Overview

Cavalier Homes, Inc. and its subsidiaries produce and sell manufactured housing. Unless otherwise indicated by the context, references to the terms "we," "us," "our," "Company," or "Cavalier" include Cavalier Homes, Inc., its subsidiaries, divisions of these subsidiaries and their respective predecessors, if any. The manufactured housing industry is cyclical and seasonal and is influenced by many of the same economic and demographic factors that affect the housing market as a whole. The crises in the credit markets and overall economic conditions have created a very challenging environment in the manufactured housing industry.

Two transactions were completed during the first quarter this year that impacted our earnings, which are as follows:

· In February 2009, we sold an idle facility in Cordele, Georgia, recognized a gain on the sale of $1,259, and received net cash of $2,797after deducting closing costs.

· In February 2009, we completed the sale of our financial services subsidiary and recorded a gain of $675. The total purchase price of $3,015 consists of the following: $765 paid at closing plus an Amount Due of $2,250, which will be paid to us within 180 days of the closing date. The Amount Due bears interest at 6% on the average outstanding balance. We received a payment of $1,000 on the Amount Due in the quarter ended March 28, 2009 and received additional payments after the end of the quarter through April 15, 2009 totaling $1,030.

In 2009, we expect to use some of our cash to provide financing under various floor plan programs, including a program of one of the national floor plan lenders that requires manufacturers to advance funds to that lender in consideration for that lender providing financing to dealers to purchase our products.

Industry/Company Shipments and Market Share

Based on the latest data available from MHI, wholesale floor shipments of
HUD-Code homes declined 48% in the first two months of 2009 compared to the
first two months of 2008. The following table shows the decline in floor
shipments over the last three years and information with respect to Cavalier
during those years.

                                                                                                      Floor Shipments
                                                              Nationwide                                                                   Cavalier's Core 11 States
                                            Increase                            Increase                                         Increase                            Increase
                                         (decrease) from                     (decrease) from                                  (decrease) from                     (decrease) from
                                              prior                               prior            Market                          prior                               prior            Market
Year                       Industry           year             Cavalier           year              Share       Industry           year             Cavalier           year              Share
2006                         206,822               (16.2 )%        8,261               (22.4 )%         4.0 %      86,748               (17.8 )%        7,774               (21.5 )%         9.0 %
2007                         163,761               (20.8 )%        7,378               (10.7 )%         4.5 %      69,115               (20.3 )%        6,568               (15.5 )%         9.5 %
2008                         135,338               (17.4 )%        6,076               (17.6 )%         4.5 %      58,145               (15.9 )%        5,789               (11.9 )%        10.0 %
Two months ended 2/28/09      11,790                                 525                                4.5 %       5,667                                 499                                8.8 %

During 2008, our floor shipments decreased 17.6% as compared to 2007, while industry wide shipments decreased 17.4%, with our market share in 2008 remaining 4.5%. In our core states, our market share in 2008 increased to 10.0% from 9.5% in 2007 due to our participation in the MEMA Alternative Housing Pilot Program. For the two months ended February 28, 2009, our total market share remained 4.5%, but our market share in our core 11 states decreased to 8.8% due in part to the completion of our contract with MEMA in mid-2008.

A major factor that impacts the manufactured housing industry is the availability of credit and the tightening/relaxation of credit standards. In late 2008, the three major national floor plan lenders announced plans to discontinue or modify their programs, which negatively impacted the amount of funds available to dealers in the manufactured housing industry during the first quarter of 2009 and contributed to the 48% decrease in HUD-Code wholesale floor shipments in the first two months of 2009 as noted above.

Capacity and Overhead Cost

Our plants operated at capacities ranging from 21% to 38% in the quarter ended March 28, 2009. We continue to monitor the relationship between demand and capacity and may take additional steps to adjust our capacity or enhance our operations based on our views of the industry and its general direction.

Outlook

As we noted in 2008, we will continue to focus on operating activities to improve manufacturing efficiencies, increase gross margins, reduce costs overall, and improve liquidity. We believe general economic issues, unemployment, and the current credit and financial market crisis, continue to indicate weakness in the manufactured housing market. Further deterioration in overall economic conditions that affect consumer purchases, availability of adequate financing sources, increases in repossessions or dealer failures and increases in material prices could affect our results of operations.

