may issue an aggregate of
200,000 shares of the Company's common stock to eligible participants (as
defined). Participants in the Plan may purchase additional shares of the
Company's common stock by reinvesting the cash distributions on all, or
part, of their shares, or by investing both their cash distributions and
optional cash payments. The purchase price of the stock will be the higher
of 95% of the average daily high and low sale prices of the Company's
common stock on the four trading days including and preceding the
Investment Date (as defined) or 95% of the average high and low sales
prices on the Investment Date.
The Company applied Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its employee and director plans. Accordingly, no compensation expense
has been recognized for these plans except where the exercise price was
less than the fair value on the date of grant. Had compensation cost been
determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS 123, the
Company's net income and net income per share would approximate the pro
forma amounts below:
1997 1996 1995
Net income:
As reported $ 10,247 $ 27,479 $ 17,630
Pro forma $ 8,661 $ 24,888 $ 17,515
Basic net income per share:
As reported $ 0.52 $ 1.42 $ 1.06
Pro forma $ 0.44 $ 1.29 $ 1.05
Diluted net income per share:
As reported $ 0.51 $ 1.39 $ 1.03
Pro forma $ 0.43 $ 1.26 $ 1.03
The fair value of options granted were estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
1997 1996 1995
Dividend yield 1.13 % 0.66 % 1.35 %
Expected volatility 0.44 % 0.41 % 0.43 %
Risk free interest rate 6.12 % 5.99 % 6.50 %
Expected lives 3.0 years 3.0 years 3.2 years
SFAS 123 does not apply to awards prior to 1995. The effects of applying
SFAS 123 in this pro forma disclosure may not be indicative of future
amounts, and additional awards in future years are anticipated.
With respect to options exercised, the income tax benefits resulting from
compensation expense allowable under federal income tax regulations in
excess of the expense reflected in the Company's financial statements have
been credited to additional paid-in-capital. These benefits, which totaled
$-0- (1997), $3,692 (1996), and $281 (1995), represent a noncash financing
transaction for purposes of the consolidated statements of cash flows.
37
<PAGE>
Information regarding all of the Company's stock option plans is
summarized below:
<TABLE>
<S> <C> <C> <C>
Weighted
Weighted Average
Average Fair Value
Shares Exercise Price At Grant Date
Shares under option:
Outstanding at January 1, 1995 1,206,854 $ 4.17
Granted:
Price = Fair Value 183,049 6.39 $ 2.24
Price < Fair Value 22,299 8.73 2.77
Exercised (174,804) 3.99
Cancelled (43,941) 7.09
------------
Outstanding at December 31, 1995 1,193,457 $ 4.51
Granted:
Price = Fair Value 1,640,833 14.42 $ 4.73
Price < Fair Value 28,833 13.70 3.75
Exercised (912,083) 4.92
Cancelled (489,431) 15.90
------------
Outstanding at December 31, 1996 1,461,609 $ 11.76
Granted at Fair Value 858,425 10.61 $ 3.52
Exercised (1,000) 4.27
Cancelled (564,420) 13.75
------------
Outstanding at December 31, 1997 1,754,614 $ 10.56
============ =========
Options exercisable as of December 31, 1997 1,536,986 $ 10.37
============ =========
Options exercisable as of December 31, 1996 649,947 $ 10.17
============ =========
Options exercisable as of December 31, 1995 1,076,235 $ 4.25
============ =========
</TABLE>
Stock options available for future grants at December 31, 1997 were
1,197,516 under all of the Company's various stock option plans.
38
<PAGE>
The following table summarizes information concerning stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$0.55 - $4.27 219,421 6.19 $ 4.00 207,833 $ 4.00
$4.43 - $10.50 218,989 7.27 8.08 173,989 7.95
$10.63 765,249 9.05 10.63 765,249 10.63
$11.25 - $13.33 273,495 7.34 13.05 116,055 12.70
$13.60 - $16.60 277,460 7.92 15.06 273,860 15.06
--------- ---------
$0.55 - $16.60 1,754,614 8.02 $ 10.56 1,536,986 $ 10.37
========= ======== ======== ========= ========
</TABLE>
8. INCOME TAXES
Provision for income taxes consist of:
1997 1996 1995
Current:
Federal $ 9,574 $ 15,456 $ 10,904
State 921 2,258 1,223
--------- --------- --------
10,495 17,714 12,127
--------- --------- --------
Deferred:
Federal (2,368) (712) (777)
State (35) (295) (182)
--------- --------- --------
(2,403) (1,007) (959)
--------- --------- ---------
Total $ 8,092 $ 16,707 $ 11,168
========= ========= =========
Total income tax expense for 1997, 1996, and 1995 is different from the
amount that would be computed by applying the expected federal income tax
rate of 35% to income before income taxes. The reasons for this difference
are as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Income tax at expected federal income tax rate $ 6,419 $ 15,465 $ 9,941
State income taxes, net of federal tax effect 651 1,810 1,168
Non-taxable life insurance proceeds (525) (655)
Non-deductible operating expenses 387 107 171
Effect of graduated tax rates (121)
State jobs tax credits (40) (471) (344)
Non-deductible merger related expenses 1,085
Other 115 451 353
------- ------- -------
$ 8,092 $ 16,707 $ 11,168
======= ======= =======
</TABLE>
39
<PAGE>
Deferred tax assets and liabilities are based on the expected future tax
consequences of temporary differences between the book and tax bases of
assets and liabilities. The approximate tax effects of temporary
differences at December 31, 1997 and 1996 were as follows:
1997 1996
------------------------
Assets (Liabilities)
------------------------
Current differences:
Warranty expense $ 4,058 $ 3,358
Inventory capitalization 512 463
Allowance for losses on receivables 939 666
Accrued expenses 1,132 1,525
Other 599 470
--------- ---------
$ 7,240 $ 6,482
========= =========
Noncurrent differences:
Depreciation and basis differential
of acquired assets $ (1,796) $ (1,815)
Goodwill (726) (534)
Merger related expenses 1,331
Other 894 407
--------- ---------
$ (297) $ (1,942)
========= =========
Cash paid for income taxes for the years ended December 31, 1997, 1996 and
1995 was $10,632, $12,387 and $10,055, respectively.
9. EMPLOYEE BENEFIT PLANS
The Company has self-funded group medical plans which are administered by
third party administrators. The Plans have reinsurance coverage limiting
liability for any individual employee loss to a maximum of $75, with an
aggregate limit of losses in any one year based on the number of covered
employees. Incurred claims identified under the Company's incident
reporting system and incurred but not reported claims are funded or
accrued based on estimates that incorporate the Company's past experience,
as well as other considerations such as the nature of each claim or
incident, relevant trend factors and advice from consulting actuaries. The
Company has established self insurance trust funds for payment of claims
and makes deposits to the trust funds in amounts determined by consulting
actuaries. The cost of these plans to the Company was $5,067, $2,893 and
$2,682 for years ended December 31, 1997, 1996 and 1995, respectively.
The Company sponsors employee 401(k) retirement plans covering all
employees who meet participation requirements. Employee contributions are
limited to a percentage of compensation as defined in the Plans. The
amount of the Company's matching contribution is discretionary as
determined by the Board of Directors. Company contributions amounted to
$545, $420 and $375 for the years ended December 31, 1997, 1996 and 1995,
respectively.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases:
Five of the Company's manufacturing facilities and one component
distribution center are leased under separate operating lease agreements
(the "Related Leases") with partnerships or companies whose owners are
certain officers, directors or stockholders of the Company. The Related
Leases require monthly payments ranging from $4 to $22 and provide for
lease terms ending from July 1998 to March 2001 as well as renewal option
periods. The Related Leases also contain purchase options whereby the
Company can purchase the respective manufacturing facility for amounts
ranging from $875 to $1,900 at any time during the lease terms.
The Company also leases three other manufacturing facilities under
operating leases with unrelated parties. These leases currently require
monthly payments ranging from $3 to $14 and provide for lease terms ending
from March 1999 to June 2017 as well as renewal option periods. The
Company has the option under one of these leases to (i) cancel the lease
at any time after October 2001 with a one year notice and (ii) purchase
the manufacturing facility for $995 at any time during the lease term. The
Company also has the option under two of these leases to cancel the lease
after the first five years with 180 days and twelve months notice,
respectively.
The Company leases delivery trucks from some of its drivers who deliver
homes for dealers. Rentals for these trucks are based on a rate per mile
and the leases are cancelable by either party upon thirty days notice.
Rent expense under these leases was approximately $2,305, $3,140, and
$2,647 for the years ended December 31, 1997, 1996, and 1995,
respectively.
40
<PAGE>
Future minimum rents payable under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December
31, 1997 are as follows:
Year Ending December 31,
1998 $ 1,087
1999 754
2000 569
2001 235
2002 149
Thereafter 441
--------
Total $ 3,235
========
Total rent expense was $1,418, $1,242 and $1,044 for the years ended
December 31, 1997, 1996 and 1995, respectively, including rents paid to
related parties of $817 (1997), $765 (1996) and $723 (1995).
Contingent Liabilities and Other:
a. It is customary practice for companies in the manufactured housing
industry to enter into repurchase and other recourse agreements with
lending institutions which have provided wholesale floor plan
financing to dealers. Substantially all of the Company's sales are
made to dealers located primarily in the southeast, southwest and
midwest regions of the United States and are pursuant to repurchase
agreements with lending institutions. These agreements generally
provide for repurchase of the Company's products from the lending
institutions for the balance due them in the event of repossession
upon a dealer's default. Although the Company is contingently
liable for an amount estimated to be $158,000 under these agreements
as of December 31, 1997, such contingency is mitigated by the fact
that (i) sales of manufactured homes are spread over a relatively
large number of dealers; (ii) the price the Company is obligated to
pay under such repurchase agreements generally declines over the
period of the agreement; and (iii) the Company may be able to reduce
its losses by the resale value of the homes which may be required to
be repurchased. The Company has an allowance for losses of $1,175
(1997) and $837 (1996) based on prior experience and current market
conditions. Management expects no material loss in excess of the
allowance.
b. Under the insurance plans described in Note 2, the Company is
contingently liable at December 31, 1997 for future retrospective
premium adjustments up to a maximum of approximately $5,700 in the
event that additional losses are reported related to prior years.
c. The Company is engaged in various legal proceedings that are
incidental to and arise in the course of its business. Certain of
the cases filed against the Company and other companies engaged in
businesses similar to the Company allege, among other things, breach
of contract and warranty, product liability, personal injury and
fraudulent, deceptive or collusive practices in connection with
their businesses. These kinds of suits are typical of suits that
have been filed in recent years, and they sometimes seek
certification as class actions, the imposition of large amounts of
compensatory and punitive damages and trials by jury. Courts have
certified several of these types of cases as class actions recently,
and many of these types of cases have resulted in large damage
awards, especially large punitive damage awards. In the opinion of
management, the ultimate liability, if any, with respect to the
proceedings in which the Company is currently involved is not
presently expected to have a material adverse effect on the Company.
However, the potential exists for unanticipated material adverse
judgments against the Company.
11. INDUSTRY SEGMENT INFORMATION
The Company's primary activities are the design, production and wholesale
sale of manufactured homes to a system of independent dealers. The Company
also offers retail financing of its homes through its exclusive
independent dealer network. For purposes of segment reporting, corporate
41
<PAGE>
assets consist primarily of cash, certain property and equipment and other
investments. Operating profit is considered to be income before general
corporate expenses, interest and income taxes.
Financial information for these segments is summarized in the following table:
<TABLE>
<S> <C> <C> <C> <C>
General
Financial Corporate
Manufacturing Services (Unallocated) Total
Year ended December 31, 1997:
Revenues $ 555,842 $ 5,346 $ 561,188
Operating income (loss) 24,380 2,043 $ (9,342) 17,081
Identifiable assets 149,893 51,843 9,818 211,554
Depreciation and amortization 7,166 208 118 7,492
Capital expenditures 9,515 265 406 10,186
Year ended December 31, 1996:
Revenues $ 573,838 $ 3,333 $ 577,171
Operating income (loss) 41,719 1,257 $ (2,129) 40,847
Identifiable assets 151,594 38,175 6,618 196,387
Depreciation and amortization 5,588 129 43 5,760
Capital expenditures 15,669 196 241 16,106
Year ended December 31, 1995:
Revenues $ 420,790 $ 1,764 $ 422,554
Operating income (loss) 30,404 638 $ (2,334) 28,708
Identifiable assets 106,872 22,388 3,434 132,694
Depreciation and amortization 3,691 59 7 3,757
Capital expenditures 13,209 260 13 13,482
</TABLE>
* * * * *
42
<PAGE>
<TABLE>
<CAPTION>
CAVALIER HOMES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Increases Additions
Balance at Attributable Charged to Charged Balance at
Beginning of to Costs and to Other End of
Period Acquisitions Expenses Accounts Deductions Period
------------- ------------- ------------ ----------- -------------- --------------
Allowance for losses on Accounts
Receivable:
Year Ended December 31, 1997 $ 837 527 (189) $ 1,175
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 787 51 225 (226) $ 837
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 675 12 153 (53) $ 787
============== ============ ============ ============ ============== =============
Allowance for credit losses:
Year Ended December 31, 1997 $ 941 1,329 (998) $ 1,272
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 551 778 (388) $ 941
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 350 311 (110) $ 551
============== ============ ============ ============ ============== =============
Accumulated amortization of goodwill:
Year Ended December 31, 1997 $ 1,947 1,068 87 $ 3,102
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 1,165 782 $ 1,947
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 723 442 $ 1,165
============== ============ ============ ============ ============== =============
Accumulated amortization of
non-compete agreement:
Year Ended December 31, 1997 $ 221 56 $ 277
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 189 32 $ 221
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 122 67 $ 189
============== ============ ============ ============ ============== =============
Warranty reserve:
Year Ended December 31, 1997 $ 10,566 24,357 (23,223) $ 11,700
============== ============ ============ ============ ============== =============
Year Ended December 31, 1996 $ 7,265 1,176 21,380 (19,255) $ 10,566
============== ============ ============ ============ ============== =============
Year Ended December 31, 1995 $ 4,757 540 14,537 (12,569) $ 7,265
============== ============ ============ ============ ============== =============
</TABLE>
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For a description of the directors and executive officers of the Company, see
"Executive Officers and Principal Stockholders," and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 20, 1998, which are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For a description of the Company's executive compensation, see "Election of
Directors," "Executive Officers and Principal Stockholders," "Executive
Compensation" (other than the "Report of the Compensation Committee on
Executive Compensation" and the "Performance Graph"), "Compensation Committee
Interlock and Insider Participation," and "Certain Relationships and Related
Transactions" of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1998, which are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
For a description of the security ownership of management and certain beneficial
owners, see "Executive Officers and Principal Stockholders" of the Company's
Proxy Statement and for the Annual Meeting of Stockholders to be held on May 20,
1998, which are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of certain relationships and related transactions of the
Company, see "Compensation Committee Interlocks and Insider Participation," and
"Certain Relationships and Related Transactions" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 20, 1998,
which are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. The financial statements contained in this report and the page on
which they may be found are as follows:
Financial Statement Description Form 10-K Page No.
Independent Auditors' Report 24
Consolidated Balance Sheets as of December 31, 1997 25
and 1996
Consolidated Statements of Income for the years ended 27
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for 28
the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the years 29
ended December 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements 30
2. The financial statement schedules required to be filed with this
report and the pages on which they may be found are as follows:
No. Schedule Description Form 10-K Page No.
II Valuation and Qualifying Accounts 43
44
<PAGE>
3. The exhibits required to be filed with this report are listed
below. The Company will furnish upon request any of the exhibits listed upon
the receipt of $15.00 per exhibit, plus $.50 per page, to cover the cost to the
Company of providing the exhibit.
(3) Articles of Incorporation and By-laws.
* (a) The Amended and Restated Certificate of Incorporation of
the Company, filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, and the amendment thereto, filed as
Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 27, 1997.
* (b) The Certificate of Designation of Series A Junior
Participating Preferred Stock of Cavalier Homes, Inc. as filed with the Office
of the Delaware Secretary of State on October 24, 1996 and filed as Exhibit A to
Exhibit 4 to the Company's Registration Statement on form 8-A filed on October
30, 1996.
* (c) The Amended and Restated By-laws of the Company, filed as
Exhibit 3(d) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 27, 1997, and the amendment thereto filed as Exhibit 3(e) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 26,
1997.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
* (a) Articles four, six, seven, eight and nine of the Company's
Amended and Restated Certificate of Incorporation, as amended, included in
Exhibit 3(a) above.
* (b) Article II, Sections 2.1 through 2.18; Article III,
Sections 3.1 and 3.2; Article IV, Sections 4.1 and 4.3; Article VI, Sections 6.1
through 6.5; Article VIII, Sections 8.1 and 8.2; and Article IX of the Company's
Amended and Restated By-laws, included in Exhibit 3(c) above.
* (c) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
(10) Material contracts
* (a) Rights Agreement between Cavalier Homes, Inc. and
ChaseMellon Shareholder Services, LLC, filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated October 30, 1996.
* (b) Lease Agreement dated October 16, 1996, between Virginia
Cary L. McDonald and Star Industries, Inc. regarding the lease of the
manufacturing facility located in Robbins, North Carolina, filed as Exhibit
10(b) to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
* (c) Assignment and Assumption Agreement between Star
Industries, Inc. and Cavalier Industries, Inc. regarding the lease of the
manufacturing facility located in Robbins, North Carolina, filed as Exhibit
10(c) to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
* (d) Cavalier Homes, Inc. Amended and Restated Dividend
Reinvestment and Stock Purchase Plan, filed as Appendix A to the Company's
Registration Statement on Form S-3 (Registration No. 333-48111).
* ** (e) Cavalier Homes, Inc. Executive Incentive Compensation
Plan, filed as an Appendix to the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders held May 15, 1996.
* ** (f) Amendment to Cavalier Homes, Inc. Executive Incentive
Compensation Plan, filed as Exhibit 10(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 28, 1997.
* ** (g) Cavalier Homes, Inc. Employee Stock Purchase Plan, filed
as an Appendix to the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held May 15, 1996.
* ** (h) Cavalier Homes, Inc. Key Employee Stock Incentive Plan,
filed as an Appendix to the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held May 15, 1996.
45
<PAGE>
* ** (i) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, filed as Exhibit 10(i) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 28, 1997.
** (j) Amendment to Cavalier Homes, Inc. Key Employee
Stock Incentive Plan, effective December 30, 1997.
** (k) Amendment to Cavalier Homes, Inc. Key Employee Stock
Incentive Plan, effective January 23, 1998.
* ** (l) Amendments to the Cavalier Homes, Inc. Nonemployee
Directors Stock Option Plan, filed as an Appendix to the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders held May 15, 1996.
* ** (m) Amendment to Cavalier Homes, Inc. Amended and Restated
Nonemployee Directors Plan filed as Exhibit 10(i) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
** (n) Amendment to Cavalier Homes, Inc. Amended and Restated
Nonemployee Directors Plan.
* (o) Option and Stock Exchange Agreement by and among
Wheelhouse Structures, Inc., Shareholders of Wheel House Structures, Inc. and
Cavalier Homes, Inc. dated as of August 28, 1995, filed as Exhibit 2(a) to the
Company's Registration Statement on Form S-3 (Registration No. 333-00607), as
amended.
* (p) Dealership Stock Option Plan of Cavalier Homes, Inc.
filed as Exhibit 4(c) to the Company's Registration Statement on Form S-3 dated
September 11, 1995 (Registration No. 33-62487).
* (q) Lease Agreement between City of Mineral Wells, Texas and
Cavalier Homes of Texas dated February 27, 1996, filed as Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
* (r) Stock Purchase Agreement, as amended, by and among Astro
Mfg. Co., Inc., Shareholders of Astro Mfg. Co., Inc. and Cavalier Homes, Inc.
dated as of October 14, 1994, filed as Exhibit 2(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
* (s) Holdback agreement between Cavalier Homes, Inc. and
Raymond A. Peltcs, dated October 28, 1994, filed as Exhibit 2(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.
* (t) Revolving, Warehouse and Term Loan Agreement among the
Company and First Commercial Bank dated February 17, 1994, filed as Exhibit
10(e) to the Company's Annual Report on Form 10-K for the year ended December
31, 1993.
* (u) Amendments to the Revolving, Warehouse and Term Loan
Agreement among the Company and First Commercial Bank dated March 14, 1996,
filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(v) Commitment Letter from First Commercial Bank regarding a
two-year renewal to the Company's Loan Agreement.
* (w) Assumption Agreement dated as of January 2, 1997, by and
among the Company, First Commercial Bank and certain subsidiaries of the
Company, filed as Exhibit 10(q) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
* (x) Lease Agreement between Leonard Properties and Cavalier
Homes of Texas, Inc. dated February 17, 1994, and amendment No. 1 thereto, filed
as Exhibit 10(f) to the Company's Annual Report on Form 10-K, for the year ended
December 31, 1993, and 10(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended April 1, 1994, respectively.
* ** (y) Cavalier Homes, Inc. 1993 Amended and Restated
Nonqualified Stock Option Plan, filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
* ** (z) Cavalier Homes, Inc. 1988 Nonqualified Stock Option Plan,
as amended, filed as Exhibit 10(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
* (aa) Lease between Cavalier Homes of Alabama, Inc. and Robert
L. Burdick, John W Lowe, and Jerry F. Wilson (now Estate of Jerry F. Wilson), as
tenants in common, dated July 30, 1996, filed as Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
46
<PAGE>
* (bb) Assignment and Assumption Agreement between Cavalier Homes
of Alabama, Inc. and Cavalier Homes, Inc. regarding the lease between Cavalier
Homes of Alabama, Inc. and Robert L. Burdick, John W Lowe and Jerry F. Wilson
(now Estate of Jerry F. Wilson), filed as Exhibit 10(v) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
* (cc) Commercial Sub-Lease between Winston County Industrial
Development Association and Cavalier Homes of Alabama, Inc., dated March 5,
1993, filed as Exhibit 10(d) to the Company's Registration Statement on Form S-2
(Registration No. 33-59452).
* (dd) Assignment and Assumption Agreement between Cavalier
Homes of Alabama, Inc. and Cavalier Homes, Inc. regarding the Commercial Sub-
Lease between Cavalier Homes of Alabama, Inc. and Winston County Industrial
Development Association, filed as Exhibit 10(x) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
* (ee) Sub-lease Agreement with Option to Purchase between
Winfield Industrial Development Association, Inc. and Buccaneer Homes of
Alabama, Inc. dated May 9, 1994, filed as Exhibit 10(k) to Amendment No.1 to the
Company's Registration Statement on Form S-2 (Registration No. 33-78644).
* (ff) Lease Agreement with Option to Purchase between Marion
County Industrial Development Corporation, Inc. and Quality Housing Supply, Inc.
dated May 9, 1994, filed as Exhibit 10(l) to Amendment No. 1 to the Company's
Registration Statement on Form S-2 (Registration No. 33-78644).
