| CAVALIER HOMES INC ITEM 1A RISK FACTORS If you are interested in making an investment in Cavalier, you should carefully consider the following risk factors concerning Cavalier and its business, in addition to the other information contained in this Report on Form 10-K: The manufactured housing industry is both cyclical and seasonal in nature, and the industry as a whole has declined significantly over the past seven years |
| The manufactured housing industry is highly cyclical and seasonal and has experienced wide fluctuations in aggregate sales in the past, resulting in the failure of many manufacturing concerns |
| Many of the same national and regional economic and demographic factors that affect the broader housing industry also affect the market for manufactured homes |
| Historically, most sectors of the home building industry, including the manufactured housing industry, have been affected by the following, among other things: o changes in general economic conditions; o inflation; o levels of consumer confidence; o employment and income levels; o housing supply and demand; o availability of alternative forms of housing; o availability of wholesale (dealer) financing; o availability of retail (consumer) financing; o the level and stability of interest rates; and o the availability of raw materials |
| According to industry statistics, after a ten-year low in floor shipments in 1991, the industry recovered significantly |
| Between 1992 and 1998, floor shipments increased each year, as set forth in the table below, although the growth rate gradually slowed and began to decline in 1999, and has declined significantly since |
| 6prca During much of the 1990s, the manufactured housing industry experienced increases in both the number of retail dealers and manufacturing capacity, which we believe ultimately created slower retail turnover, higher dealer inventories and increased price competition |
| Industry results for 2005 posted the first increase since 1998 with floor shipments increasing over 2004 by 6prca due to industry wide orders by the Federal Emergency Management Agency ( "e FEMA "e ) as part of that agencyapstas hurricane disaster relief efforts |
| The Manufactured Housing Institute ( "e MHI "e ) estimated FEMA shipments in the last four months of 2005 totaled approximately 17cmam000 floors, and in 2004 approximated 4cmam000 |
| In addition, the number of retail dealers failing and repossessions of manufactured homes have significantly improved in 2005 |
| Some manufactured housing wholesale and retail lenders also have discontinued business in the industry, and some of the remaining lenders have raised their interest rates and tightened their credit standards |
| We believe these conditions reflect that the manufactured housing industry is in a down cycle, which has had a material adverse effect on Cavalierapstas results of operations and financial condition |
| Sales in the manufactured housing industry are also seasonal in nature, with sales of homes traditionally being stronger in April through October and weaker during the first and last part of the calendar year |
| While seasonality did not significantly impact Cavalierapstas business from 1992 through 1996, when industry shipments were steadily increasing, the continued tightening of competitive conditions seems to signal a return to the industryapstas traditional seasonal patterns |
| Approximately 93dtta2prca of the Companyapstas sales in 2005 were to dealers operating sales centers in the Companyapstas core states |
| We cannot predict how long the tightening of competitive and industry conditions will last, or what the extent of their impact will be on the future results of operations and financial condition of Cavalier |
| Industry projections for wholesale shipments in 2006 are in the range of 146cmam000 to 160cmam000 |
| Our business strategy includes plans to grow our business in a competitive environment, and we may not be able to sustain profitability if we fail to maintain and strengthen our market share |
| Cavalierapstas current business strategies are to: o control costs in light of currently prevailing industry conditions; o attempt to generate an increase in sales in an increasingly competitive environment; o return to consistent profitability; o develop our exclusive and independent dealer network; o pursue the financing, insurance and other activities of CIS and the financial services segment; o attempt to further develop modular home sales base; and o eliminate redundant products to streamline production in an effort to reduce costs |
| Downturns in shipments in the manufactured housing industry and a decline in the demand for Cavalierapstas homes have had a material adverse effect on us |
| Our ability to execute our business strategy depends on a number of factors, including the following: o general economic and industry conditions; o our ability to control costs if industry production capacity decreases beyond current levels; o competition from other companies in the same business as us; o our ability to attract, retain or sell to additional independent dealers, especially exclusive dealers; o the availability of semi-skilled workers in the areas in which our manufacturing facilities are located; o the ability of CIS and the Companyapstas insurance and component parts operations to be competitive; o the availability of capital and financing; o the ability of our independent dealers and retail locations to compete under current industry conditions; o the ability to produce modular and HUD code products within the same manufacturing plants, o the availability and terms of wholesale and retail financing from lenders in the manufactured housing industry; and o market acceptance of product offerings |