Results of Operations

The following table summarizes certain financial and operating data, including,
as applicable, the percentage of total revenue:

                                                                    Quarter Ended
Statement of Operations Data:             March 28, 2009           March 29, 2008             Differences
Revenue                                $ 19,254       100.0 %   $ 48,681       100.0 %   $ (29,427 )     (60.4 )%
Cost of sales                            15,148        78.7       41,216        84.7       (26,068 )     (63.2 )
Gross profit                              4,106        21.3        7,465        15.3        (3,359 )     (45.0 )
Selling, general and administrative       5,499        28.6        7,549          --        (2,050 )     (27.2 )
Gain on sale of property, plant and
equipment                                (1,259 )      (6.6 )         --        15.4        (1,259 )       n/m
Operating loss                             (134 )      (0.7 )        (84 )      (0.1 )         (50 )     (59.5 )
Other income (expense):
Interest expense                            (72 )      (0.4 )       (128 )      (0.3 )          56       (43.8 )
Other, net                                   50         0.3          147         0.4           (97 )     (66.0 )
                                            (22 )      (0.1 )         19         0.1           (41 )       n/m
Loss before income taxes and equity
in earnings (losses) of
equity-method investees                    (156 )      (0.8 )        (65 )      (0.0 )         (91 )       n/m
Income tax benefit                         (156 )      (0.8 )        (46 )      (0.1 )        (110 )       n/m
Equity in earnings (losses) of
equity-method investees                     (17 )      (0.1 )         45         0.1           (62 )       n/m
Income (loss) from continuing
operations                                  (17 )      (0.1 )         26         0.0           (43 )       n/m
Income from discontinued operations
including gain on sale of $675, net
of income taxes                             158         0.8           92         0.2            66        71.7
Net income                             $    141         0.7 %   $    118         0.2 %   $      23        19.5 %



                                                               Quarter Ended
  Operating Data:                                 March 28, 2009          March 29, 2008
  Home manufacturing:
  Floor shipments:
  HUD-Code                                          777        96.5 %     1,745        95.8 %
  Modular                                            28         3.5          77         4.2
  Total floor shipments                             805       100.0 %     1,822       100.0 %
  Home shipments:
  Single-section                                    143        30.2 %       495        42.8 %
  Multi-section                                     330        69.8         662        57.2
  Wholesale home shipments                          473       100.0       1,157       100.0
  Shipments to company-owned retail locations        (1 )      (0.2 )        (3 )      (0.3 )
  MEMA shipments                                     --          --        (170 )     (14.7 )
  Shipments to independent retailers                472        99.8         984        85.0
  Retail home shipments                               3         0.6           5         0.4
  Shipments other than to MEMA                      475       100.4 %       989        85.4 %
  Other operating data:
  Capital expenditures                          $   168                 $    70
  Home manufacturing facilities (operating)           5                       5
  Independent exclusive dealer locations             48                      62

Revenue

Revenue for the first quarter of 2009 totaled $19,254, decreasing $29,427 or 60.4%, from 2008's first quarter revenue of $48,681. Wholesale home shipments decreased 59.1%, with floor shipments decreasing by 55.8%. The decrease in

manufactured home revenue and shipments is generally consistent with the decline in overall industry shipments in the first two months of the year, excluding the 170 MEMA units shipped in the first quarter of 2008 for approximately $8,070. Multi-section home shipments, as a percentage of total shipments, were 69.8% in the first quarter of 2009 as compared to 57.2% in 2008. Single-section homes, as a percentage of total shipments, decreased to 30.1% in the first quarter of 2009 from 42.8% in the same quarter of 2008. The primary cause of the decrease in single-section shipments in the first quarter 2009 was due to single-section units shipped to MEMA in the first quarter last year. Of the non-MEMA shipments, 56% in 2009 and 55% in 2008 were to exclusive dealers. The number of independent dealers participating in our exclusive dealer program declined from 62 at March 29, 2008 to 48 at March 28, 2009. This reduction in our exclusive dealer program is due to a shift by some of these dealers to other dealer agreements that we offer, but also due to dealer locations that have closed. Total home shipments (wholesale and retail) for the first quarter of 2009 were 475 versus 1,159 in 2008. Inventory of our product at all retail locations, including the Company-owned retail center, decreased to approximately $63,000 at March 28, 2009 from $83,200 at March 29, 2008.