* (gg) Lease Agreement dated March 1, 1997, between the City of
Winfield and Buccaneer Homes, a division of Cavalier Manufacturing, Inc., filed
as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
* (hh) Lease Agreement dated March 1, 1995, between the
Industrial Development Board of the City of Haleyville, Alabama and Wheel House
Properties, Inc., as assigned to and assumed by Star Industries, Inc. on January
11, 1996, and as further assigned to and assumed by Cavalier Manufacturing, Inc.
in December 1996, filed as Exhibit 10(bb) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
* (ii) Guaranty Agreement between SouthTrust Bank of Alabama and
Cavalier Homes, Inc. dated June 20, 1997, relating to guaranty payments by
Quality Housing Supply, LLC, filed as Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 27, 1997.
* (jj) Guaranty Agreement between AmSouth Bank of Alabama and
Cavalier Homes, Inc. dated June 11, 1997, relating to guaranty payments by Ridge
Point Manufacturing, filed as Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 27, 1997.
* (kk) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Lamraft, LP filed as Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 26, 1997.
* (ll) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Hillsboro Manufacturing, LP filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26, 1997.
* (mm) Guaranty Agreement between First Commercial Bank and
Cavalier Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
Woodperfect of Texas, LP filed as Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26, 1997.
* (nn) The Agreement and Plan of Merger dated August 14, 1997,
by and among the Company, Crimson Acquisition Corp. and Belmont Homes, Inc.,
filed as Exhibit 2 to the Company's Current Report on Form 8-K dated August 19,
1997.
* (oo) Amendment No. 1 to the Agreement and Plan of Merger
referenced in Exhibit 10(nn) above filed as Exhibit 10(e) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1997.
* ** (pp) Belmont Homes, Inc. 1994 Incentive Stock Plan, filed as
an Exhibit to the Belmont Homes, Inc. Registration Statement on Form S-1,
Registration No. 33-87868.
47
<PAGE>
* ** (qq) Belmont Homes, Inc. 1994 Non-Qualified Stock Option Plan
for Non-Employee Directors, filed as an Exhibit to the Belmont Homes, Inc.
Registration Statement on Form S-1, Registration No. 33-87868.
* (rr) $2,000,000 Line of Credit, dated January 11, 1995,
between Belmont Homes, Inc. and Colonial Bank, filed as an Exhibit to Belmont
Homes, Inc. Registration Statement on Form S-1, Registration No. 33-87868.
* (ss) $10,000,000 Revolving Credit Note, dated November 10,
1995, between Belmont Homes, Inc. and Bank of Mississippi, filed as an Exhibit
to Belmont Homes, Inc. Registration Statement on Form S-1, Registration
No. 33-80823.
* (tt) $10,000,000 Loan and Security Agreement, dated November
10, 1995, between Belmont Homes, Inc. and Bank of Mississippi, filed as an
Exhibit to Belmont Homes, Inc. Registration Statement on Form S-1, Registration
No. 33-80823.
* (uu) Stock Purchase Agreement dated October 25, 1996, among
Belmont Homes, Inc., Bellcrest Holding Co., Inc., G. Hiller Spann, Joe H. Bell,
James M. Birdwell and Delroy Dailey, Jr., filed as an exhibit to Belmont Homes,
Inc. Current Report on Form 8-K filed November 13, 1996, File No. 0-26142.
* (vv) First Amendment to Stock Purchase Agreement between
Belmont Homes, Inc. and the former shareholders of Bellcrest Homes, Inc. filed
as Exhibit 10.1 to Belmont Homes, Inc. Current Report on Form 8-K filed on
September 8, 1997.
* (ww) Form of Indemnification Agreement between Belmont Homes,
Inc. and the Directors and Executive Officers of Belmont Homes, Inc., filed as
Exhibit 10.2 to Belmont Homes, Inc. Current Report on Form 8-K filed on
September 8, 1997.
(xx) Agreement dated March 10, 1998, by and between Cavalier
Acceptance Corporation and Green Tree Financial Servicing Corporation.
(yy) Lease Agreement between the Industrial Developement Board
of the Town of Addison and Cavalier Homes of Alabama, a division of Cavalier
Manufacturing, Inc., dated November 1, 1997.
(zz) Commercial Sub-Lease and Agreement between Perfect
Panels, Inc. and Quality Housing Supply, Inc., dated July 1, 1996.
(11) Statement re Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23)(a) Consent of Deloitte & Touche LLP.
(23)(b) Consent of KPMG Peat Marwick LLP
(23)(c) Consent of Alday, Tillman, Giles & Wright, P. C.
(27) Amended Financial Data Schedule.
(99)(a) Independent Auditor's Report of KPMG Peat Marwick LLP
(99)(b) Independent Auditor's Report of Alday, Tillman, Giles
& Wright, P. C.
* Incorporated by reference herein.
** Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on December 11, 1997,
reporting as an Other Event a prospectus supplement with respect to the
institution of certain legal proceedings against Belmont Homes, Inc. and other
defendants.
48
<PAGE>
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
With the exception of historical factual information, the matters and statements
discussed, made or incorporated by reference in this Annual Report on Form 10-K
(including statements regarding trends in the industry and the business and
growth and financing strategies of the Company), as well as those statements
specifically designated with an asterisk (*), or which contain the words
"estimates," "projects," "intends," "believes," "anticipates," "expects," and
words of similar import, constitute forward-looking statements, are based upon
current expectations and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements and words involve known and unknown assumptions, risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements or words. Such assumptions, risks, uncertainties and factors include
those associated with general economic and business conditions; manufactured
housing and retail consumer financing industry trends, cyclicality and
seasonality; availability of consumer and dealer financing; changes and
volatility and uncertainty in interest rates; the sufficiency of reserves
established for installment contract receivables; warranty, product liability,
workers' compensation and other litigation arising in the course of the
Company's manufacturing and financial services business; contingent repurchase
and guaranty obligations; dependence on key personnel and favorable
relationships with employees; demographic changes; whether the current and
emerging generations of retirees will have the same interest in purchasing
manufactured homes; competition; raw material and labor costs and availability;
import protection and regulation; relationships with and dependence on
customers, distributors and dealers; changes in the business strategy or
development plans of the Company; the availability, terms and deployment of
capital; changes in or the failure to comply with government regulations; and
the inability or failure to identify or consummate successful acquisitions or to
assimilate the operations of any acquired businesses with those of the Company;
and other assumptions, risks, uncertainties and factors reflected from time to
time in the Company's filings with the Securities and Exchange Commission. The
Company expressly disclaims any obligation to update any forward-looking
statements as a result of developments occurring after the filing of this
report.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAVALIER HOMES, INC.
--------------------
Registrant
By:/s/ DAVID A. ROBERSON
------------------------
Its President
Date: March 30, 1998
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Signature Title Date
/s/ DAVID A. ROBERSON Director and Principal March 30, 1998
- --------------------------- Executive Officer
/s/ MICHAEL R. MURPHY Director and Principal March 30, 1998
- ---------------------------- Financial and Accounting Officer
/s/ BARRY DONNELL Chairman of the Board and Director March 30, 1998
- ----------------------------
/s/ THOMAS A. BROUGHTON, III Director March 30, 1998
- ----------------------------
/s/ JOHN W LOWE Director March 30, 1998
---------------------------
/s/ LEE ROY JORDAN Director March 30, 1998
- ----------------------------
/s/ GERALD R. MOORE Director March 30, 1998
- ----------------------------
/s/ A. DOUGLAS JUMPER, SR. Director March 30, 1998
- ----------------------------
/s/ MIKE KENNEDY Director March 30, 1998
- ----------------------------
50
<PAGE>
INDEX
Exhibit
Number
- -------
(10) Material Contracts
(j) Amendment to Cavalier Homes, Inc. Key
Employee Stock Incentive Plan, effective December 30, 1997.
(k) Amendment to Cavalier Homes, Inc. Key
Employee Stock Incentive Plan, effective January 23, 1998.
(n) Amendment to Cavalier Homes, Inc. Amended
and Restated Nonemployee Directors Plan.
(v) Commitment Letter from First Commercial Bank
regarding a two-year renewal to the Company's Loan Agreement.
(xx) Agreement dated March 10, 1998, by and
between Cavalier Acceptance Corporation and Green Tree Financial
Servicing Corporation.
(yy) Lease Agreement between the Industrial
Developement Board of the Town of Addison and Cavalier Homes of
Alabama, a division of Cavalier Manufacturing, Inc., dated
November 1, 1997.
(zz) Commercial Sub-Lease and Agreement between
Perfect Panels, Inc. and Quality Housing Supply, Inc., dated
July 1, 1996.
(11) Statement re Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23)(a) Consent of Deloitte & Touche LLP.
(23)(b) Consent of KPMG Peat Marwick LLP
(23)(c) Consent of Alday, Tillman, Giles & Wright, P. C.
(27) Amended Financial Data Schedule. (Filed as an EDGAR
Exhibit only)
(99)(a) Independent Auditor's Report of KPMG Peat Marwick LLP
(99)(b) Independent Auditor's Report of Alday, Tillman, Giles
& Wright, P. C.
51
Exhibit (10)(j)
AMENDMENT TO
CAVALIER HOMES, INC.
1996 KEY EMPLOYEE STOCK INCENTIVE PLAN
As directed by the Board of Directors of Cavalier Homes, Inc.
(the "Company") at its meeting held on December 30,1997, the Company's 1996 Key
Employee Stock Incentive Plan, as amended from time to time, is hereby further
amended in order to provide for the first paragraph of Section 4.1 and Sections
4.1.1 through a new Section 4.1.4 thereof to read as follows:
4.1 Number of Shares Available for Grants. The number of
Shares reserved for grants of Awards under the Plan shall be
equal to the sum of:
4.1.1 Six Hundred Thousand (600,000) Shares; and
4.1.2 one and one-half percent (1.5%) of the Shares
outstanding as of January 1, 1997 and each January 1
thereafter; and
4.1.3 such number of Shares reserved for issuance under the
Prior Plans in excess of the number of Shares as to which
options have been awarded thereunder as of the Effective
Date including any Shares subject to options previously
granted under the Prior Plans which hereafter shall lapse,
expire, terminate or be canceled; and
4.1.4 such number of Shares as equals (i) the number of shares
of the common stock of Belmont Homes, Inc., ("Belmont Shares")
reserved at the effective time (the "Effective Time") of the
merger (the "Merger") of Crimson Acquisition Corp. ("Crimson")
with and into Belmont Homes, Inc. ("Belmont") for issuance
pursuant to ungranted options under the Belmont 1994 Incentive
Stock Plant (the "Belmont Stock Plan"), plus (ii) the number
of Belmont Shares subject to outstanding options under the
Belmont Stock Plan which lapse, terminate, expire or are
canceled following the Effective Time (pursuant to the express
terms of the options and the Belmont Stock Plan and not
pursuant to any action by the Company, Belmont or Crimson),
with each such numbers of Belmont Shares in each case being
multiplied by the exchange ratio in the Merger of 0.80.
/s/ BARRY B. DONNELL
------------------------------
Barry B. Donnell
Exhibit (10)(k)
AMENDMENT TO
CAVALIER HOMES, INC.
1996 KEY EMPLOYEE STOCK INCENTIVE PLAN
As directed by the Board of Directors of Cavalier Homes, Inc.
(the "Company") at its meeting held on January 23, 1998, the Company's 1996 Key
Employee Stock Incentive Plan, as amended from time to time, is hereby further
amended in order to provide for the first paragraph of Section 4.1 and Sections
4.1.1 through a new Section 4.1.4 thereof to read as follows:
4.1 Number of Shares Available for Grants. The number of
Shares reserved for grants of Awards under the Plan shall be
equal to the sum of:
4.1.1 Six Hundred Thousand (600,000) Shares; and
4.1.2 one and one-half percent (1.5%) of the Shares
outstanding as of January 1, 1997 and each January 1
thereafter; provided, however, that following the addition of
Shares under this provision that occurs on January 1, 2001,
this provision shall not thereafter permit the addition of
Shares to the Plan for the purpose of making Awards of
Options; and
4.1.3 such number of Shares reserved for issuance under
the Prior Plans in excess of the number of Shares as to
which options have been awarded thereunder as of the Effective
Date including any Shares subject to options previously
granted under the Prior Plans which hereafter shall lapse,
expire, terminate or be canceled; and
4.1.4 such number of Shares as equals (i) the number
of shares of the common stock of Belmont Homes, Inc.,
("Belmont Shares") reserved at the effective time (the
"Effective Time") of the merger (the "Merger") of Crimson
Acquisition Corp. ("Crimson") with and into Belmont Homes,
Inc. ("Belmont") for issuance pursuant to ungranted options
under the Belmont 1994 Incentive Stock Plant (the "Belmont
Stock Plan"), plus (ii) the number of Belmont Shares subject
to outstanding options under the Belmont Stock Plan which
lapse, terminate, expire or are canceled following the
Effective Time (pursuant to the express terms of the options
and the Belmont Stock Plan and not pursuant to any action by
the Company, Belmont or Crimson), with each such numbers of
Belmont Shares in each case being multiplied by the exchange
ratio in the Merger of 0.80.
/s/ BARRY B. DONNELL
-----------------------------
Barry B. Donnell
Exhibit (10)(n)
AMENDMENT TO
CAVALIER HOMES, INC.
1993 AMENDED AND RESTATED NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN
As directed by the Board of Directors of Cavalier Homes, Inc.
(the "Company") at its meeting held on January 23, 1998, the Company's 1993
Amended and Restated Non-Employee Directors Stock Option Plan, as amended from
time to time, is hereby further amended to change the date of the Annual Grant
(as defined therein) from January 15 of each year to January 2 of each year. To
effect such amendment, the second sentence of Section 6.1(b) thereof is hereby
amended to read as follows:
On January 2, 1998 and on each January 2 thereafter,
each director who is not an employee of the Company on such
date and who has served as a director of the Company during
the calendar year immediately preceding such date shall be
granted, effective as of such date, an Option to purchase
5,000 shares of Stock.
/s/ BARRY B. DONNELL
----------------------------
Barry B. Donnell
Exhibit (10)(v)
March 13, 1998
Cavalier Homes, Inc.
Highway 41 North and Cavalier Road
Post Office Box 300
Addison, Alabama 35540
Attention: Mr. Mike Murphy, Chief Financial Officer
Re: Amendment to Revolving Warehouse and Term Loan Agreement-
$7,000,000.00 Increase to Warehouse Loan and Term Loan(s) for
Cavalier Acceptance Corporation and $5,000,000 Increase to
Revolving Loan
Gentlemen:
Pursuant to a Revolving, Warehouse and Term Loan Agreement
dated as of February 17, 1994 as amended on March 14, 1996 ("Loan Agreement"),
by and among Cavalier Homes, Inc., certain of its Subsidiaries and Cavalier
Acceptance Corporation (collectively, the "Borrowers") and First Commercial Bank
("Lender"), we have made available to the Borrowers, jointly and severally, a
Revolving Loan of up to $5,000,000.00, and to Cavalier Acceptance Corporation
("Cavalier Acceptance") a Warehouse and Term Loan Facility of up to
$18,000,000.00 (the "$18,000,000.00 Loan").
This letter shall serve as our commitment and agreement with
you that, subject to the terms and conditions set forth herein, Lender will
agree to increase the maximum dollar amount available to the Borrowers under the
Revolving Loan, and to Cavalier Acceptance under the Warehouse Loan and Term
Loan facilities, and will agree to make certain other changes to the Loan
Agreement, all as specified herein. Unless otherwise defined in this letter,
capitalized terms herein will have the meanings given to them in the Loan
Agreement.
Our agreement set forth herein shall be subject to the
execution of definitive amendments to the Loan Agreement and such other loan
documentations as we and our counsel may require, and containing such terms and
conditions as we may reasonably require and as may be customary for such
agreements, and it is expressly understood and agreed that none of the
amendments and changes specified in this letter will become effective unless and
until all such definitive documents have been executed and all other conditions
to their effectiveness have been satisfied.
Subject to the foregoing and pursuant to the terms and
conditions hereinafter described, this will serve as our commitment to you as
follows:
1. Increase of Principal Availability: Article III of the
Loan Agreement will be amended to provide that the maximum amount of principal
available under the Warehouse Loan and the Term Loan(s), in the aggregate, shall
not exceed $25,000,000.00.
2. (a) Reduction of Term Rate: Section 3.6(B) of the
Loan Agreement will be further amended so that the Term Rate for future Term
Notes will be equal to 195 basis points (1.95%) above the Five Year Treasury.
<PAGE>
(b) Interest Options for Revolving Loans: Articles
II and III of the Loan Agreement will be amended so that the applicable interest
rate for the Revolving Loan and the Warehouse Loan will be equal to whichever of
the following rates shall, from time to time, be selected by the Borrower:
(i) the Prime Rate or (ii) Three-month (90 days) LIBOR plus 250 basis points
(2.50%).
3. Availability of Advances: Availability of advances
under the Revolving Loan and under the Warehouse Loan shall be extended to April
15, 2000. Article III of the Loan Agreement will be modified in order to
clarify that although Term Loans must be in an amount of at least $2,000,000.00,
such amount represents the minimum amount for such Term Loan(s) and that the
maximum amount of such loan may exceed such amount; provided, that the maximum
warehouse Loan and aggregate Term Loans may not exceed $25,000,000.00. Article
III will be further modified to convert the Warehouse Loan to a revolving line
of credit, with availability of advances limited by a Borrowing Formula.
The Borrowing Formula shall provide that the amount available
at any time shall be equal to the lesser of: (A) $25,000,000.00 minus the
outstanding Term Loan(s) or (B) the Warehouse Borrowing Base. The Warehouse
Borrowing Base shall be equal to: (A) 80% of the outstanding principal balance
of Eligible Contracts whose credit score is rated "A" or "B", and (B) 70% of the
outstanding principal balance of Eligible Contracts whose credit score is rated
"C"; provided, further, that no more than 15% of the total Borrowing Base may be
comprised of "C" rated Eligible Contracts.
4. Fees and Charges: In consideration of the Lender's
issuance of this letter, the Borrowers shall pay to Lender the following
commitment and utilization fees, each of which when paid shall be deemed fully-
earned and non-refundable:
(a) Cavalier Homes, Inc. shall pay to Lender a
commitment fee equal to one-quarter of one percent (.0025) of the Revolving Loan
Commitment ($25,000.00), and Cavalier Acceptance shall pay to Lender a
commitment fee equal to three-sixteenths of one percent (.001875) of its
$25,000,000.00 aggregate loan facilities ($46,875.00).
(b) The Borrowers shall pay to Lender a non-usage
fee equal to one-quarter of one percent (.00250) times the Unused Line Amount.
The Unused Line Amount will be the amount by which $10,000,000.00 exceeds the
average outstanding balance of the Revolving Loan for the preceding term. The
Unused Line Amount and non-usage fee shall be computed on April 15, 1999 for the
preceding 12 months ended April 15, 1999 and again at maturity for the preceding
12 months ended April 15, 2000. The non-usage fee shall be payable each May 15
following the April 15 computation date.
(c) Cavalier Acceptance shall pay to Lender a non-
usage fee equal to one-quarter of one percent (.00250) times the Unused
Commitment Amount. The Unused Commitment Amount shall be computed on April 15,
1999 and April 15, 2000, and shall be equal to the amount by which
$25,000,000.00 exceeds the average outstanding balance of the $25,000,000.00
facility during the preceding 12 months ended on April 15. The non-usage fee
shall be payable each May 15 following the April 15 computation date.
<PAGE>
The Borrowers shall further be jointly and severally
responsible for the payment of all legal costs or fees incurred by Lender in
connection with the preparation of the documentation necessary to provide for
the matters described in this letter. The Borrowers acknowledge and agree with
Lender that each of the fees described in this paragraph is a fair and
reasonable payment to be made by Borrowers to Lender on account of the loan
commitments provided herein, and each of the Borrowers understand that the
obligation to pay such fees shall be absolute and unconditional, regardless of
whether the transactions contemplated hereby are closed.
5. Joinder to Loan Agreement: It is acknowledged and
contemplated that each Subsidiary of Cavalier Homes, Inc. shall be a co-borrower
under the Loan Agreement, and Cavalier Homes, Inc. will cause each of its
Subsidiaries that are not presently parties to the Loan Agreement to execute
such documents as may be reasonably required by the Lender in order for such
Subsidiary to become a Participating Subsidiary under the Loan Agreement.
6. Amendments to Loan Agreement. The availability of the
increased funds to be provided to the Borrowers and to Cavalier Acceptance shall
be governed by and subject to all terms and conditions presently set forth in
the Loan Agreement, and including also such additional terms and provisions as
may be provided for in the amendment documents described in this letter, all as
may be required by Lender. Lender and Borrowers will enter into certain other
amendments to the Loan Agreement as may be required by Lender, and such
amendments shall specifically include, but not necessarily be limited to, the
following:
(a) Covenant 7.2(L) will be amended to increase
the maximum lease obligations from
$2,000,000.00 to $3,000,000.00.
(b) Covenant 7.2(U) will be amended to increase
the maximum aggregate capital expenditures
from $6,000,000.00 to $14,000,000.00.
(c) Covenant 7.2(H)(6) will be amended to
increase the permitted indebtedness from
$2,500,000.00 to $10,000,000.00.
7. Prepayment Penalty for Cavalier Acceptance Term Loans:
Section 3.5 of the Loan Agreement will be amended to further provide for
prepayment penalties in the event that Cavalier Acceptance should prepay the
Term Loans, with the prepayment penalty for prepayments occurring during the
first two (2) years of any such Term Loan(s) payable on the amount by which the
principal prepayments in the aggregate exceeds 10% of the amount of such Term
Loan(s), and with such penalty in the first two (2) years to be equal to two
percent (2%), and which penalty shall be reduced to 1% in the third year and
with no penalty occurring for subsequent prepayments.
<PAGE>
8. Opinion of Counsel: The Lender will be provided with
such opinion of counsel as it may request which verifies the authorization,
execution, delivery and enforcement of the Loan Documents, and pertaining to
such other matters as the Lender may require.
9. Adverse Change: The Lender's commitment described
herein shall terminate if any adverse change occurs in the financial condition
of Cavalier Acceptance or of Cavalier Homes, Inc.
This letter is not intended to, and does not, contain all of
the terms, provisions and conditions that may be included in the final loan
documents, which shall include, among other provisions, conditions that will
require that all representations and warranties made in the Loan Agreement shall
be true and correct as of the date of the closing, and providing further that no
Default or Event of Default under the Loan Agreement shall have occurred and be
continuing.
Unless accepted by you on or before March 13, 1998, this offer
will expire, and the various transactions described herein must be consummated
on or before April 15, 1998, or this commitment shall expire.
If the terms and conditions described herein are acceptable to
you, please indicate your acceptance by returning a signed copy of this letter
to me, together with the commitment fees of $71,875.00, not later than March 13,
1998.
We appreciate the opportunity to provide this financing for
you.
Very truly yours,
/s/ James D. Williams
------------------
James D. Williams
Vice President
<PAGE>
Accepted and agreed to this 13th day of March, 1998.
FOR ALL BORROWERS:
CAVALIER HOMES, INC.
By: /s/ MICHAEL R. MURPHY
----------------------------
Michael R. Murphy
Its: Chief Financial Officer
----------------------------
CAVALIER ACCEPTANCE CORPORATION
By: /s/ JERRY F. WILSON, JR.
