-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FWXdCeyYVb5Lv0UIVqwWK/bu/cD7fOKFXBWSErSbGQcFg68D0sRRdWXsFk4sxzDG kyQKcMPtd2NLt99iHX8KkQ== 0000950153-97-000167.txt : 19970303 0000950153-97-000167.hdr.sgml : 19970303 ACCESSION NUMBER: 0000950153-97-000167 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970228 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAVCO INDUSTRIES INC CENTRAL INDEX KEY: 0000278166 STANDARD INDUSTRIAL CLASSIFICATION: MOBILE HOMES [2451] IRS NUMBER: 860214910 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08822 FILM NUMBER: 97548644 BUSINESS ADDRESS: STREET 1: 301 E BETHANY HOME RD STE C-178 CITY: PHOENIX STATE: AZ ZIP: 85012 BUSINESS PHONE: 6022650580 MAIL ADDRESS: STREET 1: 301 EAST BETHANY HOME ROAD STREET 2: SUITE C-178 CITY: PHOENIX STATE: AZ ZIP: 85012 10-K/A 1 AMENDMENT #2 TO FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ------------------------ FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMMISSION FILE 0-8822 CAVCO INDUSTRIES, INC. AN ARIZONA CORPORATION NO. 86-0214910 1001 NORTH CENTRAL, 8TH FLOOR, PHOENIX, AZ 85004 REGISTRANT'S TELEPHONE NO. (602) 256-6263 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - --------------------------------------------- --------------------------------------------- NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: FIVE CENT ($.05) PAR VALUE COMMON STOCK 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 as of November 30, 1996 was $28,035,371. As of November 30, 1996, the issuer had 3,387,968 shares of its five cent ($.05) par value Common Stock outstanding. ================================================================================ 2 PART I ITEM 1: BUSINESS RECENT DEVELOPMENTS: PROPOSED MERGER. On December 4, 1996, Cavco Industries, Inc. ("Cavco" or the "Company") entered into an Agreement and Plan of Merger ("Merger Agreement") by and among Cavco, Centex Real Estate Corporation ("CREC"), MFH Holding Company, a Nevada corporation (the "Holding Company"), MFH Acquisition Company, an Arizona corporation and wholly-owned subsidiary of the Holding Company (the "Merger Subsidiary") and certain shareholders of Cavco, Al R. Ghelfi, the Chairman of Cavco, his spouse, Janet M. Ghelfi, and Janal Limited Partnership, an Arizona limited partnership ("Janal") (the "Shareholder Parties"). The purpose of the transactions contemplated by the Merger Agreement is to effect the acquisition by CREC, through its ownership of shares in the Holding Company, of approximately 78% of the equity interest in Cavco, with the remaining approximately 22% equity interest to be retained by the Shareholder Parties through their ownership of shares in the Holding Company. If the transactions contemplated by the Merger Agreement are consummated, all shares of Cavco Common Stock held by shareholders of Cavco other than the Shareholder Parties, together with 1,047,288 shares of Cavco Common Stock held by the Shareholder Parties, will be converted into the right to receive $26.75 in cash (or in the case of shareholders who exercise appraisal rights, the amount determined under applicable law). Consummation of the transactions contemplated by the Merger Agreement is subject to certain conditions, including the approval of a majority of the outstanding shares of Cavco common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Form 10-K for additional information concerning the transactions contemplated by the Merger Agreement. (a) General Cavco is the largest manufacturer of residential and recreational manufactured housing in Arizona. The Company began as an unincorporated association in 1965, manufacturing truck campers under the name Roadrunner Manufacturing Company. In 1966, the Company changed its name to Cavalier Manufacturing Company and it incorporated in 1968. In 1974, the Company changed its name to Cavco Industries, Inc. In November 1986, the Company began manufacturing relocatable commercial modular structures for sale or lease, marketed by a division of the Company doing business as CVC Leasing ("CVC"). In August 1994, the Company sold the relocatable commercial modular structures business of CVC and founded National Security Containers, Inc. ("NSC") to market and lease security storage containers and trailer vans. The Company owns 100% of NSC's stock. In March 1987 the Company founded Action Healthcare Management Services, Inc., ("Action," formerly known as Action Health Care, Inc.) to provide health care utilization management and other health care services. The Company owned approximately 93% of Action's stock. The Company sold the assets of Action on September 30, 1996. In December 1991, the Company founded Sun Built Homes, Inc., ("Sun Built") to develop manufactured housing subdivisions and sell manufactured homes in established subdivisions. The Company owns 