Acquisition of Palm Harbor Homes, Inc.

3 Months Ended

Jun. 30, 2011

Acquisition of Palm Harbor Homes, Inc. [Abstract]

Acquisition of Palm Harbor Homes, Inc.

19. Acquisition of Palm Harbor Homes, Inc.

Description of the Acquisition — Fleetwood Homes, through its wholly-owned subsidiary, Palm Harbor Delaware, entered into the Purchase Agreement with Palm Harbor Florida to purchase substantially all of the assets, and assume specified liabilities, of Palm Harbor Florida, pursuant to an auction process under Section 363 of the U.S. Bankruptcy Code. On March 1, 2011, Palm Harbor Delaware was selected as the successful bidder in the court auction. The transaction was approved and a sale order entered by the U.S. Bankruptcy Court on March 4, 2011.

During the first quarter of fiscal year 2012, Palm Harbor Delaware completed the purchase of the Palm Harbor Florida assets and the assumption of specified liabilities pursuant to the Amended and Restated Asset Purchase Agreement dated March 1, 2011. The effective date of the transaction was April 23, 2011 (the “Acquisition Date”), except for the stock of Standard Casualty Co. The aggregate gross purchase price was $83.9 million and is exclusive of transaction costs, specified liabilities assumed and post-closing adjustments. Of the purchase price, (i) approximately $45.3 million was used to retire the debtor-in-possession loan previously made by Fleetwood Homes to Palm Harbor Florida; and (ii) $13.4 million was deposited in escrow pending regulatory approval to transfer the stock of Standard Casualty Co. to Acquisition Co., at which time the escrowed funds will be released to the Palm Harbor estate. The purchase price was funded by Fleetwood Homes’ cash on hand, along with contributions of $36.0 million each from the Company and Third Avenue (see Note 21).

Palm Harbor Delaware acquired five operating manufactured housing production facilities, idled factories in nine locations, 49 operating retail locations, one office building, real estate, all related equipment, accounts receivable, customer deposits, inventory, certain trademarks and trade names, intellectual property, and specified contracts and leases. In addition, as of the Acquisition Date, Palm Harbor Delaware purchased all of the outstanding shares of CountryPlace Acceptance Corp., CountryPlace Mortgage, Ltd. and their wholly-owned finance subsidiaries. Palm Harbor Delaware also acquired all of the outstanding shares of Standard Insurance Agency, Inc. and its wholly-owned insurance agency subsidiary., On June 7, 2011, regulatory approval of the acquisition of Standard Casualty Co. was received from the Texas Department of Insurance and on June 10, 2011 (the “SCC Acquisition Date”), Palm Harbor Delaware completed the purchase of Standard Casualty Co. Further, Acquisition Co. assumed certain liabilities of Palm Harbor Florida, including primarily debt facilities of the finance subsidiaries.

The foregoing descriptions of the DIP Agreement, DIP Security Agreement, and Purchase Agreement do not purport to be complete and are qualified in their entirety by reference to the DIP Agreement, the DIP Security Agreement, and the Purchase Agreement which were filed as Exhibits 10.1, 10.2, and 10.3, respectively, to the Company’s Current Report on Form 8-K filed with the SEC on November 29, 2010.

The purchase of the Palm Harbor Florida assets provides further operating capacity, increased home distribution, and entry into financial and insurance businesses specific to the Company’s industry. The transaction further expanded the Company’s geographic reach at a national level by adding factories and retail locations serving the Northwest, South Central, Southeast and Mid-Atlantic regions. The Company believes it will have the opportunity to achieve certain synergies and cost reductions by eliminating redundant processes and overhead.

Acquisition Date Fair Value of Consideration Transferred — The following table details the acquisition-date fair value of the consideration transferred to acquire Palm Harbor (in thousands), of which $74.0 million was in cash:

	Acquisition Date
	Fair Value
Cash advanced to Palm Harbor under DIP financing, credited to purchase	$	44,117
Paid-in-kind interest on DIP financing, credited to purchase price		1,184
Additional cash consideration		29,917
Amounts credited for customer deposits acquired at closing		8,682
Total consideration transferred	$	83,900

Recording of Assets Acquired and Liabilities Assumed — The acquisition has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of the Acquisition Date. Certain estimated values are not yet finalized (see below) and are subject to change, which could be significant. The allocation of the purchase price is still preliminary due to the short duration since the Acquisition Date and will be finalized upon completion of the analysis of the fair values of Palm Harbor’s assets and specified liabilities. The Company will finalize the amounts recognized as we obtain the information necessary to complete the analysis. We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date.

The following table summarizes the provisional estimated fair values of the assets acquired and liabilities assumed at the acquisition dates (in thousands):

	Acquisition Date
	Fair Value
Cash and cash equivalents	$	15,077
Restricted cash		5,924
Investments		16,636
Accounts receivable (1)		3,219
Inventories		42,034
Prepaid expenses and other assets		2,781
Property, plant and equipment		13,782
Assets held for sale		9,278
Consumer loans receivable		126,030
Deferred income tax assets		14,532
Intangible assets (2)		15,294
Total identifiable assets acquired	$	264,587
Accounts payable of the finance subsidiaries	$	(1,917	)
Accrued liabilities		(27,503	)
Construction lending line		(3,974	)
Securitized financings		(101,786	)
Debt of the finance subsidiaries		(19,456	)
Deferred income tax liabilities		(7,271	)
Total liabilities assumed		(161,907	)
Net identifiable assets acquired		102,680
Bargain purchase recognized		(18,780	)
Net assets acquired	$	83,900

(1)

The fair value of accounts receivables acquired is $3,219, with the gross contractual amount being $3,601. The Company determined that $382 would be uncollectible.