----------------------------
Jerry F. Wilson, Jr.
Its: President
----------------------------
Exhibit (10)(xx)
MANUFACTURED HOME LOAN PURCHASE AGREEMENT
This MANUFACTURED HOME LOAN PURCHASE AGREEMENT, dated as of
March 10, 1998, is made by and between Green Tree Financial Servicing
Corporation, a Delaware corporation ("Green Tree") and Cavalier Acceptance
Corporation, an Alabama corporation ("CAC").
R E C I T A L S:
Green Tree and CAC, together with certain affiliated companies
of Cavalier and Green Tree, are parties to that certain Financing Alliance
Agreement dated as of February 17, 1998 (the "Financing Alliance Agreement"),
pursuant to which the parties have made arrangements with respect to, among
other things, the purchase or origination and sale by CAC of certain
Manufactured Housing Retail Finance Contracts to Green Tree (as used in this
agreement, capitalized terms that are used but not otherwise defined herein,
shall be used with the same meaning as given to them in the Financing Alliance
Agreement). This Agreement is made and entered into pursuant to Article 5 of the
Financing Alliance Agreement, pursuant to which Green Tree has agreed to
acquire, and CAC has agreed to sell, approximately $25 million of Manufactured
Housing Retail Finance Contracts presently held by CAC, excluding the Carved-Out
CAC Loans, and this Agreement shall further evidence and confirm the agreements
between Green Tree and CAC with respect to the Manufactured Housing Retail
Finance Contracts sold by CAC to Green Tree pursuant to Section 5.1 of the
Financing Alliance Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual promises contained herein, the parties hereto, intending to be
legally bound, do hereby agree as follows:
Section 1. Purchase and Sale of Contracts.
Subject to the terms and conditions herein, CAC hereby agrees
to sell, and Green Tree hereby agrees to purchase from CAC, all of the
Manufactured Housing Retail Finance Contracts (including all related lien
perfection instruments, guaranties, dealer agreements and related loan
documents) presently held by CAC which were first purchased by or originated by
CAC after December 31, 1995 and before February 28, 1998, and set forth on
Schedule 1 hereto (the "Contracts Sold Hereunder"), except that Green Tree does
not agree hereby to purchase any of the Carved-Out CAC Loans, and any CAC Loans
originated by CAC on and after the Effective Date of the Financing Alliance
Agreement shall be sold to Green Tree pursuant to Article 3 of the Financing
Alliance Agreement rather than pursuant to this Agreement. The conveyance of the
Contracts Sold Hereunder shall be consummated on March 13, 1998; provided that
all conditions precedent specified in Exhibit X hereto are satisfied (the
"Consummation Date").
Section 2. Price to be Paid.
(a) The Purchase Price for each of the Contracts Sold Hereunder
(individually, a "Contract") to Green Tree by CAC shall be, for each such
Contract, an amount equal to the sum of (i) the then-outstanding principal
balance owing on such Contract and (ii) any accrued but unpaid interest at the
applicable rate of interest on such Contract to and including the effective date
on which the Contracts Sold Hereunder are transferred to Green Tree and (iii) an
acquisition premium equal to the amount specified on Exhibit X hereto. The
Acquisition Premium shall be deemed fully earned by CAC upon conveyance of the
related Manufactured Housing Retail Finance Contract by CAC to Green Tree.
(b) Not later than thirty (30) days after the Consummation
Date, Green Tree shall recalculate the accrued interest for those Contracts Sold
Hereunder which are set forth on Exhibit A to Schedule 1 (the "Adjusted
Contracts") in order to recalculate the accrued interest on each of such
Contracts, and the resultant outstanding principal balance (the "Adjusted
Balance") for such Contracts, effective as of March 12, 1998, under the
assumption that each payment received on such Contracts should be applied
effective as of the scheduled date such payment was due. The Purchase Price for
each of the Adjusted Contracts shall be reduced by the difference, if any,
between the Adjusted Balance and the principal balance originally specified by
CAC for such Contract as of March 12, 1998 (the aggregate amount of reduction to
the Purchase Price is herein referred to as the "Adjustment Amount"). Cavalier
shall be furnished with the supporting data and calculations upon which Green
Tree has based its determination of the Adjustment Amount, and CAC shall have a
reasonable opportunity, of not more than ten (10) days, to audit and verify such
data. CAC and Green Tree shall thereupon agree upon a final determination as to
the Adjustment Amount, and CAC shall remit payment to Green Tree for such
Adjustment Amount within forty-eight (48) hours from agreement as to such
amount. Upon receipt from CAC of the Adjustment Amount, Green Tree shall modify
its records for the Adjusted Contracts to reflect the Adjusted Balance, and
should provide such notice thereof to the applicable obligors as may be deemed
appropriate under the circumstances. If for any reason Green Tree and CAC are
unable to agree upon the final Adjustment Amount for the Adjusted Contracts,
then such dispute shall be resolved, at either party's request, by arbitration
pursuant to the terms provided for in Section 7.13 of the Financing Alliance
Agreement.
Section 3. Designation of Loans.
The CAC Loans evidenced by the Contracts Sold Hereunder shall
be designated on Schedule 1 to this Agreement.
Section 4. Conveyance of Contracts.
Subject to the terms and conditions hereof, and subject to a
customary bill of sale and portfolio assignment with terms consistent with this
Agreement, CAC will sell and assign to Green Tree, and Green Tree will acquire
from CAC, without recourse or warranty other than as specifically provided for
or incorporated herein, the following:
(a) all right, title and interest of CAC in and
to the Contracts Sold Hereunder which are listed on Schedule 1 hereto, including
all agreements, instruments and certificates relating thereto (including all
related guaranties and all related Dealer Agreements);
(b) all right, title and interest of CAC in
the lien on and/or the security interest in the manufactured home (including
the related lien perfection instruments) granted pursuant to the applicable
Contracts Sold Hereunder;
(c) the interest of CAC in any proceeds of any
insurance policies to the extend that they relate to the Contracts Sold
Hereunder or the related manufactured home or obligors;
(d) the right to realize on any property
(including the right to receive future liquidation proceeds) that secured a
Contracts Sold Hereunder and has been repossessed by or on behalf of CAC or
Green Tree (without in any way obligating Green Tree to purchase any contracts
sold hereunder where the underlying collateral has been repossessed);
(e) rights and remedies under all dealer
agreements or other similar agreements with respect to the Contracts Sold
Hereunder; and
(f) all proceeds of the foregoing.
At the reasonable request of Green Tree, CAC will take or
cause to be taken such further action as necessary or appropriate to effect or
perfect the sale and conveyance made hereby, including the execution of such
instruments and documents as may be reasonably necessary or appropriate to
facilitate the sale and conveyance of the Contracts Sold Hereunder from CAC to
Green Tree, including UCC-1s in favor of Green Tree as secured party and obtain
releases of all other liens.
Section 5. Terms of Payment.
On the Consummation Date, Green Tree shall pay to CAC, by wire
transfer of immediately available funds to any account specified by CAC, an
amount equal to the aggregate Purchase Price for the Contracts Sold Hereunder.
Section 6. Documents to be Provided.
With respect to the conveyance by CAC of the Contracts Sold
Hereunder, CAC agrees to endorse and deliver such Contracts Sold Hereunder to
Green Tree on the Consummation Date by overnight mail (next business day)
addressed to Green Tree, 500 Landmark Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102 (Attn: Dave Liebgott), and to provide and execute such
additional documents and instruments as may reasonably be requested by Green
Tree and which are customarily provided in connection with similar transactions,
including but not limited to limited powers of attorney in such forms as Green
Tree may reasonably request from time to time. CAC agrees to provide such notice
to borrowers under Contracts Sold Hereunder as Green Tree may reasonably
request. From and after the consummation of the transactions contemplated
hereby, CAC shall hold any and all payments received by it with respect to a
Contract Sold Hereunder in trust for the benefit of Green Tree and shall
promptly remit such payment to Green Tree in accordance with such customary
procedures as the parties may establish.
Section 7. Representations and Warranties.
With respect to each of the Contracts Sold Hereunder, and the
applicable CAC Loan evidenced thereby, CAC represents and warrants as of the
date hereof to Green Tree that:
(a) each CAC Loan evidenced thereby meets and
satisfies each of the representations and warranties made by CAC in Section 3.10
of the Financing Alliance Agreement with respect to each Available CAC Loan,
except that (i) with respect to the representations and warranties made in
Sections 3.10(e), (g) and (h) of the Financing Alliance Agreement; and (ii)
in substitution for the representations and warranties made in Sections 3.10
(e), (g) and (h), CAC instead represents and warrants solely that none of the
Contracts Sold Hereunder evidence Carved-Out CAC Loans;
(b) each CAC Loan has been originated in
conformity in all material respects with the underwriting guidelines
incorporated as Exhibit A to the Financing Alliance Agreement;
(c) to the knowledge of CAC, each Contract has
been fully and properly executed by the parties thereto;
(d) the forms of Contract and related
documentation relating to each CAC Loan shall be similar in all material
respects to those previously provided to Green Tree;
(e) each CAC Loan purchased by Green Tree
constitutes the legal, valid and binding payment obligation of the related
borrower, is enforceable by the holder thereof in accordance with its terms,
subject to applicable bankruptcy and similar laws, equitable principles and
public policy considerations;
(f) as of the Consummation Date, CAC has taken
no action such that the CAC Loan has been amended, waived, altered or modified
in any respect, except pursuant to a document, instrument or writing included in
the related file;
<PAGE>
(g) to the knowledge of CAC, the CAC Loan is not
subject to any right of rescission, set off, counterclaim or defense, including
the defense of usury;
(h) CAC has good title to the Contracts Sold
Hereunder, free and clear of all liens except that in favor of First Commercial
Bank (the "Warehouse Lender"), which lien shall be released in full
contemporaneously with the consummation of the transaction contemplated hereby,
and subject to the Warehouse Lender's consent, CAC has the right to transfer the
Contracts Sold Hereunder;
(i) CAC has a first priority perfected
security interest in the manufactured home which secures each Contract Sold
Hereunder and there are no other nonconsensual liens of record on such
collateral, including liens for work, labor, materials or unpaid state or
federal taxes;
(j) all documents, including the Contracts
Sold Hereunder and the information contained therein, submitted or to be
submitted to Green Tree are true, complete, accurate, correct and genuine in all
material respects to CAC's best knowledge;
(k) all representations of the borrowers with
respect to the loans are true and correct to CAC's knowledge and all information
contained in the Contracts Sold Hereunder and the related documents is true,
accurate, correct, and genuine to CAC's knowledge;
(l) the proceeds of the Contracts Sold Hereunder
have not been used to acquire an interest in real estate and except as disclosed
to Green Tree, the obligations thereunder are not secured by an interest in real
estate;
(m) to the knowledge of CAC, the parties to
Contracts Sold Hereunder are not minors and have the legal capacity to contract;
(n) to the knowledge of CAC, the down payment
shown on each Contracts Sold Hereunder was paid in cash (and was not paid by the
Dealer), unless otherwise shown on the Contracts Sold Hereunder or the related
credit application and does not include any rebates;
(o) to the knowledge of CAC, the related credit
application for each Contracts Sold Hereunder is true and correct;
(p) the manufactured homes which are the subject
of the Contracts Sold Hereunder are each insured by individual or blanket
policies of insurance protecting against loss of or damage to the collateral in
such amounts as may be permitted by law, not to exceed the approximate principal
balance of the related Contract;
(q) any insurance premium or charges included in
the Contracts Sold Hereunder have been or will be paid to the applicable
insurance carrier, net of any lawful commissions that may be retained;
(r) where insurance coverages are included in
any Contracts Sold Hereunder, CAC will notify the applicable insurance carrier
of the assignment of the Contracts Sold Hereunder to Green Tree and request that
Green Tree be named as beneficiary or loss payee, as applicable;
(s) to the knowledge of CAC, no borrower or
guarantor under any Contracts Sold Hereunder has any defense, counterclaim or
right of set-off with respect thereto;
(t) the terms of the Contracts Sold Hereunder
have not been impaired, waived, altered or modified in any material respect by
CAC except by written instruments contained in the Contract file;
(u) to the knowledge of CAC, the Contracts Sold
Hereunder are not subject to any right of rescission;
(v) the Contracts Sold Hereunder are not Carved-
Out Loans;
(w) in connection with the purchase or
origination of each Contract, all applicable State, local and Federal laws and
regulations were observed and all necessary disclosures required by applicable
statutes and regulations were made by Originator or CAC, as the case may be,
including, but not limited to, the Truth-in-Lending Act (including right of
rescission requirements), the Real Estate Settlement Procedures Act, the Federal
Trade Commission Home Solicitation Rule, the Alabama Mini-Code, the Fair Housing
Act, the Fair Credit Reporting Act, the Home Mortgage Disclosure Act, and the
Equal Credit Opportunity Act, except for such matters that would not, as of the
Consummation Date, affect the validity and existence of the CAC Loans or give
rise to any valid defense to payment of the related Contract or to foreclose on
any lien securing such CAC Loan and each Contract complies with the applicable
state, local and federal laws;
(x) Representations and warranties shall survive
execution of this Agreement; and
(y) All Contracts Sold Hereunder, as listed on
Schedule I attached hereto, including all agreements, instruments, certificates,
guaranties, and rights under dealer agreements related thereto, have been
conveyed to Green Tree as of the Consummation Date or within thirty (30) days
thereafter.
Section 8. Repurchase Rights.
CAC agrees to repurchase any Contract Sold Hereunder which is
in breach of any representation or warranty made by CAC under Section 7 at a
price equal to the sum of the outstanding principal balance, acquisition premium
under this Agreement, accrued but unpaid interest, and any other relevant fee,
of such Contract (the "Repurchase Price"); provided that CAC shall have thirty
(30) days during which it may cure such breach, if possible under the law, and
to the reasonable satisfaction of Green Tree. Green Tree and CAC agree that the
sole remedy of Green Tree with respect to a breach of any representation or
warranty by CAC under Section 7 is the repurchase of the related Consumer Loan
by CAC at the Repurchase Price; provided further that after receipt by CAC of a
written request for repurchase from Green Tree stating in reasonable detail the
basis for such request and after the expiration of the thirty (30) day period
within which CAC may cure such breach (if possible to be cured), then if CAC
does not repurchase the related Contract within ten (10) business days
thereafter, CAC shall be liable for any reasonable attorneys fees and related
costs incurred by Green Tree in connection with the related Contract from and
after the date of the related repurchase request by Green Tree.
Section 9. Additional Representations and Warranties.
The representations, warranties and agreements of the parties
made in Sections 4.6 and 4.7 of the Financing Alliance Agreement are hereby
restated herein by the respective parties. CAC represents and warrants that it
had in effect, at the time a related Contract was acquired by CAC, all necessary
and appropriate federal, state and local licenses or permits required to
purchase the Contracts Sold Hereunder and, as of the date hereof, all such
licenses and permits necessary to sell the Contracts Sold Hereunder. Each party
represents to the other that the execution, delivery and performance of this
Agreement does not and will not result in a breach or constitute a default under
any material agreement or instrument to which it is a party or by which it may
be bound or affected, in the case of CAC subject to the consent of the Warehouse
Lender.
Section 10. Covenants.
CAC and Green Tree agree that the covenants and promises
provided for in Section 4.10 and 4.11 of the Financing Alliance Agreement,
pertaining to Transferred CAC Loans, shall apply similarly to the Contracts Sold
Hereunder. CAC agrees to take such actions as may reasonably be necessary under
applicable law, in consultation with Green Tree or as is otherwise requested by
Green Tree, to correct, at CAC's expense, any inadvertent errors that may have
occurred in the computation of interest or disclosure of APR under certain
Contracts Sold Hereunder.
Section 11. Miscellaneous.
Notices between the parties shall be in writing and will be
deemed given upon the terms and circumstances provided for the Financing
Alliance Agreement. The parties agree that Article 7 of the Financing Alliance
Agreement shall apply to this Agreement just as if expressly set forth herein,
including the agreement to arbitrate disputes provided for at Section 7.13 of
the Financing Alliance Agreement.
IN WITNESS WHEREOF, the parties have caused their respective
duly authorized representatives to sign below as of the date first above
written.
CAVALIER ACCEPTANCE CORPORATION
By: /s/ Jerry F. Wilson, Jr.
_________________________
Its: President
_________________________
Name: Jerry F. Wilson, Jr.
_________________________
GREEN TREE FINANCIAL SERVICING
CORPORATION
By:/s/ Joel H. Gottesman
_________________________
Its: Senior Vice President
and Secretary
_________________________
Name: Joel H. Gottesman
_________________________
- --------------------------------------------------------------------------------
Exhibit (10)(yy)
LEASE AGREEMENT
- --------------------------------------------------------------------------------
Dated November 1, 1997
By and between
THE INDUSTRIAL DEVELOPMENT BOARD OF THE TOWN OF ADDISON
and
CAVALIER HOMES OF ALABAMA, a division of
Cavalier Manufacturing, Inc. a Delaware corporation
- --------------------------------------------------------------------------------
The interest of The Industrial Development Board of the Town of Addison
in any rents, revenues and receipts derived by it under this Lease Agreement has
been assigned to First Commercial Bank, as Trustee under the Trust Indenture
dated as of November 1, 1997.
- --------------------------------------------------------------------------------
This Lease Agreement was prepared by Heyward C. Hosch of Walston, Wells,
Anderson & Bains, LLP, Financial Center, 505 20th Street North, Suite 500,
Birmingham, Alabama 35203
- --------------------------------------------------------------------------------
<PAGE>
STATE OF ALABAMA
WINSTON COUNTY
LEASE AGREEMENT
---------------
LEASE AGREEMENT dated as of November 1, 1997, between THE INDUSTRIAL
DEVELOPMENT BOARD OF THE TOWN OF ADDISON, a public corporation and
instrumentality under the laws of the State of Alabama (the "Issuer"), and
CAVALIER HOMES OF ALABAMA, a division of Cavalier Manufacturing, Inc., a
Delaware corporation (the "User").
Recitals
Pursuant to and for the purposes expressed in Division 1 of Article 4
of Chapter 54 of Title 11 of the Code of Alabama 1975, the Issuer and the User
have executed and delivered this Lease Agreement simultaneously with the
issuance and sale by the Issuer of its $2,000,000 Industrial Development Revenue
Bonds (Cavalier Homes of Alabama Project), dated November 1, 1997, under and
pursuant to that certain Trust Indenture dated as of November 1, 1997 from the
Issuer to First Commercial Bank, as trustee, to finance the acquisition,
construction and installation of a "project" within the meaning of the Enabling
Law, as more particularly described in said Trust Indenture.
NOW, THEREFORE, for and in consideration of the premises, and the
mutual covenants and agreements herein contained, the Issuer and the User hereby
covenant, agree and bind themselves as follows:
ARTICLE 1
---------
Definitions
-----------
For all purposes of this Lease Agreement:
(a) Capitalized terms used herein without definition shall have
the respective meanings assigned thereto in the Indenture.
(b) The following general rules of construction shall apply:
(1) The terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular.
1
<PAGE>
(2) All accounting terms not otherwise defined herein have
the meanings assigned to them, and all computations herein provided for
shall be made, in accordance with generally accepted accounting
principles. All references herein to "generally accepted accounting
principles" refer to such principles as they exist at the date of
application thereof.
(3) All references in this instrument to designated
"Articles", "Sections" and other subdivisions are to the designated
Articles, Sections and subdivisions of this instrument as originally
executed.
(4) The terms "herein", "hereof" and "hereunder" and other
words of similar import refer to this Lease Agreement as a whole and
not to any particular Article, Section or other subdivision.
(c) The following terms shall have the following meanings:
Abatement Agreement means that certain Abatement Agreement dated
January 28, 1997 among the User and the Issuer with respect to the abatement of
certain taxes with respect to the Project.
Additional Rental Payments shall mean the payments to be made pursuant
to Section 5.03.
Basic Rental Payments shall mean the Payments payable pursuant to
Section 5.02.
Bond Fund shall mean the fund established pursuant to Section 8.01 of
the Indenture.
Bond Guaranty shall mean that certain Bond Guaranty and Continuing
Disclosure Agreement dated November 1, 1997, executed by User in favor of the
Trustee.
Bond Payment Date shall mean each date on which any principal of,
premium (if any) or interest on the Bonds is due and payable (whether on the
maturity or due dates thereof, by call for optional or mandatory or
extraordinary redemption, or by acceleration).
Construction Fund shall mean the fund established pursuant to Section
7.02 of the Indenture.
Credit Documents shall mean collectively that certain Credit Agreement
dated November 1, 1997 between the Credit Obligor and the User and all
agreements, documents, guaranties, instruments, notes, notices, and other
writings executed and delivered by the User or any other person or persons which
evidence or provide security for the obligations of the User with respect to the
Letter of Credit, including any amendments or supplements to any thereof from
time to time entered into pursuant to the applicable provisions thereof, until a
Substitute Letter of Credit shall have been accepted by the Trustee, and
thereafter "Credit Documents" shall mean collectively all agreements, documents,
2
<PAGE>
instruments, notes, notices, and other writings which evidence or provide
security for the obligations of the User with respect to such Substitute Letter
of Credit.
Credit Obligor Mortgage shall mean that certain Mortgage, Assignment of
Leases and Security Agreement dated as of November 1, 1997 by the Issuer and the
User to the Credit Obligor as security for the obligations of the User to the
Credit Obligor under the Credit Documents.
Enabling Law shall mean Division 1 of Article 4 Chapter 54 of Title 11
of the Code of Alabama 1975.
Environmental Law shall mean and include all laws, rules, regulations,
ordinances, judgments, decrees, codes, orders, injunctions, notices and demand
letters of any Governmental Authority applicable to the User or the Project Site
(including the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, 42 U.S.C. Sections 9601, et seq.) relating to pollution
or protection of human health or the environment, including any relating to
Hazardous Substances.
Equipment shall have the meaning assigned in Demising Clause III of
Article 3.
Financing Documents shall mean the Indenture, the Lease Agreement, the
Bond Guaranty, the Credit Documents, and the Letter of Credit.
Governmental Authority shall mean any federal, state, county,
municipal, or other government, domestic or foreign, and any agency, authority,
department, commission, bureau, board, court or other instrumentality thereof.
Hazardous Substances shall mean and include all pollutants,
contaminants, toxic or hazardous wastes and other substances (including
asbestos, urea formaldehyde, foam insulation and materials containing either
petroleum or any of the substances referenced in Section 101(14) of CERCLA), the
removal of which is required or the manufacture, use, maintenance and handling
of which is regulated, restricted, prohibited or penalized by an Environmental
Law, or, even though not so regulated, restricted, prohibited or penalized,
might pose a hazard to the health and safety of the public or the occupants of
the property on which it is located or the occupants of the property adjacent
thereto.
Improvements shall have the meaning assigned in Demising Clause II of
Article 3.
Indenture shall mean that certain Trust Indenture dated as of November
1, 1997 between the Issuer and the Trustee as originally executed or as it may
from time to time be supplemented, modified or amended by one or more indentures
or other instruments supplemental hereto entered into pursuant to the applicable
provisions thereof.