100% of Sun Built's stock. The Company's executive office is located at 1001 N. Central, 8th Floor, Phoenix, Arizona 85004. Its telephone number is (602) 256-6263. (b) Financial Information About Industry Segments The Company operates principally in three industries: manufactured housing, leasing, and real estate development. Information with respect to net sales, operating profit (loss) and identifiable assets by industry segment is set forth in Note 11 of the Notes to Consolidated Financial Statements in Part II of this Form 10-K. 2 3 (c) Narrative Description of Business I. MANUFACTURED HOUSING DESCRIPTION OF BUSINESS The Company is a manufacturer of quality residential and recreational manufactured housing. Cavco's manufactured housing products are manufactured in one of three facilities located in Arizona and transported in one or more sections for installation utilizing their own chassis on either temporary or permanent foundations. Although Cavco's manufactured housing products are designed to be transportable, fewer than five percent are ever moved from their original site after installation. The Company is subject to the regulations of federal and state agencies which dictate building codes for manufactured housing. In manufacturing its homes, Cavco implements efficient assembly line techniques and uses materials similar to those used in site-built homes. The Company purchases components from outside sources, installs electrical, plumbing and heating systems and fabricates sub-floors, walls and cabinets. Interior walls are constructed with a drywall material and exterior walls from wood products, vinyl lap, aluminum or anodized steel; roof construction utilizes asphalt shingles or galvanized steel. Cavco's housing products are distributed under various trademarks, with models available in a variety of floorplans ranging in size of approximately 399 square feet for a recreational/retirement park home to a range of 546 to 2,026 square feet for a residential home. A typical home includes a living room, dining room, one or two baths and one or more bedrooms. The base price of the Company's homes includes carpeting, major appliances, draperies and forced air furnaces. The Company offers numerous options and customizes models to meet the needs of different geographical areas. Retail prices of the Company's homes range from $19,000 to $100,000. The average price of a recreational/retirement park home is approximately $28,000, and the average price of a residential home is approximately $40,000. METHOD OF DISTRIBUTION The Company sells its manufactured homes through a network of independent dealers and generally does not sell products directly to the general public, except for sales in certain subdivisions developed by the Company's Sun Built subsidiary. See "Description of Business -- Real Estate Development." The retail prices of the Company's manufactured homes are set by individual dealers and not by the Company. Many of the Company's independent dealers operate more than one retail outlet. The Company presently has approximately 200 outlets in 10 states, Canada and Japan, of which there are approximately 103 in Arizona, 27 in New Mexico, 20 in Colorado, 15 in Utah, 6 in Texas, 4 each in Nevada and Washington, 3 in California, 2 in Idaho, 1 in Oregon, 7 in Canada and 8 in Japan. Most of the Company's dealers sell competing products, although from time to time the Company also may enter into exclusive agreements with certain dealers. The Company's dealers finance their purchase of manufactured homes through floor plan financing arrangements with third-party lenders. Generally, the Company receives a commitment from the dealer's lender for each order, which is earmarked for the home ordered, identified by its serial number. The Company then manufactures the home and ships it to the dealer. The dealer is responsible for all shipping costs. Payment is due from the third party floor plan lender upon the dealer's notice of delivery and acceptance of the product. The length of time it takes to manufacture and ship a home after an order is placed varies according to the Company's backlog. The Company is contingently liable under terms of repurchase agreements with the third party lenders that provide dealer floor plan financing arrangements. These arrangements, which are customary in the industry, provide for the repurchase of the manufacturer's products in the event the dealer defaults on payments. The risk of loss is spread over numerous dealers and financing institutions and is further offset by the resale value of repurchased units. The Company has not incurred any significant losses from these arrangements since its inception. The Company extends a limited warranty to original retail purchasers of manufactured housing products. The Company warrants structural