| Cavalier cannot assure investors that our business strategy will be successful |
| If our strategy is unsuccessful, this may have a material adverse effect upon Cavalierapstas results of operations or financial condition |
| Our industry suffers from a lack of third-party financing, and our financial condition and results of operations could be negatively affected if additional third-party financing for the purchases of our homes does not become available |
| Third-party lenders generally provide consumer financing for manufactured home purchases |
| Our sales depend in large part on the availability and cost of financing for manufactured home purchasers and dealers as well as our own retail locations |
| The availability and cost of such financing is further dependent on the number of financial institutions participating in the industry, the departure of financial institutions from the industry, the financial institutions &apos lending practices, and the strength of the credit markets generally, governmental policies and other conditions, all of which are beyond our control |
| Throughout the past six years the industry has been impacted significantly by reduced financing available at both the wholesale and retail levels, with several lenders exiting the marketplace or limiting their participation in the industry, coupled with more restrictive credit standards and increased home repossessions which re-enter home distribution channels and limit wholesale shipments of new homes |
| The much-anticipated infusion of new and competitive lending capacity, which the Company believes is essential to support demand at higher levels, has not yet materialized |
| Until there is substantial entry of finance resources to the manufactured housing market, the Company believes a meaningful expansion for the industry will be delayed |
| Unfavorable changes in the availability and terms of financing in the industry may have a material adverse effect on Cavalierapstas results of operations or financial condition |
| Industry inventories of completed homes have been very high, which may impact retail demand and our ability to sell additional homes at current prices |
| Changes in the level of retail inventories in the manufactured housing industry, either up or down, can have a significant impact on the Companyapstas operating results |
| For example, due to the rapid expansion of the retail distribution network in the manufactured housing industry that occurred in much of the 1990apstas, there was an imbalance between industry retail inventories and consumer demand for manufactured homes |
| The deterioration in the availability of retail financing, along with competition from repossessed homes, extended the inventory adjustment period beyond what was originally expected |
| If these trends were to continue, or if retail demand were to significantly weaken further, the inventory overhang could result in even greater intense price competition, further pressure on profit margins within the industry, and have a material adverse effect on Cavalier |
| The Companyapstas inventory at all retail locations, including Company-owned retail sales centers, declined in 2005 to dlra71cmam000 from dlra99cmam600 in 2004, with dlra13cmam300 of the reduction resulting from the closure of the Ft |
| Worth, Texas facility |
| Cavalier believes that inventories of its homes are at levels which are more consistent with retail demand |
| In spite of these efforts, significant unfavorable developments or further deterioration within the industry would undoubtedly have an adverse impact on Company operating results |
| We depend on independent dealers for substantially all retail sales of our manufactured homes, and the failure or market exit of a significant number of these dealers could negatively affect our financial condition and results of operations |
| Cavalier depends on independent dealers for substantially all retail sales of our manufactured homes |
| Typically only one dealer within a given market area distributes a particular product line of ours |
| Our relationships with our dealers are cancelable on short notice by either party |
| The manufactured housing industry recently has experienced a trend of increasing competition for quality independent dealers |
| In addition, a number of dealers in the industry are experiencing difficulty in the current market conditions, as a number of retail dealers have failed and more dealers may fail before the current downturn ends |
| While we believe that our relations with our independent dealers are generally good, we cannot assure our investors that we will be able to maintain these relations, that these dealers will continue to sell our homes, that these dealers will be successful, or that we will be able to attract and retain quality independent dealers |
| Competition from other manufactured housing providers may adversely affect our profitability |
| The production and sale of manufactured homes is a highly competitive industry, characterized by low barriers to entry and severe price competition |
| Competition is based primarily on the following factors: o price; o product features and quality; o reputation for service quality; o depth of field inventory; o delivery capabilities; o warranty repair service; o dealer promotions; o merchandising; and o terms of wholesale (dealer) and retail (consumer) financing |