3
<PAGE>
Indenture Indebtedness shall mean all indebtedness of the Issuer at the
time secured by the Indenture, including without limitation (i) all principal
of, premium (if any) and interest on the Bonds and (ii) all reasonable and
proper fees, charges and disbursements of the Trustee and Paying Agent for
services performed and disbursements made under the Indenture.
Internal Revenue Code shall mean whichever of the following shall be
applicable in the context: the Internal Revenue Code of 1954, as amended; the
Internal Revenue Code of 1986, as amended; and the transition rules of related
legislation.
Issuer shall mean The Industrial Development Board of the Town of
Addison, a public corporation under the laws of the State of Alabama, until a
successor shall have become such pursuant to the applicable provisions of the
Indenture and this Lease Agreement, and thereafter "Issuer" shall mean such
successor corporation.
Lease Agreement shall mean this instrument including any amendments or
supplements to such instrument from time to time entered into pursuant to the
applicable provisions thereof.
Lease Default shall have the meaning stated in Article 10 of this Lease
Agreement. A Lease Default shall "exist" if a Lease Default shall have occurred
and be continuing.
Lease Term means the duration of the leasehold estate granted in
Section 5.01 of this Lease Agreement.
Net Proceeds, when used with respect to any insurance or condemnation
award, means the gross proceeds from the insurance or condemnation award with
respect to which that term is used remaining after payment of all reasonable
expenses (including reasonable attorneys' fees and any extraordinary fee of the
Trustee) incurred in the collection of such gross proceeds.
Permitted Encumbrances means, as of any particular time, (i) the
Financing Documents, (ii) liens for taxes, assessments or other governmental
charges or levies not due and payable or which are currently being contested in
good faith by appropriate proceedings, (iii) utility, access and other easements
and rights of way, party walls, restrictions and exceptions that may be granted
or are permitted under this Lease Agreement, (iv) any mechanic's, laborer's,
materialman's, supplier's or vendor's lien or right or purchase money security
interest if payment is not yet due and payable under the contract in question,
(v) such minor defects, irregularities, encumbrances, easements, rights of way
and clouds on title as do not, in the opinion of an independent Counsel,
materially impair the Project for the purpose for which it was acquired or is
held by the Issuer, and (vi) such encumbrances, mortgages, and other matters
which appear of public record prior to the date of recording of this Lease
Agreement.
Project shall mean the Project Site, the Improvements and the
Equipment, as the same may at any time exist, and all other property and rights
referred to or intended so to be in Demising Clauses I through III, inclusive,
hereof.
4
<PAGE>
Project Costs shall mean all costs of acquiring, constructing,
equipping and improving the Project, including without limitation:
(1) the purchase price and related costs for the
acquisition of real property or any interest therein,
(2) the cost of labor, materials and supplies furnished or
used in the acquisition, construction and installation of the
Improvements and the costs of acquiring and installing the Equipment,
(3) acquisition, transportation and installation costs for
personal property and fixtures,
(4) fees for architectural, engineering and supervisory
services,
(5) expenses incurred in the enforcement of any remedy
against any contractor, subcontractor, materialmen, vendor, supplier or
surety,
(6) interest accruing on the Bonds until the Project is
placed in service,
(7) expenses incurred by the Issuer and the User in
connection with the financing of the Project including legal,
consulting and accounting fees,
(8) reimbursement to the User for any of the foregoing
costs, fees and expenses set forth in (1) through (7) above, paid by it
with its own funds.
Project Site shall mean the real property described in Demising Clause
I of Article 3.
Rental Payments shall mean collectively the Basic Rental Payments and
the Additional Rental Payments.
State shall mean the State of Alabama.
Trustee shall mean First Commercial Bank, until a successor Trustee
shall have become such pursuant to the applicable provisions of the Indenture,
and thereafter "Trustee" shall mean such successor.
Unimproved when used with reference to the Project Site shall mean any
part of the Project Site upon which no part of a building or other structure
rests.
User shall mean Cavalier Homes of Alabama, a division of Cavalier
Manufacturing, Inc., and its successors and assigns, and thereafter "User" shall
mean such persons.
5
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ARTICLE 2
---------
Representations
---------------
SECTION 2.01 Representations by the Issuer
-----------------------------
The Issuer makes the following representations
(a) The Issuer is duly incorporated under the provisions of the
Enabling Law and has the power to enter into the transactions contemplated by
this Lease Agreement and to carry out its obligations hereunder. The Issuer is
not in default under any of the provisions contained in its certificate of
incorporation, its by-laws, or in the laws of the State. By proper corporate
action the Issuer has duly authorized the execution and delivery of this Lease
Agreement, the Indenture, and the Bonds.
(b) The Issuer has determined that the issuance of the Bonds, the
acquisition, construction and equipping of the Project and the leasing of the
Project to the User will promote industry, develop trade and further the use of
the agricultural products and natural and human resources of the State and the
development and preservation of said resources.
(c) The Bonds will be issued and delivered contemporaneously with the
delivery of this Lease Agreement.
SECTION 2.02 Representations by the User
---------------------------
The User makes the following representations:
(a) The User is duly organized and validly existing as a corporation
under the laws of the State of Delaware, is duly qualified to do business in the
State of Alabama, is not in violation of any provisions of its documents of
organization or the laws of the State of Delaware or Alabama, has power to enter
into this Lease Agreement, and by proper action has duly authorized the
execution and delivery of this Lease Agreement.
(b) The User has the corporate power and authority to own its
properties, carry on the business in which it is presently engaged, and
consummate the transactions contemplated by the Financing Documents to which it
is a party.
(c) By proper corporate action the User has duly authorized the
execution, delivery and performance of the Financing Documents to which it is a
party and the consummation of the transactions contemplated therein.
6
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(d) The User has obtained all consents, approvals, authorizations and
orders of, and made all filings with, each Governmental Authority that are
required to be obtained or made by it as a condition to the execution and
delivery of the Financing Documents to which it is a party.
(e) The execution and delivery by the User of the Financing Documents
to which it is a party and the consummation by it of the transactions
contemplated therein will not conflict with, be in violation of, or result in a
default under, its articles of incorporation or bylaws, or any agreement,
contract, instrument, order, writ, decree or judgment to which the User is a
party or is subject.
(f) The Financing Documents to which the User is a party constitute
legal, valid and binding obligations of the User and are enforceable against the
User in accordance with the terms of such instruments, except as enforcement
thereof may be limited by (i) the exercise of judicial discretion and (ii)
bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors' rights, to the extent constitutionally applicable.
(g) There is no action, suit, proceeding, inquiry or investigation
pending before any Governmental Authority, or threatened against or affecting
the User or its properties, that (a) involves (i) the consummation of the
transactions contemplated by, or the validity or enforceability of, the
Financing Documents, (ii) its organization, (iii) the election or qualification
of its directors or officers, (iv) its powers, or (b) could have a materially
adverse effect upon the financial condition or operations of the User.
(h) The User is not an "investment company" or a company "controlled"
by an "investment company", as such terms are defined in the Investment Company
Act of 1940, as amended.
(i) The financing of the Project through the issuance of the Bonds
and the leasing of the Project to the User has induced the User to enlarge,
expand and improve existing operations in the State as provided in the Enabling
Law.
(j) The User intends to operate the Project for manufacturing,
production, assembling, processing, storing and distribution of such
agricultural, manufactured or mineral products as the User shall determine and
in such a manner that it will constitute a "project" within the meaning of the
Enabling Law.
(k) This Lease Agreement is necessary to promote and further the
financial and economic interests of the User and the assumption by the User of
its obligations hereunder will result in direct financial benefits to the User.
ARTICLE 3
---------
7
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Demising Clauses
----------------
The Issuer, for and in consideration of the rents, covenants and
agreements hereinafter reserved, mentioned and contained on the part of the User
to be paid, kept and performed, does hereby demise and lease to the User, and
the User does hereby lease, take and hire from the Issuer, the following
property:
I.
The real property described on Exhibit A hereto and all other
real property, or interests therein, acquired by the Issuer with
proceeds of the Bonds or with funds advanced or paid pursuant to this
Lease Agreement (the "Project Site"), together with all easements,
permits, licenses, rights-of-way, contracts, leases, tenements,
hereditaments, appurtenances, rights, privileges and immunities
pertaining or applicable to said real property.
II.
All buildings, structures and other improvements now or
hereafter constructed or situated on the Project Site, including
without limitation all buildings, structures and other improvements
constructed on the Project Site with proceeds of the Bonds or with
funds advanced or paid by the User pursuant to this Lease Agreement
(the "Improvements").
III.
The machinery, equipment, personal property and fixtures
described on Exhibit B attached hereto and all other machinery,
equipment, personal property and fixtures acquired with the proceeds of
the Bonds or with funds advanced or paid by the User pursuant to this
Lease Agreement, together with all personal property and fixtures
acquired in substitution therefor or as a renewal or replacement
thereof (the "Equipment").
SUBJECT, HOWEVER, to Permitted Encumbrances.
ARTICLE 4
---------
Acquisition of the Project
--------------------------
SECTION 4.01 Agreement to Acquire
--------------------
(a) Simultaneously with the delivery of this Lease Agreement the
Issuer shall cause the Bond proceeds to be deposited in the Construction Fund.
The Issuer shall cause the Bond proceeds to be advanced to the User by
withdrawal from the Construction Fund, in accordance with the requirements of
8
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the Indenture, for the payment of Project Costs at such times and in such
amounts as shall be directed by the User. The Bond proceeds shall be used
solely for the payment of Project Costs as provided in the Indenture.
(b) The User will acquire and construct the Project with all
reasonable dispatch and due diligence and will cause the Project to be placed in
service as promptly as practicable. The Issuer will not execute any contract or
purchase orders for the Project without the prior written consent of the User.
(c) Compliance with laws and regulations necessary to realize any
sales and use tax exemption with respect to the acquisition, construction and
equipping of the Project shall be the sole responsibility of the User and the
Issuer does not assume any responsibility or give any assurance with respect to
any possible exemption from sales and use taxes.
(d) The User may, with the prior written consent of the Credit
Obligor except as provided below, cause changes or amendments to be made in the
plans and specifications for such acquisition and construction of the Project,
provided (1) such changes or amendments will not change the nature of the
Project to the extent that it would not constitute a "project" as authorized by
the Enabling Law, and (2) such changes or amendments will not materially affect
the utility of the Project for its intended use. The User may, without the
consent of the Credit Obligor, make changes to the plans and specifications for
the Project which do not increase the total cost of the Project by more than
$100,000 in the aggregate for all such changes. The Issuer will make only such
changes or amendments in the plans and specifications for the acquisition and
construction of the Project as may be requested in writing by the User.
(e) The Issuer and the User shall from time to time each appoint by
written instrument an agent or agents authorized to act for each respectively in
any or all matters relating to the acquisition and construction of the Project
and payments to be made out of the Construction Fund. One of the agents
appointed by the User shall be designated its Project Supervisor. Either the
Issuer or the User may from time to time revoke, amend or otherwise limit the
authorization of any agent appointed by such party to act on such party's behalf
or designate another agent or agents to act on such party's behalf, provided
that there shall be at all times at least one agent authorized to act on behalf
of the Issuer, and at least one agent (who shall be the Project Supervisor)
authorized to act on behalf of the User, with reference to all the foregoing
matters. The Project Supervisor at any time designated by the User is hereby
irrevocably appointed as agent for the Issuer to issue and execute, for and in
the name and behalf of the Issuer and without any further approval of the board
of directors or any officer, employee or other agent thereof, a payment request
or requisition on the Construction Fund.
(f) In the event the proceeds derived from the sale of the Bonds are
insufficient to pay in full all Project Costs, the User shall be obligated to
complete the acquisition and construction of the Project at its own expense and
the User shall pay any such deficiency and shall save the Issuer whole and
harmless from any obligation to pay such deficiency. The User shall not by
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reason of the payment of such deficiency from its own funds be entitled to any
diminution in Rental Payments.
SECTION 4.02 No Warranty of Suitability of Issuer
------------------------------------
THE USER RECOGNIZES THAT SINCE THE PLANS AND SPECIFICATIONS FOR
ACQUIRING AND CONSTRUCTING THE PROJECT ARE FURNISHED BY IT, THE ISSUER MAKES NO
WARRANTY, EITHER EXPRESS OR IMPLIED, NOR OFFERS ANY ASSURANCES THAT THE PROJECT
WILL BE SUITABLE FOR THE USER'S PURPOSES OR NEEDS OR THAT THE PROCEEDS DERIVED
FROM THE SALE OF THE BONDS WILL BE SUFFICIENT TO PAY IN FULL ALL PROJECT COSTS.
SECTION 4.03 Pursuit of Remedies Against Vendors, Contractors and
----------------------------------------------------
Subcontractors and Their Sureties
- ---------------------------------
The User may, in its own name or in the name of the Issuer, prosecute
or defend any action or proceeding or take any other action involving any
vendor, contractor, subcontractor or surety under any contract or purchase order
for acquisition and construction of the Project which the User deems reasonably
necessary, and the Issuer hereby irrevocably appoints the User as its agent with
respect to any such action or proceeding and agrees that it will cooperate fully
with the User and will take all action requested by the User in any such action
or proceeding. Any amounts recovered by way of damages, refunds, adjustments or
otherwise in connection with the foregoing shall be paid into the Construction
Fund and applied as provided for funds on deposit therein. The User will pay all
costs, fees and expenses incurred which are not paid from the Construction Fund.
SECTION 4.04 Completion of the Project
-------------------------
(a) The completion of the Project shall be evidenced to the Trustee
by a certificate signed by the Project Supervisor on behalf of the User stating
that (1) construction of the Improvements has been completed in accordance with
the plans and specifications approved by the User, (2) the Equipment has been
acquired and installed in accordance with the User's instructions, (3) all
Project Costs have been paid, and (4) all facilities and improvements necessary
in connection with the Project have been acquired and installed and all costs
and expenses incurred in connection therewith have been paid. Notwithstanding
the foregoing, such certificate shall state that it is given without prejudice
to any rights against any vendor, contractor, subcontractor or other person not
a party to this Lease Agreement which exist at the date of such certificate or
which may subsequently come into being. The Issuer and the User will cooperate
in causing such certificate to be furnished to the Trustee.
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(b) After the delivery of the aforesaid certificate to the Trustee,
any moneys then remaining in the Construction Fund shall be transferred to the
Bond Fund and applied as provided therein.
ARTICLE 5
---------
Duration of Lease Term
and Rental Provisions
---------------------
SECTION 5.01 Duration of Term
----------------
The term of this Lease Agreement and of the lease herein made shall
begin on the date of the delivery of this Lease Agreement and, subject to the
provisions of this Lease Agreement, shall continue until midnight of November 1,
2007. The Issuer will deliver to the User possession of the Project on the
commencement date of the Lease Term, subject to the inspection and other rights
reserved in this Lease Agreement, and the User will accept possession thereof at
such time; provided, however, the Issuer will be permitted such possession of
the Project as shall be necessary and convenient for it to construct or install
any additions or improvements and to make any repairs or restorations required
or permitted to be constructed, installed or made by the Issuer pursuant to the
provisions hereof.
SECTION 5.02 Basic Rental Payments; Draws Under Letter of Credit
---------------------------------------------------
(a) On or before 10:00 a.m. (Birmingham, Alabama time) on each Bond
Payment Date, the User shall pay to the Trustee, for the account of the Issuer,
as Basic Rent for the use an occupancy of the Project, an amount equal to the
principal of, premium (if any) and interest on the Bonds due and payable on such
Bond Payment Date; provided, however, that (i) any amount already on deposit in
the Bond Fund on the due date of such Basic Rental Payment and available for the
payment of the principal of, premium (if any) and interest on the Bonds on such
Bond Payment Date shall be credited against the amount of such Basic Rental
Payment, and (ii) any amount drawn by the Trustee pursuant to the Letter of
Credit for the payment of the principal of, premium (if any) and interest on the
Bonds on such Bond Payment Date shall be credited against such Basic Rental
Payment.
(b) On each Bond Payment Date prior to 10:00 a.m. (Birmingham,
Alabama time) the Trustee shall, without making any prior claim or demand on the
User for the payment of Basic Rental Payments with respect to Bonds make a draw
on the Letter of Credit in an amount equal to the amount of principal of,
premium (if any) and interest on the Bonds due and payable on such Bond Payment
Date. The User shall receive a credit against Basic Rental Payments for the
amount so drawn.
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(c) The User hereby authorizes and directs the Trustee to draw moneys
under the Letter of Credit in accordance with the provisions of the Indenture
and this Lease Agreement to the extent necessary to pay the principal of,
premium (if any) and interest on the Bonds when due and payable pursuant to the
Indenture and the Letter of Credit.
(d) All Basic Rental Payments shall be made in funds immediately
available to the Trustee at its Principal Office on or before the related Bond
Payment Date.
(e) If any Basic Rental Payment is due on a day which is not a
Business Day, such payment may be made on the first succeeding day which is a
Business Day with the same effect as if made on the day such payment was due.
(f) The User acknowledges, covenants, and agrees that until the
Indenture Indebtedness is paid in full the User shall make Basic Rent Payments
in such amounts and at such times as shall be necessary to enable the Trustee to
pay in full in accordance with the Indenture the principal of, premium (if any)
and interest on the Bonds when and as the same becomes due and payable.
SECTION 5.03 Additional Rental Payments
--------------------------
(a) The User shall make Additional Rental Payments as follows:
(1) the acceptance fee of the Trustee and the annual (or other
regular) fees, charges and expenses of the Trustee and the Paying
Agent.
(2) any amount to which the Trustee may be entitled under
Section 13.07 of the Indenture; and
(3) the reasonable expenses of the Issuer incurred at the
request of the User, or in the performance of its duties under any of
the Financing Documents, or in connection with any litigation which may
at any time be instituted involving the Project, the Financing
Documents, or in the pursuit of any remedies under the Financing
Documents.
(b) All Additional Rental Payments shall be due and payable within 10
days after receipt by the User of an invoice therefor.
SECTION 5.04 Advances by Issuer or Trustee
-----------------------------
If the User shall fail to perform any of its covenants in this Lease
Agreement, the Issuer or the Trustee may, at any time and from time to time,
after written notice to the User if no Lease Default exists, make advances to
effect performance of any such covenant on behalf of the User. Any money so
advanced by the Issuer or the Trustee, together with interest at the base or
prime rate of the Trustee plus 2%, shall be paid upon demand.
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SECTION 5.05 Indemnity of Issuer, Trustee and Paying Agent
---------------------------------------------
(a) The User covenants and agrees to pay and to indemnify and hold
the Issuer and the Trustee (and each officer, director, employee, member and
agent of each thereof) harmless against, any and all liabilities, losses,
damages, claims or actions (including all reasonable attorneys' fees and
expenses of the Issuer and Trustee), of any nature whatsoever incurred by the
Issuer and the Trustee without gross negligence or willful misconduct on their
part arising from or in connection with their performance or observance of any
covenant or condition on their part to be observed or performed under any of the
Financing Documents, including without limitation, (i) any injury to, or the
death of, any person or any damage to property at the Project, or in any manner
growing out of or connected with the use, nonuse, condition or occupation of the
Project or any part thereof, (ii) any damage, injury, loss or destruction of the
Project, (iii) any other act or event occurring upon, or affecting, any part of
the Project, (iv) violation by the User of any contract, agreement or
restriction affecting the Project or the use thereof of which the User has
notice and which shall have existed at the commencement of the Lease Term hereof
or shall have been approved by the User, or of any law, ordinance or regulation
affecting the Project or any part thereof or the ownership, occupancy or use
thereof, (v) any violation of, or non-compliance of the Project Site with,
Environmental Laws, or the presence of Hazardous Substances now or hereafter on
or under or included in the Project Site and any investigation, clean up or
removal of, or other remedial action or response costs with respect to, any
Hazardous Substances now or hereafter located on or under or included in the
Project Site, or any part thereof, that may be required by any Environmental Law
or Governmental Authority (specifically including without limitation any and all
liabilities, damages, fines, penalties, response costs, investigatory or other
costs pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 et seq.) and
including without limitation claims alleging non-compliance with Environmental
Laws which seek relief under or are based on state or common law theories such
as trespass or nuisance, and (vi) liabilities, losses, damages, claims or
actions arising out of the offer and sale of the Bonds or a subsequent sale or
distribution of any of the Bonds, unless the same resulted from a representation
or warranty of the Issuer or the Trustee in any of the Financing Documents or
any certificate delivered by the Issuer or the Trustee pursuant thereto being
false or misleading in a material respect and such representation or warranty
was not based upon a similar representation or warranty of the User furnished to
the Issuer or the Trustee in connection therewith.
(b) The User hereby agrees that the Issuer and the Trustee shall not
incur any liability to the User, and shall be indemnified against all
liabilities, in exercising or refraining from asserting, maintaining or
exercising any right, privilege or power of the Issuer or the Trustee under any
of the Financing Documents if the Issuer or the Trustee as the case may be is
acting in good faith and without willful misconduct or in reliance upon a
written request by the User.
(c) If any indemnifiable party (whether the Issuer or the Trustee)
shall be obligated to pay any claim, liability or loss, and if in accordance
with all applicable provisions of this Section the User shall be obligated to
indemnify and hold such indemnifiable party harmless against such
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claim, liability or loss, then, in such case, the User shall have a primary
obligation to pay such claim, liability or loss on behalf of such indemnifiable
party and may not defer discharge of its indemnity obligation hereunder until
such indemnifiable party shall have first paid such claim, liability or loss and
thereby incurred actual loss.
(d) The covenants of indemnity by the User contained in this Section
shall survive the termination of this Lease Agreement with respect to events or
occurrences happening prior to or upon the termination of this Lease Agreement
and shall remain in full force and effect until the commencement of an action
with respect to any such event or occurrence shall be prohibited by law.
SECTION 5.06 Obligations of User Unconditional
---------------------------------
The obligation of the User to make all Rental Payments and all other
payments provided for herein and to perform and observe the other agreements and
covenants on its part herein contained shall be absolute and unconditional,
irrespective of any rights of set-off, recoupment or counterclaim it might
otherwise have against the Issuer. The User will not suspend or discontinue any
such payment or fail to perform and observe any of its other agreements and
covenants contained herein or terminate any of the Financing Documents, for any
cause whatsoever, including, without limiting the generality of the foregoing,
any acts or circumstances that may constitute an eviction or constructive
eviction, failure of consideration or commercial frustration of purpose, the
invalidity or unenforceability of the Bonds or any of the Financing Documents or
any provision thereof, the invalidity or unconstitutionality of the Enabling Law
or any provision thereof, any damage to or destruction of the Project or any
part thereof, the taking by eminent domain of title to or the right to temporary
use of all or any part of the Project, any failure of the Credit Obligor to make
a payment pursuant to the Letter of Credit or to reinstate the appropriate
amount thereof, any change in the tax or other laws or administrative rulings,
actions or regulations of the United States of America or of the State or any
political or taxing subdivision of either thereof, or any failure of the Issuer
to perform and observe any agreement or covenant, whether express or implied,
any duty, liability or obligation arising out of or in connection with this
Lease Agreement. Notwithstanding the foregoing, the User may, at its own cost
and expense and in its own name or in the name of the Issuer, prosecute or
defend any action or proceeding, or take any other action involving third
persons which the User deems reasonably necessary in order to secure or protect
its rights of use and occupancy and the other rights hereunder. The provisions
of the first and second sentences of this Section shall apply only so long as
any of the Bonds remains Outstanding.