components for 12 months and nonstructural components for 90 days. The 3 4 Company's warranty does not extend to installation, setup or appliances. Appliances are warranted by their original manufacturer. SOURCES AND AVAILABILITY OF RAW MATERIALS The Company has not experienced any material difficulty in purchasing its raw materials or component parts. The Company buys wood, wood products, aluminum, steel, tires, hardware, windows and doors from manufacturers and distributors located primarily in California and Arizona. Approximately 39 percent of the unit cost of the Company's manufactured homes is attributable to raw wood products. The majority of the other component parts of the Company's homes are purchased manufactured components. PATENTS, TRADEMARKS AND LICENSES The Company does not own any material patents, licenses, franchises, trademarks or concessions in connection with its manufactured housing business. The Company does not sell or grant franchises to its dealers. SEASONALITY The Company's manufactured housing business is not seasonal. INVENTORY The Company does not maintain a significant finished product inventory. CUSTOMERS The Company currently has approximately 200 independent dealer outlets. No dealer exceeded 10% of the Company's sales volume for the year ended September 30, 1996. The Company does not believe that the loss of any dealer would have a material adverse effect on the Company. BACKLOG The Company's backlog of firm orders for manufactured homes as of September 30, 1996 was approximately $11,500,000 (710 floors) as compared with September 30, 1995, when the backlog was approximately $19,300,000. The Company currently requires approximately six to eight weeks to fill an order. The Company presently anticipates that the entire backlog at September 30, 1996 will be filled during the 1997 fiscal year. GOVERNMENT CONTRACTS None of the Company's business is subject to renegotiation of profits or termination of contracts at the election of the government. COMPETITION The Company sells its manufactured housing products through independent dealers located in the states of Arizona, New Mexico, Colorado, Utah, Texas, Nevada, Washington, California, Idaho, Oregon, as well as Canada and Japan. The Company estimates that there are approximately 7 other manufacturers competing for a significant share of the Arizona market. The Company believes that its business represents an approximate 31% share of the Arizona market and a small share of the market in such other states. The largest competitors of the Company are Fleetwood Enterprises, Palm Harbor Homes, Inc., Schult Homes Corporation and Champion Enterprises, Inc. Most of these competitors have manufacturing facilities in Arizona and all have significantly greater financial, manufacturing and marketing resources than Cavco. The Company believes that competition in the manufactured housing industry is being affected by consolidation and by increasing competition from geographically diversified companies and vertically integrated competitors that combine manufacturing operations with other complementary services and operations, such as a retail sales network, 4 5 mortgage financing, insurance and other services. The Company believes the principal factors affecting competition in the manufactured housing market are price, product quality and reliability, reputation and service. RESEARCH AND DEVELOPMENT During the last two fiscal years, the amount the Company has spent on research and development was immaterial. ENVIRONMENTAL CONTROLS The Company believes that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on its capital expenditures, earnings or competitive position. EMPLOYEES The Company employs approximately 1,056 people in its manufacturing segment. Of these, 93 are salaried managerial, office and clerical workers; 946 are hourly production workers, and 17 are commissioned salespeople. FOREIGN OPERATIONS The Company does not have any foreign operations. II. LEASING OPERATIONS DESCRIPTION OF BUSINESS The Company sells and leases security storage containers ("containers") and trailer vans ("vans") through its NSC subsidiary. The containers are used ocean cargo containers, previously used for secure overseas shipment of packaged goods. The Company purchases the containers from various vendors and refurbishes them at its own fabricating facility or by using various outside contractors. The Company patches, sands, repaints and installs its patented locking units on the containers before transferring them to its leasing branch offices. The vans are purchased from various transportation companies usually through brokers, transported to the Company's leasing branches and refurbished at its own facilities or using outside contractors. Generally, the vans leased by the Company are used for ground