| In addition, Cavalier competes with other manufacturers, some of which maintain their own retail sales centers, for independent dealers |
| Manufactured homes also compete with other forms of low-cost housing, including site-built, prefabricated and modular homes, apartments, townhouses and condominiums |
| We face direct competition from numerous manufacturers, many of which possess greater financial, manufacturing, distribution and marketing resources |
| As a result of these competitive conditions, Cavalier may not be able to sustain past levels of sales or profitability |
| We sell a majority of our homes to dealers who finance the purchases under floor plan arrangements, which requires us to enter into contingent repurchase agreements to repurchase the homes from the lender in certain circumstances |
| Manufactured housing companies customarily enter into repurchase and other recourse agreements with lending institutions, which have provided wholesale floor plan financing to dealers |
| A majority of Cavalierapstas sales are made to dealers located primarily in the South Central and South Atlantic regions of the United States pursuant to repurchase agreements with lending institutions |
| These agreements generally provide that we will repurchase our products from the lending institutions at a declining price based upon the Companyapstas original invoice date and price in the event such product is repossessed upon a dealerapstas default |
| The risk of loss under repurchase agreements is lessened by the fact that (1) sales of our manufactured homes are spread over a relatively large number of independent dealers; (2) the price that Cavalier is obligated to pay under such repurchase agreements generally declines over the period of the agreement and also declines during such period based on predetermined amounts; and (3) Cavalier has been able to resell homes repurchased from lenders |
| While we have established a reserve for possible repurchase losses, we cannot assure investors that we will not incur material losses in excess of these reserves in the future |
| Our decisions regarding credit risk could be inaccurate and our reserve for credit losses could be inadequate, which could adversely affect our financial condition and results of operations |
| Cavalier purchases retail installment finance loans that have been originated by our dealers |
| We maintain a reserve for estimated credit losses on installment sale contracts owned by CIS to provide for future losses based on our historical loss experience, current economic conditions and portfolio performance |
| It is difficult to predict with any certainty the appropriate reserves to establish, and we cannot assure investors that CIS will not experience losses that exceed Cavalierapstas loss reserves and have a material adverse effect on Cavalierapstas results of operations and financial condition |
| Volatility or a significant change in interest rates might also materially affect CISapstas and Cavalierapstas business, results of operations or financial condition |
| Our strategy currently includes the continued operation of the financial services segment of our business |
| We also may engage in other transactions, such as selling portions of our installment loan portfolio, that are designed to facilitate the ability of CIS to purchase and/or originate an increased volume of loans and to reduce our exposure to interest rate fluctuations and installment loan losses |
| Accordingly, we may incur additional debt, or other forms of financing, in order to continue to fund such growth |
| CIS is currently re-selling installment loan contracts to other financial institutions |
| Cavalier believes the periodic sale of installment contracts under various retail finance agreements will reduce requirements for both working capital and borrowings, increase Cavalierapstas liquidity, reduce Cavalierapstas exposure to interest rate fluctuations and enhance the ability of CIS to increase its volume of loan purchases |
| However, we cannot assure investors that we will be able to make additional sales |
| We also cannot offer any assurance that possible additional financing, or the aforementioned transactions involving our installment loan portfolio, will be available on terms acceptable to Cavalier |
| If not, we may be forced to curtail our financial services business and to alter our other strategies |
| We obtain our raw materials from a limited number of suppliers, and unavailability or price increase in raw materials could have a material adverse effect on our financial condition and results of operations |
| The availability and pricing of raw materials used in the production of homes may significantly affect Cavalierapstas operating costs |
| Sudden increases in demand for these construction materials, as has recently occurred, 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, especially in competitive times, and, consequently, may adversely impact Cavalierapstas profitability |
| Further, a reduction in the availability of raw materials also may affect our ability to meet or maintain production requirements |
| Cavalier obtains a substantial amount of its supply of laminated wallboard from a wholly-owned subsidiary, and obtains a majority of its supply of cabinetry from another wholly-owned subsidiary |
| We depend upon these subsidiaries for a significant portion of the materials used to construct portions of our manufactured homes |