SECTION 5.07 This Lease a Net Lease
----------------------
The User recognizes, understands and acknowledges that it is the
intention hereof that this Lease Agreement be a net lease and that as long as
any of the Bonds are Outstanding all Basic Rent be available for payment of the
principal of, premium (if any) and interest on the Bonds and
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that all Additional Rent shall be available for the purposes specified therefor.
This Lease Agreement shall be construed to effectuate such intent.
ARTICLE 6
Maintenance, Alterations, Replacements,
Taxes and Insurance
---------------------------------------
SECTION 6.01 Maintenance and Repairs, Alterations and Improvements,
------------------------------------------------------
Party Walls; and Liens; Utility Charges
- ---------------------------------------
(a) The User shall, at its own expense, (1) keep the Project in as
reasonably safe condition as its operations permit, (2) from time to time make
all necessary and proper repairs, renewals and replacements thereto, including
external and structural repairs, renewals and replacements, and (3) pay all gas,
electric, water, sewer and other charges for the operation, maintenance, use and
upkeep of the Project.
(b) The User may, at its own expense, make structural changes,
additions, improvements, alterations or replacements to the Improvements that it
may deem desirable, provided such structural changes, additions, improvements,
alterations or replacements do not change the character of the Project as a
"project" under the Enabling Law, and that such additions, improvements,
alterations or replacements will not adversely affect the utility of the Project
or substantially reduce its value. All such changes, additions, improvements,
alterations and replacements whether made by the User or the Issuer shall become
a part of the Project and shall be covered by this Lease Agreement.
(c) The User may connect or "tie-in" walls of the Improvements and
utility and other facilities located on the Project Site to other structures and
facilities owned or leased by it on real property adjacent to the Project Site.
The User may use as a party wall any wall of the Improvements which is on or
contiguous to the boundary line of real property owned or leased by it, and in
the event of such use, each party hereto hereby grants to the other a ten-foot
easement adjacent to any such party wall for the purpose of inspection,
maintenance, repair and replacement thereof and the tying in of new
construction. If the User utilizes any wall of the Improvements as a party wall
for the purpose of tying in new construction that will be utilized under common
control with the Project, the User may also remove any non-loadbearing wall
panel in the party wall; provided however, if the adjacent property ceases to be
operated under common control with the Project, the User shall, at its own
expense, install wall panels similar in quality to those that have been removed.
Prior to the exercise of any one or more of the rights granted by this
subsection (c), the User shall demonstrate to the reasonable satisfaction of the
Issuer and Trustee that the operation of the Project will not be adversely
affected by the exercise of such rights.
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(d) The Issuer shall also, upon request of the User, grant such
utility and other similar easements over, across or under the Project Site as
shall be necessary or convenient for the furnishing of utility and other similar
services to the Project or to real property adjacent to or near the Project Site
and owned or leased by the User; provided that such easements shall not
adversely affect the operation of the facilities forming a part of the Project.
SECTION 6.02 Removal of, Substitution and Replacement for Equipment
------------------------------------------------------
If the User in its sole discretion determines that any item of
Equipment has become inadequate, obsolete, worn-out, unsuitable, undesirable or
unnecessary in the operation of the Project, the User may remove such Equipment
from the Improvements or the Project Site and (on behalf of the Issuer) sell,
trade in, exchange or otherwise dispose of it without any responsibility or
accountability to the Issuer or the Trustee therefor, provided that the User
shall either:
(a) substitute and install in or on the Project Site other
personal property or fixtures which shall (1) have equal or greater
utility (but not necessarily the same value or function) in the
operation of the Project, (2) be free of all liens and encumbrances
except for purchase money liens or encumbrances reasonably acceptable
to the Trustee, (3) be the sole property of the Issuer, subject to the
demise hereof, (4) be held by the User on the same terms and conditions
as the items originally comprising the Equipment, and (5) not impair
the Project or change the nature of the Project as a "project" under
the Enabling Law; or
(b) forthwith upon such sale apply the price or amount
obtained upon the sale of such Equipment to the redemption of the
principal of the Bonds in accordance with the terms thereof.
SECTION 6.03 Installation of Machinery and Equipment Owned or Leased
-------------------------------------------------------
by the User or Subject to a Security Interest in Third Parties
- --------------------------------------------------------------
(a) The User, may, at its own expense, or permit any sublessee of the
Project to, at its own expense, install at the Project any machinery, equipment
or other personal property which will facilitate the operation of the Project.
Any such property which is installed and does not constitute a part of the
Project under the terms of this Lease Agreement shall be and remain the property
of the User or such sublessee and may be removed thereby at any time while no
Event of Default exists under this Lease Agreement; provided, that any damage to
the Project occasioned by such removal shall be repaired by such party at its
own expense.
(b) If (i) any machinery, equipment or other personal property is
leased by the User or the User shall have granted a security interest in any
such property in connection with the acquisition thereof by the User, (ii) such
property is installed or is located on the Project Site, and (iii) such property
does not constitute a part of the Project under the terms of this Lease
Agreement, then the lessor of such property or the party holding a security
interest therein, as the case may be, may remove such property from the Project
16
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Site even though an Event of Default may then exist hereunder or this Lease
Agreement may have been terminated following an Event of Default hereunder,
provided, that the foregoing permission to remove shall be subject to the
agreement by such lessor or secured party to repair at its own expense an
damage to the Project occasioned by such removal.
SECTION 6.04 Insurance
---------
(a) The User will take out and continuously maintain in effect the
following insurance with respect to the Project, paying as the same become due
all premiums with respect thereto:
(1) Insurance to the extent of the full insurable value of the
Project against loss or damage by fire, tornado, windstorm, flood and
other hazards and casualties, with uniform standard extended coverage
endorsement limited only as may be provided in the standard form of
extended coverage endorsement at the time in use in the State.
(2) Insurance against liability for bodily injury to or death
of persons and for damage to or loss of property occurring on or about
the Project or in any way related to the condition or operation of the
Project, in the minimum amounts of $1,000,000 for death of or bodily
injury to any one person, $3,000,000 for all death and bodily injury
claims resulting from any one accident, and $500,000 for property
damage.
(3) Flood insurance under the national flood insurance program
established by the Flood Disaster Protection Act of 1973, as at any
time amended, only during such times while the Project is eligible
under such program, in an amount at least equal to the principal amount
of the Bonds Outstanding or to the maximum limit of coverage made
available with respect to the Project under said Act, whichever is
less.
(4) Title insurance in an amount equal to the initial stated
amount of the Letter of Credit, insuring the mortgage on the Project
created by the Financing Documents subject to no liens and encumbrances
other than such encumbrances as shall be approved by the Trustee and
the Credit Obligor. Any proceeds of such title insurance shall be
applied, at the direction of the Credit Obligor, to cure the title
defect in respect of which such proceeds are made available or shall be
deposited with the Trustee and applied to the redemption of the Bonds
in accordance with the terms thereof.
(5) Use and occupancy insurance (or business interruption or
risk insurance) covering suspension or interruption of the User's
operations at the Project in whole or in part, with such exemptions as
are customarily imposed by insurers, covering a period of suspension or
interruption of at least six months with a minimum limit in an amount
equal to 100% of the maximum amount to be paid as Rental Payments and
other payments under Article 5 hereof during the then current or any
subsequent year.
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(6) During the period of acquisition and construction of any
part of the Project builders' risk insurance in the amount of the full
replacement value of the Project against all losses which are normally
covered by such builders' risk insurance. The User may satisfy its
obligations with respect to the builder's risk insurance by causing
such insurance to be carried by a construction contractor for any part
of the Project.
(b) All policies evidencing the insurance required by the terms of
the preceding paragraph shall be taken out and maintained in generally
recognized responsible insurance companies, qualified under the laws of the
State to assume the respective risks undertaken. All such insurance policies
shall name as either loss payee or additional insureds the Credit Obligor, the
Issuer and the Trustee (as their respective interests shall appear) and shall
contain, where appropriate, standard mortgage clauses providing for all losses
thereunder in excess of $50,000 to be paid to the Trustee; provided that all
losses (including those in excess of $50,000) may be adjusted by the User,
subject, in the case of any single loss in excess of $50,000, to the approval of
the Trustee. The User may insure under a blanket policy or policies.
(c) Each insurance policy required to be carried by this Section
shall contain, to the extent obtainable, an agreement by the insurer that (1)
the User may not, without the consent of the Credit Obligor, the Issuer and
Trustee, cancel such insurance or sell, assign or dispose of any interest in
such insurance, policy or any proceeds thereof, (2) such insurer shall notify
the Credit Obligor, the Issuer and the Trustee if any premium is not paid when
due or if any such policy is not renewed prior to the expiration thereof, and
(3) such insurer shall not materially amend or cancel any such policy except on
30 days' prior written notice to the Credit Obligor, the Issuer and the Trustee.
(d) The User shall deposit with the Trustee a certificate or
certificates of the respective insurers attesting the fact that all policies
evidencing the insurance required to be carried by this Section are in force and
effect. Upon the expiration of any such policy, the User shall furnish to the
Trustee evidence reasonably satisfactory to the Trustee that such policy has
been renewed or replaced by another policy or that there is no necessity
therefor under this Lease Agreement.
ARTICLE 7
---------
Provisions Respecting Damage,
Destruction and Condemnation
----------------------------
SECTION 7.01 Damage and Destruction
----------------------
(a) If no Lease Default shall have occurred and be continuing and the
Letter of Credit is in effect and the Credit Obligor has not dishonored any
draws thereunder and there has not been instituted insolvency proceedings with
respect to the Credit Obligor, then all Net Proceeds of insurance resulting from
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claims for losses in respect of damage to or destruction of the Project (in
whole or in part) shall be applied as provided in the Credit Obligor Mortgage.
(b) If no Lease Default shall have occurred and be continuing and the
Letter of Credit is not in effect, or if the Credit Obligor has dishonored any
draw thereunder or if there has been instituted insolvency proceedings with
respect to the Credit Obligor, then the following provisions shall apply in
event of damage to or destruction of the Project (in whole or in part):
(1) If the Project is destroyed (in whole or in part) or is
damaged the User shall continue to make Rental Payments and will
promptly give written notice of such damage and destruction to the
Trustee and the Issuer. All Net Proceeds of insurance resulting from
claims for such losses shall be paid to the Trustee and deposited in
the Construction Fund, whereupon (i) the User, or the Issuer at the
User's direction, shall proceed promptly to repair, rebuild or restore
the property damaged or destroyed to substantially the same condition
in which it existed prior to the event causing such damage or
destruction, with such changes, alterations and modifications
(including the substitution and addition of other property) as may be
desired by the User and as will not impair the operating unity or
productive capacity of the Project or its character as a "project"
under the Enabling Law, and (2) the Issuer shall cause withdrawals to
be made from the Construction Fund to pay the costs of such repair,
rebuilding or restoration, either on completion thereof or as the work
progresses. The balance (if any) of Net Proceeds remaining after the
payment of all of the costs of such repair, rebuilding or restoration
shall be applied to the redemption of Bonds in accordance with the
provisions thereof and of the Indenture, or, if none of the Bonds are
then Outstanding, shall be paid to the User.
(2) In the event the Net Proceeds are not sufficient to pay
in full the costs of repairing, rebuilding and restoring the Project as
provided in this Section, the User shall nonetheless complete the work
thereof and shall pay that portion of the costs thereof in excess of
the amount of said proceeds or shall pay to the Trustee for the account
of the Issuer the moneys necessary to complete said work. The User
shall not by reason of the payment of such excess costs (whether by
direct payment thereof or payment to the Trustee therefor) be entitled
to any reimbursement from the Issuer or any abatement or diminution of
the Rental Payments hereunder.
(3) Anything in this Section to the contrary
notwithstanding, if, as a result of such damage or destruction the User
is entitled to exercise an option to purchase the Project and duly does
so in accordance with the applicable provisions of Section 11.03
hereof, then neither the User nor the Issuer shall be required to
repair, rebuild or restore the property damaged or destroyed, and so
much (which may be all) of any Net Proceeds referable to such damage or
destruction as shall be necessary to provide for full payment of the
Indenture Indebtedness shall be paid to the Trustee and the excess
thereafter remaining (if any) shall be paid to the User.
19
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(c) If a Lease Default has occurred and is continuing, and the Letter
of Credit is not in effect or the Credit Obligor has dishonored any draw
thereunder or there has been instituted insolvency proceedings with respect to
the Credit Obligor, then all Net Proceeds of insurance resulting from claims for
losses in respect to damage to or destruction of the Project (in whole or in
part) shall be applied to the redemption of the Bonds in accordance with the
terms thereof.
SECTION 7.02 Condemnation
------------
(a) If no Lease Default shall have occurred and be continuing and the
Letter of Credit is in effect and the Credit Obligor has not dishonored any
draws thereunder and there has not been instituted insolvency proceedings with
respect to the Credit Obligor, then all Net Proceeds resulting from any taking
by eminent domain of the Project (in whole or in part) shall be applied as
provided in the Credit Obligor Mortgage.
(b) If no Lease Default shall have occurred and be continuing and the
Letter of Credit is not in effect, or if the Credit Obligor has dishonored any
draw thereunder or if there has been instituted insolvency proceedings with
respect to the Credit Obligor, then the following provisions shall apply in
event of any taking by eminent domain of the Project (in whole or in part):
(1) In the event that title to, or the temporary use of, the
Project or any part thereof shall be taken under the exercise of the
power of eminent domain and as a result thereof the User is entitled to
exercise an option to purchase the Project and duly does so in
accordance with the applicable provisions of Section 11.03 hereof, so
much (which may be all) of the Net Proceeds referable to such taking,
including the amounts awarded to the Issuer and the Trustee and the
amount awarded to the User for the taking of all or any part of the
leasehold estate of the User in the Project created by this Lease
Agreement, as shall be necessary to provide for full payment of the
Indenture Indebtedness shall be paid to the Trustee and the excess of
such Net Proceeds remaining (if any) shall be paid to the User.
(2) If as a result of such taking, the User is not entitled
to exercise an option to purchase the Project under Section 11.03
hereof, or, having such option, fails to exercise the same in
accordance with the terms thereof or notifies the Issuer and the
Trustee in writing that it does not propose to exercise such option,
the User shall be obligated to continue to make the Rental Payments and
the entire Net Proceeds hereinabove referred to shall, be paid to the
Trustee and applied in one or more of the following ways as shall be
directed in writing by the User:
(i) To the restoration of the remaining improvements
located on the Project Site to substantially the same
condition in which they existed prior to the exercise of the
power of eminent domain;
(ii) To the acquisition, by construction or
otherwise, by the Issuer of other lands or improvements
suitable for the User's operations at the Project, which land
20
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or improvements shall be deemed a part of the Project and
available for use and occupancy by the User without the
payment of any Rental Payments other than that herein provided
to the same extent as if such land or other improvements were
specifically described herein and demised hereby, and which
land or improvements shall be acquired by the Issuer subject
to no liens or encumbrances.
(3) Any balance of such Net Proceeds remaining after the
application thereof as provided in subsection (b) of this Section shall
be applied to the redemption of the Bonds in accordance with the terms
thereof, or, if the Indenture Indebtedness is paid in full, shall be
paid to the User.
(4) The Issuer shall cooperate fully with the User in the
handling and conduct of any prospective or pending condemnation
proceeding with respect to the Project or any part thereof and shall,
to the extent it may lawfully do so, permit the User to litigate in any
such proceeding in the name and behalf of the Issuer. In no event shall
the Issuer settle, or consent to the settlement of, any prospective or
pending condemnation proceeding without the prior written consent of
the User.
(5) The User shall be entitled to the Net Proceeds of any
award or portion thereof made for damage to or taking of its own
property not included in the Project, provided that any Net Proceeds
resulting from the taking of all or any part of the leasehold estate of
the User in the Project created by this Lease Agreement shall be paid
and applied in the manner provided in this Section 7.02.
(c) If a Lease Default has occurred and is continuing, and the Letter
of Credit is not in effect or the Credit Obligor has dishonored any draw
thereunder or there has been instituted insolvency proceedings with respect to
the Credit Obligor, then all Net Proceeds of condemnation awards resulting from
condemnation of the Project (in whole or in part) shall be applied to the
redemption of the Bonds in accordance with the terms thereof.
ARTICLE 8
---------
Assignment, Subleasing, Mortgaging and the Bonds
------------------------------------------------
SECTION 8.01 Provisions Relating to Assignment and Subleasing
------------------------------------------------
With the consent of the Trustee and the Credit Obligor, except as
provided below, the User may assign this Lease Agreement and the leasehold
interest created hereby and may sublet the Project or any part thereof, subject,
however, to the following conditions:
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(1) No such assignment or subleasing and no dealings or
transactions between the Issuer or the Trustee and any assignee or
sublessee shall in any way relieve the User from primary liability for
any of its obligations hereunder. In the event of any such assignment
or subleasing the User shall continue to remain primarily liable for
the payment of all Rental Payments herein provided to be paid by it and
for the performance and observance of the other agreements and
covenants on its part herein provided to be performed and observed by
it.
(2) The User will not assign the leasehold interest created
hereby nor sublease the Project to any person unless the operations of
such assignee or sublessee are consistent with, and in furtherance of,
the purpose of the Enabling Law. The User shall, prior to any such
assignment or sublease, demonstrate to the reasonable satisfaction of
the Trustee that the operations of such assignee or sublessee will
preserve the character of the Project as a "project" under the Enabling
Law, if applicable, and deliver to the Trustee an Opinion of Bond
Counsel acceptable to the Trustee to the effect that such assignment or
sublease will not cause the interest on the Bonds to be Taxable.
(3) The User shall, within 30 days after the delivery
thereof, furnish to the Issuer and the Trustee a true and complete copy
of each such assignment or sublease.
SECTION 8.02 Assignment of Lease Agreement and Rents by the Issuer
-----------------------------------------------------
The Issuer has, simultaneously with the delivery of this Lease
Agreement, assigned its interest in and pledged any money receivable under this
Lease Agreement (other than certain rights to indemnification and reimbursement)
to the Trustee as security for payment of the Bonds, and the User hereby
consents to such assignment and pledge. The Issuer has in the Indenture
obligated itself to follow the instructions of the Trustee or the Owners or a
certain percentage thereof in the election or pursuit of any remedies herein
vested in it. The Trustee shall have all rights and remedies herein accorded to
the Issuer and any reference herein to the Issuer shall be deemed, with the
necessary changes in detail, to include the Trustee, and the Trustee and the
registered owners of the Bonds are deemed to be third party beneficiaries of the
covenants, agreements and representations of the User herein contained. Neither
the Issuer nor the User will unreasonably withhold any consent herein or in the
Indenture required of either of them. The User shall not be deemed to be a party
to the Indenture or the Bonds and reference in this Lease Agreement to the
Indenture and the Bonds shall not impose any liability or obligation upon the
User other than its specific obligations and liabilities undertaken in this
Lease Agreement.
SECTION 8.03 Transfer or Encumbrance Created by Issuer; Corporate
----------------------------------------------------
Existence of Issuer
- -------------------
(a) Without the prior written consent of the Trustee, the Credit
Obligor, and the User, the Issuer (1) will not sell, transfer or convey the
Project or any part thereof, except as provided
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in this Lease Agreement, and (2) will not create or incur or suffer or permit to
be created or incurred or to exist any mortgage, lien, charge or encumbrance on
the Project or any part thereof.
(b) The Issuer shall not consolidate with or merge into any other
corporation or transfer its property substantially as an entirety, except as
provided in the Indenture.
SECTION 8.04 Redemption of Bonds
-------------------
(a) The Issuer will redeem any or all of the Bonds upon the
occurrence of any event or contingency requiring the mandatory redemption of
Bonds, all in accordance with the applicable provisions of the Bonds and the
Indenture.
(b) If no Lease Default exists, the Issuer will exercise any right of
optional redemption with respect to the Bonds only upon the written request of
the User.
ARTICLE 9
---------
Covenants of the User
---------------------
Until the Indenture Indebtedness is paid in full:
(a) The User shall not do or permit anything to be done at the
Project that will affect, impair or contravene any policies of insurance that
may be carried on the Project. The User will, in the use of the Project and the
public ways abutting the same comply with all lawful requirements, the violation
of which would have a material adverse effect on the Project, of all
governmental bodies; provided, however, the User may, at its own expense in good
faith contest the validity or applicability of any such requirement.
(b) The User shall permit the Issuer, the Trustee, the Credit Obligor
and their duly authorized agents at all reasonable times to enter upon, examine
and inspect the Project.
(c) The User will maintain proper books of record and account, in
which full and correct entries will be made, in accordance with generally
accepted accounting principles, of all its business and affairs. The User shall
furnish to the Trustee with reasonable promptness such financial information of
the User as the Trustee shall reasonably request.
(d) The User will duly pay and discharge all taxes, assessments and
other governmental charges and liens lawfully imposed on the User and upon the
properties of the User, and the Project; provided, however, the User will not be
required to pay any taxes, assessments or other governmental charges so long as
in good faith it shall contest the validity thereof by appropriate legal
proceedings, the User has given notice of such contest to the Trustee, the User
has established adequate reserves therefor, and no part of the Project shall, in
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the opinion of the Trustee, be subject to loss or forfeiture.
(e) The User will comply with all valid laws, ordinances, regulations
and requirements applicable to it or to its property and the Project.
(f) Except as otherwise permitted in the Credit Documents, the User
will maintain and preserve its existence as a corporation under the laws of the
State of Delaware and will not voluntarily dissolve without first discharging
its obligations under this Agreement and will not in any manner transfer or
convey any substantial portion of its properties, assets or licenses without
receipt of present and adequate consideration therefor.
(g) The User will do, execute, acknowledge and deliver such further
acts, conveyances, mortgages, financing statements and assurances as the Issuer
or the Trustee shall require for accomplishing the purposes of the Financing
Documents. The User will cause this Lease Agreement, any amendments to this
Lease Agreement and other instruments of further assurance, including financing
statements and continuation statements, to be promptly recorded, registered and
filed, and at all times to be kept recorded, registered and filed in such places
as may be required by law fully to preserve and protect the rights of the Issuer
and the Trustee to all property comprising the Project.