transportation of goods. METHOD OF DISTRIBUTION NSC currently sells or leases containers and vans directly to customers through nine offices located in Arizona, Texas, Colorado, Louisiana and Tennessee. At the customer's request, NSC will contract or use its own equipment to deliver the container or van to the customer's site. Pricing is dependent upon competition and demand within each geographical area. SOURCES AND AVAILABILITY OF PRODUCTS NSC has not experienced, and does not anticipate, any significant difficulty in purchasing containers or trailer vans in sufficient quantity to supply its business. PATENTS, TRADEMARKS AND LICENSES NSC owns a patent on a single lever locking system designed to secure its containers. The patent expires in June 2014. GOVERNMENT CONTRACTS None of NSC's business is subject to renegotiation of profits or termination of contracts at the election of the government. 5 6 COMPETITION Competition in the container and van leasing business in the Company's markets consists primarily of privately owned companies that concentrate on container sales. The Company believes that the principal factors affecting competition in the leasing business are price and service. RESEARCH AND DEVELOPMENT During the year, the amount NSC has spent on research and development was immaterial. CUSTOMERS; SEASONALITY NSC sells or leases containers and vans directly to any business with a need for additional storage space. Typical customers include retail stores, construction companies, and educational and government institutions. NSC experiences seasonal upturns during holiday periods, when retailers require storage space for extra merchandise. The terms of the leases generally range from one month to three years, with an average rental period of six months. The Company believes that there is increasing demand throughout the business community for secure storage due to increasing theft and vandalism. The business of NSC is not dependent upon any one customer. ENVIRONMENTAL CONTROLS The Company believes that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on the capital expenditures, earnings or competitive position of NSC. EMPLOYEES NSC has approximately 71 employees. Of these, approximately 6 are executives or managers, 10 are branch managers, 14 are sales representatives, 29 are hourly production and transportation workers, and 12 are office and clerical workers. FOREIGN OPERATIONS NSC does not have any foreign operations. III. REAL ESTATE DEVELOPMENT DESCRIPTION OF BUSINESS The Company organized its Sun Built subsidiary in December 1991, to develop manufactured housing subdivisions, purchase developed lots and to sell manufactured homes in established subdivisions. The Company has generally sought to acquire land with the intent to complete the sale of housing units within 36 to 60 months from the date of acquisition. Generally, this involves acquiring land that is properly zoned and is either ready for development or already developed. Homes sold by Sun Built are manufactured by the Company at the Company's existing manufacturing plants. The average size of these homes ranges from 576 to 1,800 square feet, with retail selling prices ranging from $30,200 to $86,800, excluding the land. Competition is intense in the residential development market. Pricing is dependent upon competition and demand within each geographical area. METHOD OF DISTRIBUTION Sun Built sells lots in its subdivisions and manufactured homes directly to the consumer. Sun Built does not provide financing to its customers, but may from time to time assist customers in obtaining third party lender financing. Sun Built distributes its products through fully developed subdivisions in which Sun Built either has an agreement to sell the homes or may have a percentage of ownership. 6 7 SOURCES AND AVAILABILITY OF PRODUCTS Sun Built has not experienced, and does not anticipate, any problems in purchasing its manufactured homes, all of which are produced by the Company. PATENTS, TRADEMARKS AND LICENSES Sun Built does not own any materially significant patents, licenses, franchises, trademarks or concessions. Sun Built does not sell or grant franchises. GOVERNMENT CONTRACTS None of Sun Built's business is subject to renegotiation of profits or termination of contracts at the election of the government. COMPETITION Sun Built competes with a large number of firms, most of which have substantially greater financial, marketing and development resources than Sun Built. To date, all of Sun Built's development and sale of lots and manufactured homes has been made in Arizona. The residential housing industry is essentially a local business and is intensely competitive. The industry is cyclical and is affected by changes in local economic conditions, long-term and short-term interest rates, federal