Gross Profit

Gross profit was $4,106, or 21.3% of total revenue, for the first quarter of 2009, a decrease from $7,465, or 15.3%, in 2008. The decrease in gross profit is attributable to the decline in unit volume. The improvement in gross margin is a result of a number of factors, including (i) the impact of adjustments to certain accruals and reserves as described below, (ii) increases in unit sales prices during the last year, and (iii) improvements in manufacturing efficiencies, offset by the negative impact of the volume decrease. Our average wholesale sales price per unit (including MEMA) in the first quarter of 2009 decreased to approximately $39,700 from $41,000 in the first quarter of 2008 as a result of product sales mix. Excluding MEMA home shipments, our average wholesale sales price per unit was $39,900 in the first quarter of 2008. We adjusted accruals as a result of the sale of the Cordele, Georgia facility, which increased gross profit by $250. We reduced overhead costs associated with the service group as part of our cost reduction plans. This reduction resulted in an adjustment to the warranty reserve in the first quarter of 2009, which increased gross profit by $895. During the quarter ended March 28, 2009, we repurchased 37 homes under our dealer repurchase agreements due to dealer failures compared to no homes repurchased in the quarter ended March 29, 2008, which reduced gross profit between the two periods by $345. Gross margin in the first quarter of 2009, excluding these three items, was 16.9%.

Selling, General and Administrative

Selling, general and administrative expenses ("SG&A") during the first quarter of 2009 were $5,499 or 28.6 % of revenue, compared to $7,549 or 15.5 % in 2008, a decrease of $2,050, as a result of our focus to reduce costs. Lower SG&A was primarily due to (i) an overall decrease in salaries, wages, and employee benefits of $1,387 as a result of lower headcount and reduced sales commissions,
(ii) lower levels of advertising and promotions of $263, and (iii) a total of $400 for all other administrative expenses.

Gain on Sale of Property, Plant and Equipment

In February 2009, we completed the sale of our idled facility in Cordele, Georgia, and recorded a gain of $1,259.

Other Income (Expense)

Interest expense for the quarter was $72 compared to $128 in the first quarter of 2008. This decrease is primarily due to the decrease in outstanding debt between the two periods from scheduled and additional payments in 2008 and the first quarter of 2009.

Other, net is comprised primarily of interest income and decreased $97 to $50 for the first quarter of 2009 from $147 for the same period in 2008 due to the decrease in interest rates.

Income Tax Provision

We recorded an income tax benefit from continuing operations of $156 in the quarter ended March 28, 2009 that includes an $11 reduction for uncertain tax positions taken in prior years and $1 of interest related to uncertain tax positions, net of a tax provision of $146 allocated to discontinued operations. The income tax benefit from continuing operations of $46 in the quarter ended March 29, 2008 is $2 of interest related to uncertain tax positions, net of a tax provision of $57 allocated to discontinued operations.

Since December 31, 2006, we have maintained a valuation allowance to fully reserve our deferred tax assets due to a number of factors, including among others, operating losses and uncertainty of future operating results. We did not record a federal income tax benefit in the quarters ended March 28, 2009 and March 29, 2008 because management believes it is not appropriate to record income tax benefits in excess of anticipated refunds and certain carryforward items under the provisions of SFAS No. 109, Accounting for Income Taxes. As of March 28, 2009, our valuation allowance against deferred tax assets totaled approximately $16,000. The valuation allowance may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer needed.

Income from Discontinued Operations including Gain on Sale of $675, Net of Income Taxes

On February 27, 2009, we completed the sale of our financial services subsidiary, CIS Financial Services, Inc. ("CIS") to Triad Financial Services, Inc. ("Triad") and recorded a gain of $675. The purchase price was $765 in cash, paid at closing, plus a total of $2,250 ("Amount Due") for the principal balance of installment contracts held for resale, which will be paid to us as collected by the purchaser within 180 days of the closing date. The Amount Due bears interest at 6% on the average outstanding balance. We received payments from Triad on the Amount Due of $1,000 in the quarter ended March 28, 2009. Revenues from CIS totaled $243 and $835 for the first quarters of 2009 and 2008, respectively, and income (loss) from discontinued operations before provision for income taxes was $(371) and $149 for the first quarter of 2009 and 2008, respectively. The provision for income taxes allocated to discontinued operations totaled $146 and $57, respectively. For the quarter ended March 28, 2009, we purchased contracts of $2,182 and sold installment contracts totaling $853. For the quarter ended March 29, 2008, we purchased contracts of $8,923 and sold installment contracts totaling $8,911.