ARTICLE 10
----------
Events of Default and Remedies
------------------------------
SECTION 10.01 Events of Default
-----------------
Any one or more of the following shall constitute an event of default
(a "Lease Default") under this Lease Agreement (whatever the reason for such
event and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(1) default in the payment of any Basic Rental Payment when
such Basic Rental Payment becomes due and payable; or
(2) default in the performance, or breach, of any covenant
or warranty of the User in this Lease Agreement (other than a covenant
or warranty, a default in the performance or breach of which is
elsewhere in this Section specifically described), and the continuance
of such default or breach for a period of 30 days after there has been
given, by registered or certified mail, to the User and the Credit
Obligor by the Issuer or by the Trustee a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "notice of default" hereunder, provided that if such
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default is of a kind which cannot reasonably be cured within such
thirty-day period, the User shall have a reasonable period of time
within which to cure such default, provided that it begins to cure the
default promptly after its receipt of such written notice and proceeds
in good faith, and with due diligence, to cure such default; or
(3) The dissolution or liquidation of the User or the filing
by the User of a voluntary petition in bankruptcy, or failure by the
User promptly to lift any execution, garnishment or attachment of such
consequence as will impair its ability to carry on its operations at
the Project, or the User's seeking of or consenting to or acquiescing
in the appointment of a receiver of all or substantially all its
property or of the Project, or the adjudication of the User as a
bankrupt, or any assignment by the User for the benefit of its
creditors, or the entry by the User into an agreement of composition
with its creditors, or if a petition or answer is filed by the User
proposing the adjudication of the User as a bankrupt or its
reorganization, arrangement or debt readjustment under any present or
future federal bankruptcy code or any similar federal or state law in
any court, or if any such petition or answer is filed by any other
person and such petition or answer shall not be stayed or dismissed
within 60 days.
(4) The occurrence of an event of default under any of the
other Financing Documents; or
(5) Receipt by the Trustee of written notice from the Credit
Obligor that an event of default has occurred and is continuing under
the Credit Documents or any other related documents to which the User
and the Credit Obligor are parties signatory thereto.
SECTION 10.02 Remedies on Default
-------------------
Whenever any such Lease Default shall have happened and be continuing,
the Issuer or the Trustee may, with the consent of the Credit Obligor, take any
of the following remedial steps:
(1) Declare all installments of Basic Rental Payments for
the remainder of the Lease Term to be immediately due and payable,
whereupon the same shall become immediately due and payable;
(2) Reenter the Project, without terminating this Lease
Agreement, and, upon ten days' prior written notice to the User and
Credit Obligor, relet the Project or any part thereof for the account
of the User, for such term (including a term extending beyond the Lease
Term) and at such rentals and upon such other terms and conditions,
including the right to make alterations to the Project or any part
thereof, as the Issuer may, with the approval of the Trustee and Credit
Obligor, deem advisable, and such reentry and reletting of the Project
shall not be construed as an election to terminate this Lease Agreement
nor relieve the User of its obligations to pay Basic Rent and
Additional Rent or to perform any of its other obligations under this
Lease Agreement, all of which shall survive such reentry and reletting,
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<PAGE>
and the User shall continue to pay Basic Rent and all Additional Rent
provided for in this Lease Agreement until the end of the Lease Term,
less the net proceeds, if any, of any reletting of the Project after
deducting all of the Issuer's and Trustee's expenses in connection with
such reletting, including, without limitation, all repossession costs,
brokers' commissions, attorneys' fees, alteration costs and expenses of
preparation for reletting;
(3) Terminate this Lease Agreement, exclude the User from
possession of the Project and, if the Issuer or Trustee elects so to
do, lease the same for the account of the Issuer, holding the User
liable for all rent due up to the date such lease is made for the
account of the Issuer; or
(4) Take whatever legal proceedings may appear necessary or
desirable to collect the Rental Payments then due, whether by
declaration or otherwise, or to enforce any obligation or covenant or
agreement of the User under this Lease Agreement or by law.
SECTION 10.03 Availability of Remedies
------------------------
(a) No remedy herein conferred upon or reserved to the Issuer or the
Trustee is intended to be exclusive of any other available remedy or remedies,
but each and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Lease Agreement or now or hereafter existing
at law or in equity or by statute. No delay or omission to exercise any right or
power accruing upon any default shall impair any such right or power or shall be
construed to be a waiver thereof but any such right or power may be exercised
from time to time and as often as may be deemed expedient.
(b) In the event any agreement contained in this Lease Agreement
should be breached by either party and thereafter waived by the other party
such waiver shall be limited to the particular breach so waived and shall not be
deemed to waive any other breach hereunder.
(c) All rights, remedies and powers provided by this Article may be
exercised only to the extent the exercise thereof does not violate any
applicable provision of law in the premises, and all the provisions of this
Article are intended to be subject to all applicable mandatory provisions of law
which may be controlling in the premises and to be limited to the extent
necessary so that they will not render this Lease Agreement invalid or
unenforceable.
SECTION 10.04 Agreement to Pay Attorneys' Fees and Expenses
---------------------------------------------
In the event the User should default under any of the provisions of
this Lease Agreement and the Issuer or the Trustee (in its own name or in the
name and on behalf of the Issuer) should employ attorneys or incur other
expenses for the collection of rent or the enforcement of performance or
observance of any obligation or agreement on the part of the User herein
26
<PAGE>
contained, the User will on demand therefor pay to the Issuer or the Trustee (as
the case may be) the reasonable fee of such attorneys and such other reasonable
expenses so incurred.
ARTICLE 11
----------
OPTIONS
-------
SECTION 11.01 Options to Terminate
--------------------
The User shall have, if it is not in default hereunder, the option to
cancel or terminate the term of this Lease Agreement at any time after full
payment of the Indenture Indebtedness and termination of the Letter of Credit by
giving the Issuer notice in writing of such termination and such termination
shall forthwith become effective. This Lease Agreement may not be terminated
prior to payment in full of the Indenture Indebtedness even if all amounts due
hereunder have been paid in full.
SECTION 11.02 Option to Renew
---------------
There shall be no option to renew the term of this Lease Agreement.
SECTION 11.03 Option to Purchase Prior to Payment of the Bonds
------------------------------------------------
(a) The User, if not in default hereunder, shall have the option to
purchase the Project at any time prior to the full payment of the Indenture
Indebtedness if any of the following shall have occurred:
(i) The Project or any part thereof shall have been damaged
or destroyed (A) to such extent that, in the opinion of the User, it
cannot be reasonably restored within a period of four consecutive
months substantially to the condition thereof immediately preceding
such damage or destruction, or (B) to such extent that, in the opinion
of the User, the User is thereby prevented from carrying on its normal
operations at the Project for a period of four consecutive months, or
(C) to such extent that the cost of restoration thereof would exceed by
more than $50,000 the Net Proceeds of insurance carried thereon
pursuant to the requirements of this Lease Agreement; or
(ii) Title to the Project or any part thereof or the
leasehold estate of the User in the Project created by this Lease
Agreement or any part thereof shall have been taken under the exercise
of the power of eminent domain by any governmental authority or person,
firm or corporation acting under governmental authority, which taking
may result, in the opinion of the User, in the User being thereby
prevented from carrying on its normal operations at the Project for a
period of four consecutive months; or
27
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(iii) As a result of any changes in the Constitution of the
State or the Constitution of the United States of America or of
legislative or administrative action (whether state or Federal), or by
final decree, judgment or order of any court or administrative body
(whether state or Federal) entered after the contest thereof by the
User in good faith, this Lease Agreement shall have become void or
unenforceable or impossible of performance in accordance with the
intent and purpose of the parties as expressed herein, or unreasonable
burdens or excessive liabilities shall have been imposed on the Issuer
or the User, including without limitation, the imposition of taxes of
any kind on the Project or the income or profits of the Issuer
therefrom, or upon the interest of the User therein, which taxes were
not being imposed on the date of this Lease Agreement;
(b) To exercise such option, the User shall, within 30 days following
the event authorizing the exercise of such option, give written notice to the
Issuer and to the Trustee and shall specify therein the date of closing such
purchase, which date shall be not less than 30 days from the date such notice is
mailed, and shall make arrangements satisfactory to the Trustee for the giving
of the required notice for the redemption of the Bonds. The purchase price
payable by the User in the event of its exercise of the option granted in this
Section shall be that amount required to pay in full all Indenture Indebtedness
and shall be paid to the Trustee.
(c) Upon the exercise of the option granted in this Section and the
payment of the option price, any Net Proceeds of insurance or condemnation award
then on hand or thereafter received shall be paid to the User.
SECTION 11.04 Option to Purchase Project After Payment of the
-----------------------------------------------
Indenture Indebtedness
- ----------------------
(a) The User shall have the option to purchase the Project at any
time following full payment of the Indenture Indebtedness for a purchase price
of $10.00. To exercise the option granted in this Section, the User shall
notify the Issuer of its intention so to exercise such option prior to the
proposed date of purchase and shall on the date of purchase pay such purchase
price to the Issuer. The User may not purchase the Project prior to payment in
full of all Indenture Indebtedness even if all amounts due hereunder shall have
been paid in full.
(b) In the event the option granted in this Section 11.04 has not
been exercised prior to the end of the Lease Term, then said option shall
automatically be considered to be exercised upon the end of the Lease Term
unless the User gives written notice prior thereto that it does not elect to
exercise such option.
SECTION 11.05 Option to Purchase Portions of Project Site
-------------------------------------------
(a) The User, if not in default hereunder, shall have the option to
purchase any Unimproved portion of the Project Site at any time and from time to
time with the prior written consent of the Trustee and for a purchase price
equal to the pro-rata cost of such portion of the Project Site to be so
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purchased, provided that the User furnish the Issuer and the Trustee with the
following:
(1) A notice in writing containing (i) an adequate legal
description of that portion of the Project Site with respect to which
such option is to be exercised, which portion may include rights
granted in party walls, the right to "tie-into" existing utilities, the
right to connect and join any building, structure or improvement with
existing structures, facilities and improvements on the Project Site,
and the right of ingress or egress to and from the public highway which
shall not interfere with the use and occupancy of existing structures,
improvements and buildings, and (ii) a statement that the User intends
to exercise such option to purchase such portion of the Project Site on
a date stated.
(2) A certificate of an Independent Engineer or of an
Independent Architect made and dated not more than 90 days prior to the
date of the purchase and stating that, in the opinion of the person
signing such certificate, (i) the portion of the Project Site with
respect to which the option is exercised is not needed for the
operation of the then existing Project and (ii) the severance of such
portion of the Project Site and the location or construction thereon of
buildings, structures and improvements, if any, will not impair the
usefulness of the then existing Project or the means of ingress and
egress to and from the remaining portions of the Project or impair or
deny highway access, rail access or utility services to such remaining
portions of the Project.
(3) An amount of money equal to the purchase price computed
as provided in this Section, which amount shall be paid to the Trustee
and applied to the redemption of the Bonds in accordance with the terms
thereof.
(b) Upon receipt of the notice and certificate required in this
Section to be furnished by the User and the payment by the User to the Trustee
of the purchase price, the Issuer will promptly deliver to the User the
documents referred to in Section 11.06.
(c) If such option relates to portions of the Project Site on which
transportation or utility facilities are located, the Issuer shall retain an
easement to use such transportation or utility facilities to the extent
necessary for the efficient operation of the Project.
(d) No purchase effected under the provisions of this Section shall
affect the obligation of the User for the payment of Rent and other payments in
the amounts and at the times provided in this Lease Agreement or the performance
of any other agreement, covenant or provision hereof, and there shall be no
abatement or adjustment in Rent by reason of the release of any such portion
29
<PAGE>
of the Project Site and the obligations of the User shall continue in all
respects as provided in this Lease Agreement, excluding, however, any portion of
the Project Site so purchased.
SECTION 11.06 Conveyance of Exercise of Option to Purchase
--------------------------------------------
At the closing of the purchase pursuant to the exercise of any option
to purchase granted herein, the Issuer shall upon receipt of the purchase price
deliver to the User documents conveying to the User the property with respect to
which such option was exercised, as such property then exists, subject to the
following: (a) all easements or other rights, if any, required to be reserved by
the Issuer under the terms and provisions of the option being exercised by the
User; (b) those liens and encumbrances, if any, to which title to said property
was subject when conveyed to the Issuer; (c) those liens and encumbrances
created by the User or to the creation or suffering of which the User consented;
and (d) those liens and encumbrances resulting from the failure of the User to
perform or observe any of the agreements on its part contained in this Lease
Agreement.
ARTICLE 12
----------
Internal Revenue Code
---------------------
SECTION 12.01 Covenants Regarding Section 103 and Sections 141-150
----------------------------------------------------
of the Code
- -----------
(a) The Issuer and the User do each hereby covenant and agree for the
benefit of the Owners that neither the Issuer nor the User will take any action,
omit to take any action, permit any action to be taken or fail to require any
action to be taken, which would cause the interest on the Bonds to be or become
includable in gross income for federal income taxation. Without limiting the
generality of the foregoing, the User covenants and agrees that (a) the proceeds
of the Bonds shall not be used or applied in such manner as to cause any Bond to
be or become an "arbitrage bond" as that term is defined in Section 148 of the
Code, (b) ninety-five percent (95%) or more of the net proceeds will be used for
the acquisition, construction, reconstruction, or improvement of land or
property of a character subject to the allowance for depreciation, within the
meaning of Section 144(a) of the Code, (c) the proceeds will be used solely for
the acquisition and construction of the Project, which shall constitute
facilities solely for the manufacturing, including processing, of tangible
personal property, or for issuance expenses, or shall be rebated to the United
States of America as provided in this Lease Agreement and the Indenture, and no
part of the proceeds will be used by the User, directly or indirectly, for
working capital or to finance inventory, or to acquire any facility or asset
which may not be financed, in whole or in part, with the proceeds of obligations
the interest on which is excludable from gross income for federal income
taxation, (d) the net proceeds shall not be used for the acquisition,
construction, reconstruction or improvement of any property which would cause
the average maturity of the Bonds to exceed one hundred twenty percent (120%) of
the average reasonably expected economic life of the facilities financed with
the net proceeds of the Bonds, within the meaning of Section 147(b) of the Code,
30
<PAGE>
(e) none of the net proceeds shall be used to acquire (directly or indirectly)
any land (or any interest therein) to be used for farming purposes; (f) less
than twenty-five percent (25%) of the net proceeds shall be used to acquire
(directly or indirectly) the Project Site or any other land (or any interest
therein), (g) none of the net proceeds shall be used to acquire any property or
any interest therein (including, without limitation, buildings, structures,
facilities, improvements, equipment, machinery or other personal property) the
first use of which property was not pursuant to such acquisition with the
proceeds, (h) neither the Bonds nor any proceeds therefrom shall ever be
federally guaranteed, as such term is defined in Section 149(b) of the Code,
except as expressly permitted by said Section 149(b), (i) neither the User nor
any related person shall ever have allocated to it and outstanding tax-exempt
facility-related bonds (as such term is used in Section 144(a) (10) of the Code)
in an aggregate principal amount exceeding $40,000,000, (j) no party shall
ever be allowed to use or otherwise occupy or derive any benefit whatsoever from
the Project, or any part thereof, if the effect of the foregoing shall result in
a test period beneficiary (as defined in Section 144(a) (10) of the Code) having
allocated to it and outstanding in excess of $40,000,000 in aggregate principal
amount of tax-exempt facility related bonds, (k) no more than two percent of the
face amount of the Bonds shall be used to pay issuance costs.
(b) The Issuer has elected and does hereby elect to have the
provisions relating to the $10,000,000 limit in Section 144(a)(4) of the Code
apply to the Bonds.
(c) The Issuer and the User will each cooperate to assure compliance
with the provisions of Section 12.03 of this Lease Agreement and Article XVI of
the Indenture.
SECTION 12.02 User's Obligation Upon Determination of Taxability
--------------------------------------------------
(a) Upon the occurrence of a Determination of Taxability, the Trustee
shall notify the User in writing that all Outstanding Bonds shall be subject to
mandatory redemption on the date specified by the Trustee in accordance with the
Indenture irrespective of whether the User has violated any covenant or
representation in this Lease Agreement. Within seven days after the receipt of
such notice the User shall purchase the Project from the Issuer for the price
specified in subsection (b) of this Section, which purchase price shall be paid
to the Trustee.
(b) The price payable by the User for the project in the event of a
Determination of Taxability shall be equal to the amount required to redeem the
Bonds in accordance with the terms thereof and to pay in full all Indenture
Indebtedness. There shall be credited against such payment otherwise required by
this paragraph all amounts which have been paid to the Trustee pursuant to the
Letter of Credit with respect to such payment of the Bonds then Outstanding.
(c) Any other options of the User to purchase the Project shall be
superseded by its mandatory obligation to purchase the Project pursuant to this
section 12.02.
SECTION 12.03 Federal Rebate Payments
-----------------------
31
<PAGE>
The provisions of Article XVI of the Indenture are incorporated herein
by reference, and the User shall comply with said provisions and shall perform
and discharge all obligations, duties and responsibilities imposed upon the User
under said Article, including without limitation the payment of all required
rebates to the United States of America.
ARTICLE 13
----------
Provisions of General Application
---------------------------------
SECTION 13.01 Covenant of Quiet Enjoyment
---------------------------
So long as the User performs and observes all the covenants and
agreements on its part herein contained, it shall peaceably and quietly have,
hold and enjoy the Project during the Lease Term subject to all the terms and
provisions hereof.
SECTION 13.02 Investment of Funds
-------------------
The Issuer shall cause any money held as a part of the Special Funds
which may by the terms of the Indenture be invested to be so invested or
reinvested by the Trustee solely at the request of, and solely as directed by,
the User and as provided in the Indenture.
SECTION 13.03 Issuer's Liabilities Limited
----------------------------
(a) The covenants and agreements contained in this Lease Agreement
shall never constitute or give rise to a personal or pecuniary liability or
charge against the general credit of the Issuer, and in the event of a breach of
any such covenant or agreement, no personal or pecuniary liability or charge
payable directly or indirectly from the general assets or revenues of the Issuer
shall arise therefrom. Nothing contained in this Section, however, shall relieve
the Issuer from the observance and performance of the covenants and agreements
on its part contained herein.
(b) No recourse under or upon any covenant or agreement of this Lease
Agreement shall be had against any past, present or future officer or member of
the governing body of the Issuer, or of any successor either directly or through
the Issuer, whether by virtue of any constitution, statute or rule of law, or by
the enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Lease Agreement is solely a corporate obligation, and that
no personal liability whatever shall attach to, or is or shall be incurred by,
any officer or member of the governing body of the Issuer or any successor
corporation, or any of them, under or by reason of the covenants or agreements
contained in this Lease Agreement.
SECTION 13.04 Prior Agreements
----------------
32
<PAGE>
Excepting the Abatement Agreement and any deed, bill of sale, or other
instrument by which the Project, any part thereof, or any interest therein has
been transferred and conveyed by the User to the Issuer, this Lease Agreement
shall completely and fully supersede all prior agreements, both written and
oral, between the Issuer and the User relating to the acquisition of the Project
Site, the construction of the Improvements, the acquisition and installation of
the Equipment, the leasing of the Project and any options to purchase. Neither
the Issuer nor the User shall hereafter have any rights under such prior
agreements, except as otherwise herein provided, but shall look solely to this
Lease Agreement for definition and determination of all of their respective
rights, liabilities and responsibilities relating to the Project.
SECTION 13.05 Execution Counterparts
----------------------
This Lease Agreement may be executed in several counterparts, each of
which shall be an original and all of which shall constitute but one and the
same instrument.
SECTION 13.06 Binding Effect; Governing Law
-----------------------------
This Lease Agreement shall inure to the benefit of, and shall be
binding upon, the Issuer, the User and their respective successors and assigns.
This Lease Agreement shall be governed exclusively by the applicable laws of the
State.
SECTION 13.07 Enforceability
--------------
In the event any provision of this Lease Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provision hereof.
SECTION 13.08 Article and Section Captions
----------------------------
The Article and Section headings and captions contained herein are
included for convenience only and shall not be considered a part hereof or
affect in any manner the construction or interpretation hereof.
SECTION 13.09 Notices
-------
(a) Any request, demand, authorization, direction, notice, consent,
or other document provided or permitted by this Lease Agreement to be made upon,
given or furnished to, or filed with, the Issuer, the User, the Trustee or the
Credit Obligor shall be sufficient for every purpose hereunder if in writing and
(except as otherwise provided in this Lease Agreement) either (i) delivered
personally to the party or, if such party is not an individual, to an officer,
or other legal representative of the party to whom the same is directed
(provided that any document delivered personally to the Trustee must be
delivered to a corporate trust officer at its Principal Office during normal
business hours) at the hand delivery address specified in Section 1.10 of the
33
<PAGE>
Indenture or (ii) mailed by first-class, registered or certified mail, postage
prepaid, addressed as specified in Section 1.10 of the Indenture. Any of such
parties may change the address for receiving any such notice or other document
by giving notice of the change to the other parties as provided in this Section.
(b) Any such notice or other document shall be deemed delivered when
actually received by the party to whom directed (or, if such party is not an
individual, to an officer, or other legal representative of the party) at the
address specified pursuant to this Section, or, if sent by mail, three days
after such notice or document is deposited in the United States mail, proper
postage prepaid, addressed as provided above.
SECTION 13.10 Amendment of Indenture and this Lease Agreement
-----------------------------------------------
(a) The Issuer will not cause or permit the amendment of the
Indenture or the execution of any amendment or supplement to the Indenture
without the prior written consent of the User and the Credit Obligor. The
Issuer and the User shall have no power to modify, alter, amend or terminate
this Lease Agreement without the prior written consent of the Credit Obligor.
Prior to the payment in full of the Indenture Indebtedness, the Issuer and the
User shall have no power to modify, alter, amend or terminate this Lease
Agreement without the prior written consent of the Trustee and then only as
provided in the Indenture.
(b) This Lease Agreement may not be amended unless there has first
been delivered to the Trustee and the User an opinion of Bond Counsel that such
action will not, whether solely or in conjunction with any other fact or
circumstance, cause the interest on the Bonds to be or to become Taxable.
34
<PAGE>
IN WITNESS WHEREOF, the Issuer and the User have each caused this Lease
Agreement to be executed in its name, under seal, and the same attested, by an
officer thereof duly authorized thereunto, and the parties hereto have caused
this Lease Agreement to be dated as of November 1, 1997.
THE INDUSTRIAL DEVELOPMENT BOARD
OF THE TOWN OF ADDISON, ALABAMA
By /s/ Kenneth Suddith
-------------------------------
Chairman
S E A L
Attest: /s/ Gary Hyatt
----------------------------
Its Secretary
CAVALIER HOMES OF ALABAMA,
a division of Cavalier
Manufacturing, Inc.
By /s/ James C. Caldwell
-------------------------------
Its President
35
<PAGE>
STATE OF ALABAMA )
WINSTON COUNTY )
I, the undersigned, a Notary Public in and for said County in said
State, hereby certify that Kenneth Suddith whose name as Chairman of The
Industrial Development Board of the Town of Addison, a public corporation, is
signed to the foregoing Lease Agreement and who is known to me, acknowledged
before me on this day that, being informed of the contents of said Lease
Agreement, he, as such officer and with full authority, executed the same
voluntarily for and as the act of said public corporation.
Given under my hand and seal this the 13th day of November, 1997.