| The inability of either of these subsidiaries to provide laminated wallboard or cabinetry to the Company, whether due to materials shortages, destruction of manufacturing facilities or other events affecting production of these component parts, may affect our ability to meet or maintain production requirements |
| If manufactured housing sites are limited by zoning laws or other local regulation, our financial condition and results of operations could be materially adversely affected |
| Any limitation on the growth of the number of sites for placement of manufactured homes or on the operation of manufactured housing communities could adversely affect the manufactured housing business |
| Manufactured housing communities and individual home placements are subject to local zoning ordinances and other local regulations relating to utility service and construction of roadways |
| In the past, property owners often have resisted the adoption of zoning ordinances permitting the location of manufactured homes in residential areas, which Cavalier believes has adversely affected the growth of the industry |
| We cannot assure investors that manufactured homes will receive widespread acceptance or that localities will adopt zoning ordinances permitting the location of manufactured home areas |
| The inability of the manufactured home industry to gain such acceptance and zoning ordinances could have a material adverse effect on our financial condition or results of operations |
| We are dependent on the services of our management team, and the unexpected loss of key officers may adversely affect our operations |
| Cavalierapstas success depends highly upon the personal efforts and abilities of its current executive officers |
| Specifically, Cavalier relies on the efforts of its President and Chief Executive Officer, David A Roberson, its Chief Operating Officer, Gregory A Brown, and its Vice President, Chief Financial Officer and Secretary-Treasurer, Michael R Murphy |
| The loss of the services of one or more of these individuals could have a material adverse effect upon our business |
| We do not have employment or non-competition agreements with any of our executive officers |
| Our ability to continue to work through the industryapstas current downturn will depend upon our ability to attract and retain experienced management personnel |
| We are subject to extensive regulation affecting the production, sale, financing and insuring of manufactured housing, which could adversely affect our profitability |
| Cavalier is subject to a variety of federal, state and local laws and regulations affecting the production, sale, financing and insuring of manufactured housing |
| We suggest you refer to the section above under the heading "e Regulation "e for a description of many of these laws and regulations |
| Cavalierapstas failure to comply with such laws and regulations could expose us to a wide variety of sanctions, including closing one or more manufacturing facilities |
| Governmental bodies have regulatory matters affecting our operations under continuous review and we cannot predict what effect (if any) additional laws and regulations promulgated by HUD would have on us or the manufactured housing industry |
| Failure to comply with laws or regulations applicable to or affecting Cavalier, or the passage in the future of new and more stringent laws affecting Cavalier, may adversely affect us |
| We must comply with extensive environmental regulation, and failure in our compliance efforts could result in damages, expenses or liabilities that individually or in the aggregate would have a material adverse affect on our financial condition and results of operations |
| Federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment govern Cavalierapstas operations |
| In addition, third parties and governmental agencies in some cases have the power under such laws and regulations to require remediation of environmental conditions and, in the case of governmental agencies and entities, to impose fines and penalties |
| The requirements of such laws and enforcement policies have generally become stricter in recent years |
| Accordingly, we cannot assure investors that we will not be required to incur response costs, remediation expenses, fines, penalties or other similar damages, expenses or liabilities, or to incur operational shut-downs, business interruptions or similar losses, associated with compliance with environmental laws and enforcement policies that either individually or in the aggregate would have a material adverse effect on our results of operations or financial condition |
| Our liability for estimated warranties may be inadequate, which could materially and adversely affect our business, financial condition and results of operations |
| Cavalier is subject to warranty claims in the ordinary course of its business |
| Although we maintain reserves for such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate |
| A large number of warranty claims exceeding our current warranty expense levels could have a material adverse effect on Cavalierapstas results of operations |
| The market price of our common stock will fluctuate and could fluctuate significantly, causing our common stock to trade at prices below the current market price |
| The Companyapstas common stock is currently traded on the American Stock Exchange |
| The market price of the Companyapstas common stock may be subject to significant fluctuations in response to variations in the Companyapstas operating results and other factors affecting the Company specifically, the manufactured housing industry generally, and the stock market generally |