Net Income

Net income for the first quarter of 2009 was $141 or $0.01 per diluted share
compared to $118 or $0.01 per diluted share in the same period last year. The
changes between these two periods are due to the items discussed above.

Liquidity and Capital Resources

                                                                         Balances as of
                                                                    March 28,      December
                                                                      2009         31, 2008
Cash, cash equivalents, and certificates of deposit                 $  27,223     $   31,198
Working capital                                                     $  25,822     $   24,662
Current ratio                                                        2.1 to 1       1.9 to 1
Long-term debt:
Current                                                             $     552     $      707
Long-term                                                                  10            959
Total                                                               $     562     $    1,666
Installment loan portfolio                                          $   2,245     $    3,543

Quarter Ended March 28, 2009

Cash decreased $3,975 from $31,198 at December 31, 2008 to $27,223 at March 28, 2009. Our cash and cash equivalents in the first quarter of each year generally decrease from the beginning of the year cash balances due to a number of factors: (i) the closing of our facilities at the end of December for plant-wide vacations and holidays, which results in lower average levels of inventories and accounts receivable and higher levels of cash at December 31st, (ii) a return to normal operating levels of inventory and accounts receivable at the end of the first quarter due to production through March month-end, and (iii) lower shipments in the first quarter of each year in comparison to other quarters due to the weather and buying patterns of retail customers.

Operating activities used net cash of $6,768 primarily as a result of the following:

(a) an increase in accounts receivable of $2,453 due to the seasonal increase in receivables from the traditional low point in December,

(b) a total of $1,019, which represents a calculated net loss for the quarter that excludes certain non-cash items, including depreciation, stock-based compensation, provision for credit and accounts receivable losses, gain on sale of property, plant and equipment and gain on sale of discontinued operations,

(c) a decrease in amounts payable under dealer incentive programs of $658,

(d) the net purchase of installment contracts for resale of $1,329, and

(e) a decrease in accrued compensation and related withholdings of $1,032 due to the payment in 2009 of incentive compensation earned and accrued in 2008.

Investing activities provided cash in the first quarter of 2009 of $4,150, primarily the proceeds from the sale of the idle facility in Cordele, Georgia of $2,797, proceeds from the sale of discontinued operations of $694, and collections on notes and Amount Due totaling $1,086. Our capital expenditures totaled $168 during the first quarter of 2009 for normal property, plant and equipment additions and replacements. In the first quarter of 2009, we loaned $340 to a national lender under its modified dealer floor plan lending program, which provides that we advance to it two-thirds of the invoice amount for homes floored with this lender. We expect to use up to $5,000 for loans to this lender under this program to provide floor plan resources to certain dealers impacted by the modification or termination of programs offered by the national floor plan lenders.

The decrease in long-term debt for the first quarter of 2009 was due to scheduled and additional principal payments totaling $1,104. Net payments on our retail floor plan agreement totaled $253 in the first quarter of 2009.

Quarter Ended March 29, 2008

Cash decreased $2,832 from $22,043 at December 31, 2007 to $19,211 at March 29, 2008. As noted above, this decline in cash at March 29, 2008 is consistent with the trend in the first quarter, but declined less this year than in prior years due to our focus to increase gross margins, reduce costs, and improve manufacturing efficiencies, including a decrease in inventory levels.

Operating activities used net cash of $5,130 primarily as a result of the following:

(a) an increase in accounts receivable of $8,640 due to the seasonal increase in receivables from the traditional low point in December,

(b) a decrease in amounts payable under dealer incentive programs of $616, offset by

(c) a decrease in inventories of $1,010,

(d) an increase of $1,578 in accounts payable, again reflecting normal production levels in March compared to the seasonality of low production levels in late December, and

(e) net income excluding non-cash payments for depreciation, provision for credit losses and stock based compensation totaling $877.

Investing activities provided cash in the first quarter of 2008 of $2,447, primarily from cash received on the December 31, 2007 sale of a portion of our installment contracts held for investment. Our capital expenditures, excluding a $29 addition financed through a capital lease transaction, totaled $41 during the first quarter of 2008 for normal property, plant and equipment additions and replacements.

The decrease in long-term debt for the first quarter of 2008 was due to scheduled principal payments of $161. Net borrowings under our retail floor plan agreement were $12 in the first quarter of 2008.