/s/ Elizabeth Davis
------------------------------------
Notary Public
NOTARIAL SEAL
My commission expires: 12/05/00
--------
36
<PAGE>
STATE OF ALABAMA )
WINSTON COUNTY )
I, the undersigned, a Notary Public in and for said County in said
State, hereby certify that James C. Caldwell, name as President of Cavalier
Homes of Alabama, a division of Cavalier Manufacturing, Inc., a Delaware
corporation, is signed to the foregoing Lease Agreement, and who is known to me,
acknowledged before me on this day that, being informed of the contents of said
Lease Agreement, he, as such officer and with full authority, executed the same
voluntarily for and as the act of said corporation.
Given under my hand and seal this the 12th day of November, 1997.
/s/ Heyward C. Hosch, III
------------------------------------
Notary Public
NOTARIAL SEAL
My commission expires: June 19, 2000
_______________
37
<PAGE>
EXHIBIT A
COMMENCE AT THE NORTH EAST CORNER OF SECTION 32, TOWNSHIP 9 SOUTH,
RANGE 6 WEST, WINSTON COUNTY ALABAMA:
THENCE NORTH 89 DEGREES 49 MINUTES 00 SECONDS WEST 89.34 FEET TO AN
IRON PIN SET:
THENCE NORTH 89 DEGREES 49 MINUTES 00 SECONDS WEST 1000.00 FEET TO AN
IRON PIN SET:
THENCE NORTH 89 DEGREES 49 MINUTES 00 SECONDS WEST 931.60 FEET TO AN
IRON PIN SET:
THENCE SOUTH 1 DEGREES 54 MINUTES 00 SECONDS WEST 982.57 FEET TO AN
IRON PIN SET THE POINT OF BEGINNING FOR THE PROPERTY HEREIN DESCRIBED:
THENCE SOUTH 36 DEGREES 27 MINUTES 40 SECONDS EAST 625.27 FEET TO AN
IRON PIN SET ON THE WEST MARGIN OF A COUNTY ROAD:
THENCE ALONG SAID MARGIN SOUTH 5 DEGREES 50 MINUTES 59 SECONDS EAST
83.74 FEET TO A POINT:
THENCE ALONG SAID MARGIN SOUTH 1 DEGREES 40 MINUTES 03 SECONDS EAST
427.95 FEET TO AN IRON PIN SET:
THENCE AROUND A CURVE TO THE LEFT WITH A RADIOS OF 195.96 FEET AND A
LENGTH OF 195.34 FEET AND A CHORD OF SOUTH 29 DEGREES 08 MINUTES 23 SECONDS EAST
187.35 FEET TO AN IRON PIN SET:
THENCE LEAVING SAID ROAD NORTH 89 DEGREES 32 MINUTES 54 SECONDS WEST
760.46 FEET TO AN IRON PIN FOUND:
THENCE NORTH 1 DEGREES 54 MINUTES 02 SECONDS EAST 712.67 FEET TO THE
POINT OF BEGINNING AND CONTAINING 10.50 ACRES MORE OR LESS:
<PAGE>
EXHIBIT B
TO
LEASE AGREEMENT
DATED AS OF NOVEMBER 1, 1997
BETWEEN
THE INDUSTRIAL DEVELOPMENT BOARD OF THE TOWN OF ADDISON
AND
CAVALIER HOMES OF ALABAMA, a division of Cavalier
Manufacturing, Inc.
EQUIPMENT LIST
--------------
Description of Personal Property and Fixtures
---------------------------------------------
Heating and air conditioning and ventilating equipment, electrical
equipment, plumbing fixtures and furnishings, fire detection, suppression and
extinguishment apparatus, equipment and fixtures, and building materials and
supplies to be incorporated in the Project.
<PAGE>
LEASE AGREEMENT
TABLE OF CONTENTS
RECITALS.......................................................................1
ARTICLE 1
---------
Definitions.............................. 1
-----------
ARTICLE 2
---------
Representations
---------------
SECTION 2.01 Representations by the Issuer......................... 6
SECTION 2.02 Representations by the User........................... 7
ARTICLE 3
---------
Demising Clauses......................... 8
----------------
ARTICLE 4
---------
Acquisition of the Project
--------------------------
SECTION 4.01 Agreement to Acquire.................................. 9
SECTION 4.02 No Warranty of Suitability of Issuer.................. 10
SECTION 4.03 Pursuit of Remedies Against Vendors, Contractors and
Subcontractors and Their Sureties.......................... 10
SECTION 4.04 Completion of the Project............................. 10
ARTICLE 5
Duration of Lease Term
and Rental Provisions
---------------------
SECTION 5.01 Duration of Term...................................... 11
SECTION 5.02 Basic Rental Payments; Draws Under Letter of Credit... 11
SECTION 5.03 Additional Rental Payments............................ 12
SECTION 5.04 Advances by Issuer or Trustee......................... 12
SECTION 5.05 Indemnity of Issuer, Trustee and Paying Agent......... 13
SECTION 5.06 Obligations of User Unconditional..................... 14
SECTION 5.07 This Lease a Net Lease................................ 14
<PAGE>
ARTICLE 6
---------
Maintenance, Alterations, Replacements,
Taxes and Insurance
----------------------------------------
SECTION 6.01 Maintenance and Repairs, Alterations and Improvements,
Party Walls; and Liens; Utility Charges.. 15
SECTION 6.02 Removal of, Substitution and Replacement for
Equipment................................ 16
SECTION 6.03 Installation of Machinery and Equipment Owned or
Leased by the User or Subject to a
Security Interest in Third Parties....... 16
SECTION 6.04 Insurance............................................. 17
ARTICLE 7
---------
Provisions Respecting Damage,
Destruction and Condemnation
-----------------------------
SECTION 7.01 Damage and Destruction................................ 18
SECTION 7.02 Condemnation.......................................... 20
ARTICLE 8
---------
Assignment, Subleasing, Mortgaging and the Bonds
------------------------------------------------
SECTION 8.01 Provisions Relating to Assignment and
Subleasing............................... 21
SECTION 8.02 Assignment of Lease Agreement and Rents
by the Issuer............................ 22
SECTION 8.03 Transfer or Encumbrance Created by Issuer;
Corporate Existence of Issuer............ 22
SECTION 8.04 Redemption of Bonds................................... 23
ARTICLE 9
---------
Covenants of the User.................... 23
---------------------
ARTICLE 10
----------
Events of Default and Remedies
------------------------------
SECTION 10.01 Events of Default.................................... 24
SECTION 10.02 Remedies on Default.................................. 25
SECTION 10.03 Availability of Remedies............................. 26
SECTION 10.04 Agreement to Pay Attorneys' Fees and Expenses........ 26
<PAGE>
ARTICLE 11
----------
OPTIONS
-------
SECTION 11.01 Options to Terminate................................. 27
SECTION 11.02 Option to Renew...................................... 27
SECTION 11.03 Option to Purchase Prior to Payment of the Bonds..... 27
SECTION 11.04 Option to Purchase Project After Payment of the
Indenture Indebtedness................... 28
SECTION 11.05 Option to Purchase Portions of Project Site.......... 28
SECTION 11.06 Conveyance of Exercise of Option to Purchase......... 29
ARTICLE 12
----------
Internal Revenue Code
---------------------
SECTION 12.01 Covenants Regarding Section 103 and Sections
141-150 of the Code...................... 30
SECTION 12.02 User's Obligation Upon Determination of Taxability... 31
SECTION 12.03 Federal Rebate Payments.............................. 31
ARTICLE 13
----------
Provisions of General Application
---------------------------------
SECTION 13.01 Covenant of Quiet Enjoyment.......................... 32
SECTION 13.02 Investment of Funds.................................. 32
SECTION 13.03 Issuer's Liabilities Limited......................... 32
SECTION 13.04 Prior Agreements..................................... 32
SECTION 13.05 Execution Counterparts............................... 33
SECTION 13.06 Binding Effect; Governing Law........................ 33
SECTION 13.07 Enforceability....................................... 33
SECTION 13.08 Article and Section Captions......................... 33
SECTION 13.09 Notices.............................................. 33
SECTION 13.10 Amendment of Indenture and this Lease Agreement...... 34
TESTIMONIAL...................................................................35
SIGNATURES....................................................................35
ACKNOWLEDGMENTS............................................................36-37
<PAGE>
EXHIBIT A
EXHIBIT B
Exhibit (10)(zz)
COMMERCIAL SUB-LEASE
--------------------
The Commercial Sub-Lease and Agreement made as of the 1st day
of July, 1996, between Perfect Panels, Inc., an Alabama Corporation,
(hereinafter referred to as "Landlord"), whose address is P. O. Box 1805,
Hamilton, Alabama 35570, and Quality Housing Supply, Inc., an Alabama
Corporation, (hereinafter referred to as "Tenant") whose address is P. O. Box
664, Winfield, Alabama 35539.
Whereas, Landlord has a new building, fixtures, and property
located at or near Hamilton, Marion County, Alabama, wherein Landlord is the
Lessee under a Lease Agreement with Option to Purchase (the "Prime Lease") with
The City of Hamilton on a bond issue; and,
Whereas, Landlord and Tenant (who will be a sub-lessee of
Landlord) wish to enter into a Commercial Sub-Lease for a period of ninety-six
(96) months on the terms and conditions hereinafter set forth:
1. DESCRIPTION OF PROPERTY: That Landlord has and does hereby
lease (and/or sub-lease) unto the said Tenant the following described real
estate (including the fixtures placed hereon), which is situated in the City of
Hamilton, County of Marion, and State of Alabama, (hereinafter referred to as
the "Premises"):
(See Attached Schedule "A" for description of the real estate)
TO HAVE AND TO HOLD the Premises unto the Tenant for a term of
ninety-six (96) months commencing as stated in paragraph (b) herein.
2. RENT. Tenant hereby covenants and agrees to pay Landlord rent
for the Premises as follows:
1
<PAGE>
2.1 First Rental Period.
Tenant covenants and agrees to pay Landlord as base rent for
the first forty-eight (48) months of this lease for said Premises the sum of Six
Hundred Thousand and No/100 ($600,000.00) Dollars for said period. The first
rental payment will be due July 1, 1996 and on the 1st day of each month
thereafter payable in forty-eight (48) consecutive monthly installments, in
advance, being in the sum of Twelve Thousand Five Hundred and No/100
($12,500.00) Dollars per month.
2.2 Second Rental Period.
Landlord and Tenant agree that the base rent for months
forty-nine (49) through month ninety-six (96) shall be in the minimum base sum
of Seven Hundred Twenty Thousand and No/100 ($720,000.00) Dollars payable in
forty-eight (48) consecutive monthly installments, in advance, in the sum of
Fifteen Thousand and No/100 ($15,000.00) Dollars per month.
2.3 Annual Rent Adjustment during Second Rental Period.
The base rent payable hereunder shall be adjusted effective as
of the 1st day of each annual anniversary date of the lease term beginning July
1, 2000, in accordance with this Section 2.3, effective July 1, 2000 and on July
1 of each year thereafter during the remaining term of this lease; beginning
with the fifth year of the lease term and each succeeding July 1 thereafter, the
monthly rent shall increase by the actual annual inflation increase and the
annual inflation increase shall be calculated as follows: the monthly rent
payment due pursuant to this lease shall be adjusted to an amount equal to the
product obtained by multiplying the previous years' monthly rental by a
fraction, the numerator of which is the Consumer Price Index for all urban
consumers, U.S. City Average, for all items, as published by the U.S. Bureau of
Labor Statistics (the "CPI Index") for the first month of the new annual term,
and the denominator of which is the first month of the previous annual term;
provided, however the monthly payment shall not be less than the monthly rental
2
<PAGE>
payment for the previous year. The monthly rent payment calculated pursuant to
the preceding sentence shall then remain constant during the next twelve month
period of the lease.
3. OPTION TO PURCHASE. (a) (i) Tenant is hereby granted an
exclusive option to purchase the Premises by giving ninety (90) days written
notice of the exercise of such option to Landlord during the original term of
this lease or during any renewal thereof, (said option to purchase the Premises
being hereinafter referred to as the "Option"). The purchase price to be paid
by Tenant to Landlord at the closing in the event the Option is exercised and
the sale of the Premises is consummated pursuant thereto shall be an amount
equal to One Million One Hundred Twenty-Five Thousand and No/100 ($1,125,000.00)
Dollars, during the first four (4) years (48 months) of the lease term and the
minimum sum of One Million Two Hundred Fifty and No/100 ($1,250,000.00) Dollars
during the remaining term of the lease, which shall be adjusted annually on July
1 of each year beginning July 1, 2000 by the increase in the Consumer Price
Index (CPI) as stated herein payable in cash at the closing (the "Closing") of
such sale, and shall be in addition to any rent or other sums theretofore paid
or payable by Tenant to Landlord under this lease through the period ending on
the date of the Closing (the "Closing Date").
(ii) As a condition precedent to the closing of the
Option to Purchase, Tenant shall cause the Landlord and the personal guarantors
on the Bond Issue with the City of Hamilton to be released from any further
obligations or liability on the Bond Issue.
(iii) Option to Purchase: Price Adjustment. In the
event Lessee exercises its Option to purchase as set forth in paragraph 3 of
this Sub-Lease and Agreement, the minimum purchase price payable hereunder shall
be adjusted effective as of July 1, 2000 and on the 1st day of July of each year
thereafter during the remaining term of this lease, in accordance with this
Section. Effective July 1, 2000, the annual Option to purchase price due
pursuant to this lease shall be increased and adjusted to an amount equal to the
3
<PAGE>
product obtained by multiplying $1,250,000.00 by a fraction, the numerator of
which is the Consumer Price Index for all Urban Consumers U.S. City Average, for
all items, as published by the U.S. Bureau of Labor Statistics (the "CPI Index")
for July 1, 2000, and the denominator of which is the CPI Index for July 1,
1996; provided, however, the Option to purchase price shall not be less than One
Million Two Hundred Fifty Thousand and No/100 ($1,250,000.00) Dollars. The
Option to purchase price calculated pursuant to the preceding sentence shall
then remain constant for the next twelve (12) month period, and, shall be
re-calculated annually on July 1st of each year during the remaining term of the
lease and adjusted for the increase in the CPI, but in no event shall the Option
to purchase price be less than One Million Two Hundred Fifty Thousand and No/100
($1,250,000.00) Dollars.
(b) In the event Tenant gives notice to Landlord of
the exercise of the Option, Landlord agrees to use its best efforts to acquire
title to the Premises, which shall be fee simple title in the case of the
Premises, from the City of Hamilton, including, without limitation, curing any
defaults under that certain lease agreement by and between the City and the
Landlord dated as of March 6, 1996 (the "Prime Lease"), taking such steps as
may be necessary to provide for the prepayment of the Bond under the Prime
Lease, thereafter exercising its option to purchase the Premises under the Prime
Lease, terminating the Prime Lease, and otherwise taking such actions as may be
necessary to provide for the redemption of the Bond, the release of the mortgage
on the Mortgaged Realty by the Trustee, and the discharge of the Indenture.
Landlord shall be entitled to make its obligations to acquire such title
contingent upon a contemporaneous closing of the purchase of the Premises
pursuant to the Option. In the event Landlord exercises its best efforts as
aforesaid, such acquisition of title shall be a condition precedent to the
enforceability against either Landlord or Tenant of the Option granted hereunder
or the exercise thereof.
4
<PAGE>
(c) Tenant shall have the right, at its expense
(except as provided in subsection (d) hereof, to conduct an examination of
Landlord's title to the Premises and, in the judgment of Tenant, exercised in
good faith and based upon such termination, if such title is not at any time in
a condition satisfactory to Tenant, Tenant shall have the right to elect not to
consummate the purchase of the Premises by written notice given to Landlord at
any time prior to the consummation of said purchase. Tenant agrees to give
Landlord prompt notice in the event it obtains knowledge of any fact or matter
constituting a defect in Landlord' title, and in the event the title is
defective Landlord agrees to use its best efforts to promptly correct said
defect. Tenant's election not to consummate the purchase of the Premises as
herein provided shall not affect this lease nor in any way limit or affect
Tenant's right to exercise the Option at a later time during the term of this
lease or any renewal thereof as provided in subsection (a) of this Section 3.
(d) The Closing of the purchase of the Premises
provided for this Section 4 shall take place on or before the end of the ninety
(90) day notice period provided for herein, or at such other time as the
parties may mutually agree upon in writing. Conveyance of the Premises shall be
made by general warranty deed with full covenants and warranties of title,
subject to restrictive covenants, free of all liens except whose as may be
approved in writing by Tenant. Possession shall be given upon delivery of the
deed. Landlord shall furnish to Tenant, at Tenant's expense, a current,
standard form title insurance binder and policy with respect to the Premises
issued by a reputable title insurance company in the amount of the purchase
price. The title insurance binder and policy shall show merchantable fee simple
title to the Premises in the Landlord, free and clear of all liens, encumbrances
and exceptions, except as may be otherwise approved by Tenant in writing prior
to the consummation of the sale. Tenant shall bear all charges of the title
company for the title premium for the issuance of the title insurance binder and
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<PAGE>
policy. Tenant further shall furnish, at its expense, such surveys of the
Premises as may be needed by the Tenant.
(e) The right to exercise the Option shall expire
upon the expiration or earlier termination of the original term of this lease if
not renewed, and, if renewed, upon the expiration or earlier termination of the
renewal term of this lease.
(f) In the alternative to exercising the Option
provided for in subparagraph (a) through (e) hereof, Tenant shall have the
exclusive right and option (the "Landlord Option") herein granted by the
Landlord to acquire subject to the terms and conditions of the Prime Lease and
the conditions in this lease paragraph 2(a)(ii), the leasehold interest of the
Landlord in the Prime Lease (including the option to purchase) on any
installment payment date, as defined in the Prime Lease. To exercise the
Leasehold Option, the Tenant shall give written notice to the Landlord not more
than ninety (90) nor less than forty-five (45) days prior to such installment
note. The purchase price payable by the Tenant in the event of the exercise of
the Leasehold Option, which shall be payable in cash at the Closing, shall be
the difference between (a) One Million One Hundred Twenty-Five Thousand and
No/100 ($1,125,000.00) Dollars during the first four years of the lease term and
the minimum sum of One Million Two Hundred Fifty Thousand and No/100
($1,250,000.00) Dollars during the remaining term of the lease, adjusted
annually by the increase in the CPI, and (b) an amount which, when added to the
amount on deposit in the Bond Fund created in the Indenture, will be sufficient
to retire and redeem the Bond on such installment payment date, including,
without limitation, the principal, interest to mature until and on such
installment payment date, any redemption premium with respect to the Bond,
expenses of redemption and Trustee's fees. Upon the consummation of such
purchase, the Landlord will assign to Tenant all its right, title and interest
in the Prime Lease, and the Tenant will assume all the obligations of Landlord
under the Prime Lease that accrue after the Closing. Tenant further shall be
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<PAGE>
entitled to the benefit of the title matters set forth in subparagraph (c) and
(d) hereof. In the alternative to an assignment and assumption of the Prime
Lease, the Tenant shall be entitled to elect that, immediately upon receipt of
the amount specified in clause (b) of the third sentence of this subparagraph,
the Landlord will pay such amount to the Trustee and will thereafter cooperate
fully with the Tenant in taking any and all action that may be necessary to
effect the redemption of the Bond on the then next succeeding installment
payment date. The Landlord and the Tenant recognize and agree that upon the
purchase of the right, title and interest of the Landlord in and to the Prime
Lease pursuant to the provisions of this subparagraph, the Tenant will exercise
the option to purchase the Project granted in the Prime Lease. Accordingly, the
Landlord agrees that it will cooperate with the Tenant in causing the City to
take any and all actions necessary under the Prime Lease and the Indenture to
effect the redemption of the Bond on the installment payment date with respect
to which the Leasehold Option granted to the Tenant in this paragraph is to be
exercised.
(g) The right to exercise the Leasehold Option shall
expire upon the expirations or earlier termination of the original term of this
lease.
(h) In connection with the Closing of the Option or
the Leasehold Option, Tenant and Landlord each agree to execute any and all
documents reasonably requested by counsel to the parties to effectuate the
transactions contemplated in the foregoing subparagraphs.
4. TENANT'S PROPERTY. All furniture, machinery, and equipment
placed upon the leased Premises by Tenant, except fixtures which shall become
the property of Landlord, shall remain the property of Tenant and may be removed
by Tenant at or prior to the expiration or termination of this lease agreement,
provided that all terms and conditions of this lease agreement have been
complied with by Tenant, and provided further, that Tenant repair any damage to
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<PAGE>
the leased building caused by such removal and shall not permit any damage or
weakening of the structural integrity of said building to occur by such removal.
Notwithstanding the foregoing, in the event that Tenant shall
hereafter make any structural changes, additions, improvements, alterations or
replacements to the Premises that do not constitute fixtures, or in the event
Tenant makes any substitutions or replacements of the fixtures, such structural
changes, additions, improvements, alterations or replacements shall be deemed to
constitute a part of the Premises, subject to being delivered to Landlord
pursuant to Section 20 hereof or to repossession and reletting pursuant to
Section 23 hereof. Tenant agrees to identify by labeling or other conspicuous
means any furniture, machinery, or equipment which belongs to it and does not
constitute a fixture and a part of the Premises.
5. LANDLORD'S LIEN. A lien is expressly reserved by Landlord and
granted by Tenant, upon all equipment, building material, inventory,
improvements, and all other items (and fixtures which are the property or to
become the property of Landlord) erected or put in place upon the Premises by or
through Tenant or other occupants for the payment of rent and also for the
satisfaction of any causes of actions which may accrue to the Landlord by the
provisions of this lease, except as may be waived in writing by the Landlord.
6. WAIVER OF SUBROGATION. Landlord and Tenant mutually agree to
waive any right of subrogation which they may have against the other for any
losses paid to them on insurance policy or policies carried on the property to
the extent permitted by the terms of said policy or policies.
7. PROOF OF PAYMENT. The burden of proof of payment of rent in
case of controversy shall be upon Tenant.
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8. INTERRUPTED POSSESSION. Landlord hereby covenants that if
Tenant shall keep and perform all of the covenants of this lease on the part of
Tenant to be performed, Landlord will guarantee to Tenant the quite, peaceful,
interrupted possession of the Premises.
9. Tenant hereby covenants
(a) USE FOR LAWFUL PURPOSES. That the Premises and
all buildings and improvements thereon shall during the term of this lease be
used only and exclusively for lawful and moral purposes, and no part of the
Premises or improvements thereon shall be used in any manner whatsoever for any
purpose in violation of the laws of the United States, the State of Alabama, or
the ordinances and laws of the City of Hamilton, and County of Marion;
(b) O.S.H.A., etc. To save and hold Landlord
harmless from any violations on the Premises of the laws of the United States
including but not limited to requirements of Occupational Safety and Health
Association, of the State of Alabama, and the ordinances and laws of the City of
Hamilton and County of Marion;
(c) NUISANCE. Not to create or allow any nuisance
to exist on the Premises, and to abate any nuisance that may arise promptly and
free of expenses to Landlord;
(d) INCREASE OF INSURANCE. Not to suffer anything
to remain upon or about the Premises nor permit upon the Premises any trade or
occupation or cause to be done anything which may render an increased or extra
premium payable for the insurance on the Premises or the building thereon
against fire, theft, and extended coverage unless consented to in writing by the
Landlord and if so consented to, Tenant shall pay such increased or extra
premium within ten (10) days after Tenant shall have been advised of the amount
thereof;
(f) HOLD HARMLESS. To hold Landlord harmless against
all damages, accidents and injuries to persons or property caused by or
resulting from, or in connection with any equipment, power plant, machinery,
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elevator, elevator shaft, stairway, signs, awnings, glass, brick, and other
building material, hatch, or other openings, flagpole, or any other things in or
pertaining to any other parts of any building or buildings on the Premises or
things in or pertaining to or upon the said buildings and Premises during the
term of this lease or while Tenant is occupying the Premises;
(g) INSOLVENCY OR BANKRUPTCY. That, notwithstanding
any other provisions in this lease, in the event of the insolvency or
bankruptcy of Tenant, or in the event of a partial or general assignment for the
benefit of a creditor, at any time thereafter Landlord shall have the right to
terminate the lease immediately.