(2)

Of the $15,294 of acquired intangible assets, $5,450 was assigned to trademarks and trade names and $1,100 was assigned to state insurance licenses, which are considered indefinite lived intangible assets and are not subject to amortization and $8,744 was assigned to customer-related intangibles, technology and insurance business in force, policies and renewal rights, subject to a weighted-average useful life of approximately 5 years.

In connection with the acquisition of Palm Harbor, approximately $30 million was transferred at closing of the Palm Harbor transaction on April 23, 2011 and $19.5 million was used to retire a certain debt obligation of the Company’s new subsidiary, CountryPlace Acceptance Corp., on May 10, 2011 (including payoff of the loan, prepayment penalty and related legal fees).

During the fiscal quarter ended June 30, 2011, the Company recognized $744,000 of acquisition related costs that were expensed as incurred. During the year ended March 31, 2011, the Company recognized $272,000 of acquisition related costs. These costs were recognized in selling, general and administrative expenses on the Consolidated Statement of Operations. We anticipate additional acquisition-related costs in fiscal year ended March 31, 2012 related to the purchase of the Palm Harbor assets.

Because the Company purchased Palm Harbor out of bankruptcy, the fair value of identifiable assets acquired and specified liabilities assumed exceeded the fair value of the consideration transferred. In accordance with ASC 805, Business Combinations, the Company consequently reassessed the recognition and measurement of identifiable assets acquired and specified liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain on bargain purchase of $18.8 million in its consolidated statements of operations for the quarter ended June 30, 2011.

The recorded amounts are provisional and subject to change primarily as follows:

• Amounts for inventory and property and equipment are pending completion of certain confirmation of physical existence and condition.

• Amounts for intangibles, property held for sale, consumer loans receivable, securitized financing obligation, deferred income taxes and accrued liabilities are pending finalization of valuation efforts.

A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. Judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact results of operations.

Pro Forma Impact of Acquisition (unaudited) — The following table presents supplemental pro forma information as if the acquisition of Palm Harbor had occurred on April 1, 2010 (in thousands):

	Unaudited Pro Forma
	Consolidated Results
	Three Months Ended June 30,
	2011			2010
Revenues	$	113,034		$	123,681
Income (loss) attributable to Cavco stockholders		(968	)		9,270
Diluted earnings per common share attributable to Cavco stockholders		(0.14	)		1.37

The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the historical financial information of Cavco and Palm Harbor, reflecting both Cavco and Palm Harbor results of operations for the three months ended June 30, 2011 and 2010, respectively. The historical financial information has been adjusted to give effect to the pro forma events that are: (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition on April 1, 2010. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisition, including the elimination of overhead costs. The results reflect primarily the following pro forma pre-tax adjustments:

• Reclassification of amounts to conform to Cavco’s accounting policies resulting in no impact to net income/(loss) (grossed up both net sales and cost of sales by $0.8 million and $4.4 million for the three months ended June 30, 2011 and 2010, respectively, and decreased SG&A and increased cost of sales by $0.7 million and $1.5 million, respectively).

• Reclassification of amounts to conform to Cavco’s accounting policies for revenue recognition in the retail sales process, resulting in the reclassification of net sales and cost of sales among periods. These revenue recognition adjustments resulted in a decrease in net sales and cost of sales for the three months ended June 30, 2011 of $$203,000 and $166,000, respectively, net of adjustment for amounts deferred under Cavco’s revenue recognition policy. For fiscal year 2010, the revenue recognition pro forma adjustment resulted in a net decrease in net sales of $565,000 and an increase in cost of sales of $12,000, respectively.

• Elimination of Palm Harbor’s historical interest expense related to Senior Convertible Notes discharged in bankruptcy, a note payable settled prior to the bankruptcy and a credit agreement that has been terminated and will not be a part of the Company’s capitalization going forward ($239 and $2,249 in the three months ended June 30, 2011 and 2010, respectively).

• Elimination of $1.9 million of costs incurred and $187,000 of interest income in the three months ended June 30, 2011, which are directly attributable to the bankruptcy and subsequent acquisition, and which do not have a continuing impact on the combined company’s operating results. Included in these costs are advisory, legal and regulatory costs incurred by both legacy Cavco and legacy Palm Harbor and income and costs related to the debtor-in-possession financing that has been terminated.

• Additional amortization expense (approximately $111,000 and $849,000 for the three months ended June 30, 2011 and 2010, respectively) related to the fair value of identifiable intangible assets acquired.

• Reduction in depreciation expense (approximately $128,000 in the three months ended June 30, 2011 and $572,000 in fiscal year 2010, respectively) related to the fair value adjustment to property, plant and equipment acquired.

• Elimination of operating activities related to closed manufacturing facilities and retail locations that (i) were not purchased in the transaction or (ii) are held for sale as of the Date of Acquisition. The amounts eliminated included sales of $645,000, cost of sales of $1.3 million, and SG&A of $558,000 for the three months ended June 30, 2011. For the three months ended June 30, 2010, the amounts eliminated were sales of $12.0 million, cost of sales of $10.7 million, and SG&A of $2.9 million.

In addition, all of the above adjustments were adjusted for the applicable tax impact.