CVCO

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Cavco Industries, Inc., a manufacturer and retailer of manufactured homes. Effective June 30, 2003, Cavco Industries, LLC merged into Cavco Industries, Inc., and 100% of the outstanding shares were distributed to stockholders of Centex Corporation, making Cavco a separate public company. The financial statements reflect this reorganization as if it occurred prior to the reporting period.

Key Financial Metrics

Note: All dollar amounts are in thousands. The company had no third-party debt or interest expense in Q2 2003 following the repayment of debt and capital contribution from Centex prior to March 31, 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 12.6% to $29.5 million, driven by a 7.0% increase in floors shipped (1,519 vs. 1,419) and a 5.2% increase in average wholesale sales price per floor.
• Profitability: Net income surged to $1.57 million from $475,000 the prior year. This improvement was aided by the elimination of losses from discontinued manufacturing operations (which were distributed to Centex) and reduced losses from discontinued retail operations.
• Cash Flow: Operating cash flow turned positive, providing $4.98 million compared to a use of $814,000 in the prior year. This was primarily due to operating income and an increase in accounts payable/accrued expenses related to the transition to new banking accounts.
• Liquidity: Cash balances increased from $0 to $18.16 million, largely due to a $13.2 million capital contribution from Centex to settle intercompany balances prior to the spin-off.

Guidance, Outlook, and Risks

Outlook and Liquidity: Management believes cash on hand, proceeds from retail assets held for sale, and operating cash flow will fund operations for at least the next twelve months. The company has secured a commitment for a $15 million revolving line of credit from Bank One N.A., subject to final documentation. Borrowing availability is limited to 80% of eligible receivables and 50% of eligible inventory (up to $5 million).

Discontinued Operations: The company is disposing of certain retail sales centers. Losses in this segment are primarily related to accrued lease costs for closed locations. Manufacturing facilities in New Mexico and Texas were distributed to Centex and are classified as discontinued.

Risks and Contingencies:

• Repurchase Agreements: The company is contingently liable for approximately $21.9 million under repurchase agreements with financial institutions for independent retailers. A reserve of $2.0 million has been established.
• Legal Proceedings: The company faces various legal proceedings typical of the industry (warranty, product liability). Management does not expect a material adverse effect, though unanticipated judgments are possible.
• Market Risks: The company is exposed to interest rate risk but currently has no foreign currency or commodity price risk. It is not party to market risk-sensitive instruments.

Investor Verification Checklist

• Verify the final execution and terms of the $15 million revolving credit facility with Bank One N.A.
• Monitor the progress of the disposal of retail assets held for sale ($7.35 million) and the realization of expected cash proceeds.
• Review the impact of the transition to a standalone public company on SG&A expenses, which increased 19.5% year-over-year.
• Assess the adequacy of the $2.0 million reserve against the $21.9 million contingent liability for retailer repurchase agreements.
• Confirm the sustainability of the 18.0% gross margin given the mix of larger homes and options driving higher average sales prices.