10. CONDITION AT OCCUPANCY AND REPAIRS AND/OR REPLACEMENT.
Tenant acknowledges that all the appliances, plumbing, heating
and cooling apparatus, and fixtures, are new and in good order by the act of
occupancy and use of the Premises, and does hereby covenant and agree that
during the terms of this lease the same shall be maintained and kept in good
order and condition, with replacement if required by Landlord, at Tenant's
expense, and, at the expiration of this lease, to make good all damages to same,
if deemed necessary by the Landlord, either during the term of this lease or at
the expiration thereof. Tenant further agrees, that in the event it deems a
fixture owned by Landlord to be worn out or obsolete for its manufacturing
purposes, it will replace the worn out fixture or substitute new modern fixtures
at its sole expense and the new or replacement fixture will immediately become
the property of the Landlord.
11. REPAIRS AND MAINTENANCE. In addition to those provisions in
paragraph 11 herein, Tenant further agrees that it shall be responsible for all
repairs to the buildings and fixtures and to the Premises including but not
limited to maintaining and/or replacing the roof and side walls of the
building(s) on the Premises to keep them in good order, to maintain a water
tight seal, and Tenant shall be responsible for any damage to the building(s),
fixtures, or the Premises which may be caused by a defect(s) in the roof.
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12. ENVIRONMENTAL MATTERS AND COMPLIANCE. (i) Lessee represents
and warrants that the Tenant's use of the Premises will not violate any
environmental laws and that no substance, chemical, material, or substance the
exposure to which is prohibited, limited or regulated by any Federal, State,
County, Regional, or Local Authority, or which, even if not so regulated, may
pose a hazard to the health and safety to the occupants of the Premises or the
owners of property adjacent thereto. Tenant further represents and warrants that
there are no areas on the Premises where hazardous substances have been disposed
of, or released by Tenant, and Tenant shall give Landlord immediate oral and
written notice of its receipt of any notice of a violation of any law, standard
or regulation covered by this paragraph.
(ii) Tenant hereby agrees to indemnify and hold
Landlord harmless from all loss, cost, damage, claim, and expense incurred by
Landlord on account of the violation of any representations or warranties set
forth in this paragraph, or of Tenant's failure to perform any obligations of
this paragraph, or of Tenant's failure to comply fully with all environmental
laws, rules, and regulations.
(iii) Tenant shall comply with all applicable,
present and future, local, state, and federal environmental laws and
regulations. Tenant shall notify Landlord immediately if any, hazardous
substance, (as defined in CERCLA) is released, discharged, or disposed of,
stored, or discovered on the Premises. Tenant shall notify Landlord in writing
within three (3) days after receiving written notice from any governmental
authority or any individual or entity claiming violation of any environmental
protection law or regulation related to the Premises, or demanding compliance
within any environmental protection law or regulation, or demanding payment,
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indemnity, or contribution for any environmental damage or injury to any natural
resources or the Premises.
(iv) At its sole cost and expense, Tenant shall
comply with all Federal, State, and Local Laws, Regulations and Orders with
respect to the discharge and removal of hazardous substances or toxic waste, pay
immediately when due the cost of removal of any such waste, and keep the
Premises free of any lien imposed pursuant to such laws, rules, regulations,
and orders. In addition, Tenant shall not install or permit to be installed in
the Premises, any substance containing anything deemed hazardous by Federal,
State, or Local laws, rules, regulations, or orders respecting such material.
In the event Tenant fails to comply herewith, then after notice to Tenant and
the expiration of the early of (a) thirty (30) days after written notice, or (b)
the cure, permitted under the applicable law, rule, regulation, or order, Lessee
may either declare this lease to be in default and terminate the lease or cause
the Premises to be freed from the hazardous waste, and contaminates, and the
cost of the removal shall be so much additional indebtedness charged to the
Tenant as rent which shall become immediately due and payable without notice.
(v) For purposes of this entire paragraph thirteen
"hazardous substances" shall mean and include those elements or compounds which
are contained in the list of hazardous substances adopted by the United States
Environmental Protection Agency (EPA) or the list of toxic pollutants designated
by Congress or the EPA or any flammable substances, explosives, radioactive
materials, hazardous materials, hazardous waste, toxic substances, pollutants,
pollution, or related materials which are covered by, or regulated under, any
other Federal, State, or Local Statute, Law, Ordinance, Code, Rule, Regulation,
Order, or Decree regulating, relating to, or imposing liability or standards of
conduct concerning, any hazardous, toxic or dangerous waste, substance, or
material,
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as now or at any time hereafter in effect (herein collectively referred to as
the "Environmental Laws").
13. DRAINAGE. Tenant agrees to keep all ditches in good repair
and maintain good drainage around the building(s) and to be responsible for any
surface water damage to the building(s) and Premises.
14. SEWER SYSTEM. Tenant expressly agrees to accept the sewage
and water systems in good order and to be responsible for any expense to
maintain, repair, replace, or improve said systems.
15. UTILITY CHARGES. Tenant agrees to pay any and all bill for
its utilities, such as electricity, gas, water, telephone, and trash removal,
used by Tenant during the term of this lease and Landlord shall have no
obligation therefor.
16. LIABILITY INSURANCE. That Tenant shall, during the term of
this lease, keep in full force and effect a policy of public liability insurance
with respect to the Premises and the business operated thereon by Tenant, in
which the limits of liability shall not be less than Two Million and No/100
($2,000,000.00) Dollars per person and Five Million and No/100 ($5,000,000.00)
Dollars for each accident or occurrence for bodily injury and the same for
property damage. Should Landlord ever desire this limit increased, Tenant will
pay the increased premium, and Tenant shall cause the Landlord to be a named
insured on said policy "as its interest may appear" and furnish Landlord with a
copy thereof and any renewals thereto.
17. FIRE INSURANCE. Tenant agrees to maintain fire and all risk
extended coverage insurance on the ISO Special Forms, including earthquake
coverage, on the building(s) and fixtures equal to one hundred (100%) percent of
replacement cost, during the term of this lease, or any renewal thereof.
Landlord shall be the named insured on said insurance policies covering the
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building(s) and fixtures and be provided with a copy of the policies. Tenant
agrees to pay any increase in said premium after the original policy term, if
any.
18. PROPERTY TAXES. Tenant shall pay the ad valorem taxes on the
real estate and fixtures covered in this lease during the lease term or any
renewal thereof. And, Tenant shall pay all ad valorem taxes assessed on any
equipment placed on the Premises by it and on any inventory or other items
subject to said tax and shall hold the Landlord harmless therefrom.
19. VACATE PREMISES AT END OF TERM. If at the expiration of this
lease or any renewal thereof, the Option to purchase the Premises herein granted
to Tenant has not been exercised, Tenant agrees to deliver up to Landlord, or
Landlord's agents or assigns, the fixtures and the Premises at the expiration of
this lease in good order and condition, and to make good all damage to the
building(s) and fixtures and the Premises, ordinary wear and tear excepted. The
said delivery to be made on the day immediately following the last day of this
lease or any renewal thereof, and in the event of failure of Tenant to deliver
the Premises on the termination of this lease or any renewal thereof, Landlord
may hold Tenant for any damages that Landlord may have sustained due to the
failure of Tenant to make delivery of the Premises, until all the Premises, with
the keys to same, cleared of all persons and property not belonging to same, be
returned to Landlord, or Landlord's successors or assigns. No demand or notice
of such delivery shall be necessary.
20. INSPECTION AND RIGHT TO REPAIR. Landlord reserves the right
during the term of this lease or any renewal to enter the Premises at reasonable
hours to show the same to other persons who may be interested in renting or
buying the property, and for the purposes of inspecting the Premises, in order
to request Tenant to make such repairs and/or replacements as the Landlord
may deem necessary for the protection and preservation of the Premises and the
buildings and fixtures thereon; but Landlord is not bound to make any inspection
or repairs whatever, not to be held liable for any damages in consequences of
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stoppage of water, sewer, gas or drain pipes by reason of freezing or any other
cause of obstructions, nor for any other defects about the Premises and the
building(s) and fixtures thereon, Tenant having examined the same and being
satisfied therewith, but should such obstruction, freezing, stoppages, or other
defects about the Premises and the building(s) thereon occur during the term of
this lease or any renewal, or while Tenant is occupying the Premises, then
Tenant shall remedy the same promptly at Tenant's expense unless Landlord by
written agreement undertakes to do the same.
21. DESTRUCTION OF BUILDING. In the even of the total
destruction of, or partial damage to, the building(s) upon the demised Premises
by fire or other casualty, Landlord shall proceed with due diligence and
dispatch to repair and restore the building(s) to the conditions to which they
existed immediately prior to the occurrence of such casualty, at Landlord's cost
and expense, provided such cost does not exceed the proceeds of insurance
collected on the building(s), by reason of such casualty, the application of
which insurance proceeds are not prohibited, by reason of any mortgage
provision, from being used toward the cost of restoration and repairing the
same; provided, further, that if the unexpired portion of the term of this lease
or any extension thereof shall be two (2) years or less on the date of such
casualty or the cost of repair or restoration, as estimated by two or more
contractors, exceeds twenty (20%) percent of the replacement value of the
Premises immediately prior to the occurrence of such casualty, then Landlord may
by written notice to the Tenant, within sixty (60) days after the occurrence of
such casualty, terminate this lease. If the insurance proceeds are insufficient
to effect such restoration or repairs, Landlord at its option may cancel this
lease by written notice to Tenant within sixty (60) days after the occurrence of
such casualty.
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In the event the repairing and restoring of the buildings
cannot be completed within six (6) months after the date of occurrence of such
casualty, as estimated by two or more reputable contractors, the Tenant shall
have the right to terminate this lease upon giving written notice to Landlord
within thirty (30) days from the date of occurrence of said casualty. From the
date of such damage or destruction until said building has been substantially
repaired or restored, an equitable abatement of rent shall be allowed the
Tenant.
22. DEFAULT. If Tenant fails to pay any installment of
rent within ten (10) days of the date it is due, Landlord may, after notifying
Tenant in writing of such default in the payment of rent (unless within five (5)
days after receipt of such notice Tenant cures such default) declare the lease
and any renewal thereof cancelled and terminated. If Tenant defaults in the
payment of any moneys required herein to be paid by Tenant other than rent, or
in the performance of any Tenant's other obligations hereunder, Landlord may,
after once notifying Tenant in writing of such default (unless within thirty
(30) days after such notice Tenant cures such default if the same involves the
payment of money other than rent required herein to be paid by Tenant, or in the
case of default other than in the payment of money. Tenant commences and
diligently prosecutes the curing of such default) declare the lease and any
renewal thereof cancelled and terminated and the remainder of the rent due under
the lease shall be due and payable immediately. If the lease shall terminate as
aforesaid or should Landlord elect not to terminate this lease, in either event
Landlord shall have the immediate right to re-enter and repossess the Premises
and the remainder of the rent due under the lease term shall be due and payable
immediately. Landlord shall have the further right (but shall not be obligated
to do so) to relet the Premises and the improvements thereon, if the Landlord
elects not to terminate this lease. If Landlord relets for an amount less than
the rental and other charges required by this lease to be paid by Tenant, then
Landlord shall notify Tenant of this deficiency each month and Tenant shall
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either receive credit for any amounts paid or pay the deficiency to Landlord
within fifteen (15) days of receipt of such notice. No entry by Landlord under
the provisions of this section shall bar the recovery of rent or damages for
breach or any of the covenants, agreements or conditions on the part of the
Tenant herein contained. The receipt of rent after breach or condition broken,
or delay on the part of Landlord to enforce any right hereunder shall not be
deemed a waiver or forfeiture of Landlord of any of the rights or remedies
provided for herein. The exercise by Landlord of any right or remedy or of any
alternative rights or remedies, granted herein to Landlord shall not affect or
prejudice any other rights or remedies afforded Landlord by law. Any failure of
Landlord promptly to exercise the rights or pursue the remedies accruing
hereunder by reason of any breach or default shall not operate as a waiver but
the right and remedies shall be available to Landlord at any time or times.
Nothing contained in this Section 22 shall limit or affect the rights granted
Landlord by Section 9(g) of this lease.
23. WAIVER OF TERMINATION NOTICE. Both Landlord and Tenant waive
notice of the termination of this lease at the end of the lease period specified
or any renewal thereof.
24. WAIVER OF BREACH. It is hereby covenanted and agreed that no
waiver of a breach of any of the covenants of this lease shall not be construed
to be a waiver of any succeeding breach of the same or any other covenant.
25. SUCCESSORS AND ASSIGNS. It is hereby covenanted and agreed
between the parties hereto that all covenants, conditions, agreements, and
undertakings, contained in this lease or any renewal thereof shall extend to and
be binding on the respective heirs, executors, administrators, successors and
assigns of the respective parties hereto.
26. BUSINESS ON PREMISES. Unless written consent is otherwise
given by Landlord, the business to be conducted on the Premises throughout the
full term of this lease is the manufacture of wall panels and other construction
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supplies for the housing industry and at no time will the premises be unoccupied
or vacant as that term is defined in Landlord's fire insurance policies.
27. ASSIGNMENT. Tenant shall not have the right to assign the
lease or sub-let all or a portion of the Premises without the prior written
consent of Landlord which shall not be unreasonably withheld.
28. EMINENT DOMAIN. If at any time during the term of this lease
or any renewal thereof, the entire Premises unusable for Tenant's business,
shall be taken or appropriated by virtue of eminent domain or other similar
proceedings, or be condemned for any public or quasi public use, Tenant shall
have the right and privilege of terminating the lease, by written notice to
Landlord within thirty (30) days after such condemnation or appropriation. All
rents and other charges and payments provided for herein shall be permanently
abated from the time of such taking, appropriation, or injury resulting in the
termination of this lease. It is understood and agreed that in the event of
such termination, Landlord and Tenant will prosecute at their option their
respective claims against the public or private body, herein designated as the
taking authority, on the account of any taking, appropriation, or injury of or
to the Premises, and neither party hereto shall be liable to the other for any
recovery to be obtained or recovered from the taking authority.
29. ATTORNEY FEES. Tenant agrees to pay all costs of collection,
including a twenty-five (25%) percent attorney's fees, if all or any part of the
rent reserved herein is collected after maturity with the aid of any attorney;
also to pay reasonable attorney's fees in the event it becomes necessary for the
Landlord to employ an attorney to force Tenant to comply with any of the
covenants, obligations, or conditions imposed by this lease or any renewal
thereof.
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30. LAW GOVERNING. This lease has been entered into under the
laws of the State of Alabama and the rights and obligations of the parties
hereunder shall be governed and determined according to such laws.
31. ENTIRE AGREEMENT. This lease contains the entire agreement
between the parties with respect to the Premises and cannot be changed unless
such change, modification, or amendment is in writing and executed by all
parties to this lease.
32. COUNTERPARTS. This lease may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
33. NOTICE. Any notice provided to be given by the parties hereto
shall be in writing, each to the other, as the case may be, and mailed by
Certified United States Mail, postage prepaid, and directed to Landlord at P. O.
Box 1805, Hamilton, Alabama 35570, and to Tenant at P. O. Box 664, Winfield
Alabama 35594, or by delivery of any such written notice to the other.
34. HEADINGS. Headings of sections and subsections have been
inserted in this agreement as a matter of convenience and it is agreed that such
headings are not a part of this agreement and will not be used in the
interpretation of any provision hereof.
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IN TESTIMONY WHEREOF, the above named Landlord and Tenant have
executed this and two other original instruments of identical tenor and date, on
the day and year set forth in the first paragraph of this lease.
LANDLORD:
PERFECT PANELS, INC.,
/s/ /s/ Charles Dempsey
- ----------------------------- By----------------------(L.S.)
Witness Its President
TENANT:
QUALITY HOUSING SUPPLY, INC.
/s/ Michelle Jones /s/ Jay G. Godsey
- ----------------------------- By----------------------(L.S.)
Witness Its President
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EXHIBIT "A"
-----------
Commencing at the Southeast corner of the SE 1/4 of NE 1/4, Section 36,
Township 10 South, Range 14 West, Marion County, Alabama; thence run westerly
along the South line of said SE 1/4 of NE 1/4 a distance of 548.02 feet;
thence turn a deflection angle to the right of 90 degrees 00' 00" and run a
distance of 40.00 feet to a point at the intersection of the westerly
right-of-way line of Bedford Drive (80' R.O.W.) with the northerly
right-of-way line of Park Road (40' R.O.W.) and the point of beginning. FROM
SAID POINT OF BEGINNING continue northerly along the westerly right-of-way
line of Bedford Drive a distance of 560.00 feet; thence turn a deflection
angle to the left of 90 degrees 00' 00" and run a distance of 399.00 feet;
thence turn a deflection angle to the left of 90 degrees 00' 00" and run a
distance of 560.00 feet to the northerly right-of-way line of Park Road;
thence turn a deflection angle to the left of 90 degrees 00' 00" and run along
the northerly right-of-way line of Park Road a distance of 399.00 feet to the
point of beginning.
Said parcel being in and a part of the SE 1/4 of NE 1/4 of Section 36,
Township 10 South, Range 14 West, Marion County, Alabama and containing 5.13
acres more or less.
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Exhibit 11
<TABLE>
<CAPTION>
CAVALIER HOMES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(dollars in thousands except per share amounts)
For the Year Ended December 31,
----------------------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------------- ----------------- -----------------
BASIC & PRIMARY
Net Income $ 10,247 $ 27,479 $ 17,630
================= ================= =================
SHARES:
Weighted average common shares
outstanding (basic) 19,834,942 19,362,944 16,629,523
Dilutive effect of stock options
and warrants 193,239 436,548 427,422
----------------- ----------------- -----------------
Weighted average common shares
outstanding, assuming dilution (diluted) 20,028,181 19,799,492 17,056,945
================= ================= =================
Basic net income per share $ 0.50 $ 1.40 $ 1.06
================= ================= =================
Diluted net income per share $ 0.50 $ 1.30 $ 1.03
================= ================= =================
</TABLE>
Exhibit 21
Subsidiaries of the Registrant
Cavalier Manufacturing, Inc., a Delaware corporation
Cavalier Industries, Inc., a Delaware corporation
Cavalier Acceptance Corporation, an Alabama corporation
Belmont Homes, Inc., a Mississippi corporation
Spirit Homes, Inc., an Arkansas corporation
Bellcrest Homes, Inc., a Georgia corporation
Delta Homes, Inc., a Mississippi corporation
Home Transportation Co., Inc., a Mississippi Corporation
Quality Housing Supply, LLC, a Tennessee limited liability company
Cavalier Insurance Agency, Inc., an Alabama corporation *
Blake Insurance Agency, Inc., an Alabama corporation *
* Effective January 1, 1998, Blake Insurance Agency, Inc. was merged with and
into Cavalier Insurance Agency, Inc. and the name of the corporation was changed
to Quality Certified Insurance Services, Inc., an Alabama corporation.
Exhibit 23(a)
Consent of Deloitte & Touche LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-20842, 33-20859, 33-86232, 33-86236, 333-06371, 333-04953, 333-19833 and
333-45255 of Cavalier Homes, Inc. on form S-8, and to the incorporation by
reference in Registration Statements Nos. 33-62487 (as amended), 33-63060 (as
amended), 33-86348 (as amended), 333-18213 (as amended), 333-00607 (as amended)
and 333-48111 of Cavalier Homes, Inc. on Form S-3 of our report dated February
17, 1998 (March 13, 1998 as to the amendment to the Credit Facility described in
Note 5), appearing in this Annual Report on Form 10-K of Cavalier Homes, Inc.
for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Birmingham, Alabama
March 30, 1998
Exhibit 23(b)
Independent Auditors' Consent
We consent to incorporation by reference in the Registration
Statements of Cavalier Homes, Inc. (Form S-8 Registration Nos. 33-20842,
33-20859, 33-86232, 33-86236, 333-06371, 333-04953, 333-19833, 333-45255 and
Form S-3 Registration Nos. 33-62487, 33-63060, 33-86348, 333-18213, 333-00607
and 333-48111, as amended) of our report dated February 21, 1997, with respect
to the consolidated balance sheet of Belmont Homes, Inc. and subsidiaries as of
December 31, 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995, which report appears in the December 31, 1997 annual report on Form 10K of
Cavalier Homes, Inc.
/s/ KPMG PEAT MARWICK LLP
- ------------------------------
KPMG Peat Marwick, LLP
Jackson, Mississippi
March 27, 1998
Exhibit 23(c)
Independent Auditors' Consent
We consent to incorporation by reference in the Registration
Statements of Cavalier Homes, Inc. (Form S-8 Registration Nos. 33-20842,
33-20859, 33-86232, 33-86236, 333-06371, 333-04953, 333-19833, 333-45255 and
Form S-3 Registration Nos. 33-62487, 33-63060, 33-86348, 333-18213, 333-00607,
333-48111 as amended) of our report dated January 23, 1996, with respect to the
statement of income of Bellcrest Homes, Inc. for the year ended December 31,
1995, which report is incorporated by reference in the Form 10-K of Cavalier
Homes, Inc. dated March 30, 1998.
/s/ Alday, Tillman, Wright & Giles, P.C.
- ----------------------------------------
Alday, Tillman, Wright & Giles, P.C.
Valdosta, Georgia
March 27, 1998
Exhibit 99(a)
Independent Auditors' Report
The Board of Directors and Shareholders
Belmont Homes, Inc.:
We have audited the accompanying consolidated balance sheet of Belmont Homes,
Inc. and subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the management of
the Company. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Belmont Homes, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Jackson, Mississippi KPMG Peat Marwick LLP
February 21, 1997
Exhibit 99(b)
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Bellcrest Homes, Inc.
Millen, Georgia
We have audited the accompanying statement of income of Bellcrest Homes, Inc.
for the year ended December 31, 1995. This statement of income is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this statement of income based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of income is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of income. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the statement of
income. We believe that our audit of the statement of income provides a
reasonable basis for our opinion.
In our opinion, the statement of income referred to above presents fairly, in
all material respects, the results of the operations of Bellcrest Homes, Inc.
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Alday, Tillman, Wright & Giles, P.C.
- ------------------------------------------
Alday, Tillman, Wright & Giles, P.C.
Valdosta, Georgia
January 23, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME OF CAVALIER
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FINANCIAL STATEMENTS.
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