The installment loan portfolio totaling $7,569 at March 29, 2008 decreased from the balance at December 31, 2007 due to our decision to reduce the balance in this portfolio.

General Liquidity and Debt Agreements

Historically, we have funded our operating activities with cash flows from operations supplemented by available cash on hand and, when necessary, funds from our Credit Facility. We have also benefited from the proceeds from sales of idle facilities as an additional source of funds. As note above, we received cash of $2,797 from the sale of the Cordele, Georgia facility in the quarter ended March 28, 2009. We have one remaining idle facility that is being marketed for sale; however, we cannot predict when or at what amounts the facility will ultimately be sold.

We had a credit agreement with our primary lender (the "Credit Facility"), which was amended from time to time with a maturity date in April 2009. After evaluating the renewal terms offered, we decided not to renew the Credit Facility due to the cost of the renewal, collateral requirements, and the fact that we had only borrowed under the revolving line of credit portion of the Credit Facility on two instances during the last five years to fund material purchases related to contracts with governmental agencies to deliver homes for disaster relief. The lender has agreed to keep the real estate term loan portion of the Credit Facility in place, and we entered into a security agreement with the lender related to outstanding letters of credit. Under this security agreement, we transferred $3,773 of cash in April 2009 to a restricted cash account that is pledged as collateral for outstanding letters of credit.

The real estate term loan agreement contained in the Credit Facility provided for an initial borrowing of $10,000, of which $41 and $490 was outstanding on March 28, 2009 and December 31, 2008, respectively. Interest on the term note is fixed for a period of five years from September 2008 at 7.0% and may be adjusted in September 2013.

The Credit Facility contained certain restrictive and financial covenants which, among other things, limited our ability without the lender's consent to (i) make dividend payments and purchase treasury stock in an aggregate amount which exceeded 50% of consolidated net income for the two most recent years, (ii) mortgage or pledge assets which exceeded in the aggregate $1,000, (iii) incur additional indebtedness, including lease obligations, which exceeded in the aggregate $1,000, excluding floor plan notes payable which could not exceed $3,000 and (iv) make annual capital expenditures in excess of $5,000. In addition, the Credit Facility contained certain financial covenants requiring us
(i) to maintain on a consolidated basis certain defined levels of liabilities to tangible net worth ratio (not to exceed 1.5 to 1), (ii) to maintain a current ratio, as defined, of at least 1.1 to 1, (iii) maintain minimum cash and cash equivalents of $5,000, (iv) achieve an annual cash flow to debt service ratio of not less than 1.35 to 1 for the year ended December 31, 2008, and (v) achieve an annual minimum profitability of $100. The Credit Facility also required CIS to comply with certain specified restrictions and financial covenants. At March 28, 2009, we were in compliance with our debt covenants.

We had amounts outstanding under Industrial Development Revenue Bond issues ("Bonds") totaling $500 and $1,155 at March 28, 2009 and December 31, 2008, respectively. One bond issue bearing interest at 5.25% was repaid in February 2009 in connection with the sale of our Cordele, Georgia facility. The second bond issue with annual installments payable through 2013 provides for monthly interest payable at a variable rate as determined by a remarketing agent. Due to turmoil in the credit markets, the remarketing agent was unable to market this bond at the end of March. Therefore, in accordance with the underlying credit agreement, the bonds have been called and the amount outstanding of $500 is currently due in June 2009. The long-term portion of this bond totaling $385 was re-classified as a current liability in our condensed consolidated balance sheet as of March 28, 2009 and the interest rate on this debt increased to prime. In April 2009, we repaid the outstanding balance of these bonds. The real estate term loan and the Bonds are collateralized by substantially all of our plant facilities and equipment.

We had $0 and $253 of notes payable under a retail floor plan agreement at March 28, 2009 and December 31, 2008, respectively. The notes are collateralized by certain retail new home inventories and bear interest rates ranging from prime to prime plus 2.5% but not less than 6% based on the age of the home. At March 28, 2009 and December 31, 2008, respectively, $21 was outstanding under a capital lease obligation.

We believe existing cash and cash provided by operations will be adequate to fund our operations and plans for the next twelve months. However, there can be no assurances to this effect. If it is not, we would seek to obtain short or long-term indebtedness or other forms of financing, asset sales, and/or the sale . . .