mortgage financing programs and, to a lesser extent, changes in property taxes and energy costs, federal income tax laws and various demographic factors. The Company believes the main competitive factors affecting Sun Built's operations are price, location, quality and design of homes, availability and cost of land, development and product acquisition cost, marketability and reputation. RESEARCH AND DEVELOPMENT During the last fiscal year, the amount Sun Built has spent on research and development was immaterial. ENVIRONMENTAL CONTROLS The Company believes that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on the capital expenditures, earnings or competitive position of Sun Built. EMPLOYEES Sun Built has 2 employees: 1 project manager and 1 salesperson. FOREIGN OPERATIONS Sun Built does not have any foreign operations. ITEM 2: PROPERTIES I. MANUFACTURED HOUSING The Company's executive, accounting and engineering offices are located at 1001 N. Central Avenue, Suite 800, Phoenix, Arizona. In June, 1996, the Company entered into a 5-year lease for 20,188 square feet of office space. Approximately 5,000 square feet is occupied by offices of NSC. Lease payments total $18,506 per month for the first two years, $18,926 for the third year, and $19,347 for the fourth and fifth years. The Company may exercise two 5-year options on the property. The Company entered into a 5-year lease in February, 1993, consisting of approximately 188,000 square feet which are primarily production facilities with some office space, located at 1300 S. Litchfield Road, Goodyear, Arizona. In December, 1993, The Company added 5,860 square feet to the lease. The Company 7 8 produces manufactured homes on this property. The cost of the lease is $18,423 per month. The Company has three 5-year options it may exercise on this property. The Company acquired the manufacturing facilities located at 2502 W. Durango, Phoenix, Arizona in August, 1988. On this property are buildings totaling approximately 75,000 square feet, which are primarily production facilities with some office space. The Company produces manufactured homes on this property. The loan on this property is amortized over a 13 year term. A payment of $8,070, plus interest at prime plus 1%, is due monthly, with the balance due and payable in August, 2002. Debt secured by the property totaled $1,154,068 and $1,250,913 at September 30, 1996 and 1995, respectively. The Company leases approximately 4.7 acres of property at 1700 S. 27th Avenue, Phoenix, Arizona. The property is used as a holding yard for finished homes until they are shipped to dealers. The original terms of the lease run from February 1, 1994 to January 31, 1999, with monthly rent at $1,721. The lease provides for two 5-year extension options, and a purchase option of $256,000 at the effective date of the lease, escalating at 4% per year. The Company owns manufacturing facilities located at 3502 W. Lower Buckeye Road, Phoenix, Arizona. On this property are buildings which contain approximately 60,000 square feet, primarily production facilities with some office space. The Company produces recreational and residential homes on this property. There is no mortgage on this property. In September, 1996 the Company purchased approximately 22 acres of land located at 80 Don Luis Trijello Blvd., Belen, New Mexico. The Company is building a 140,000 square foot production facility on this property, which will include 8,000 square feet of office space. Total construction costs will approximate $4.8 million. The facility will be used to produce manufactured homes. Production is scheduled to begin in fiscal 1997, under a newly formed subsidiary, Cavco Industries of New Mexico, Inc. All of the properties on which the Company's plants are located contain sufficient room to expand production, if necessary. The Company believes its plants, equipment and offices are in good condition and are adequate for the Company's foreseeable business requirements. II. LEASING OPERATIONS NSC's executive and accounting offices are located at 1001 N. Central Avenue, Suite 800, Phoenix, Arizona. See first paragraph of Manufactured Housing section above. NSC's Phoenix branch is located at 2229 W. Roosevelt, Phoenix, Arizona. In June, 1994, NSC entered into a 3-year lease, commencing September 1, 1994 for a 2.5 acre lot with a 2,100 square foot building. Monthly lease payments are $2,500. NSC uses the property for its leasing and sales office, and to store unleased containers. NSC's Tucson branch is located at 7011 N. Camino Martin, Tucson, Arizona. In October, 1996 NSC entered into a 3-year lease. Monthly lease payments are $915. NSC uses the property for its leasing and sales office, and to store unleased containers. NSC has a leasing and sales location on rented property at 15960 East Colfax Avenue, Aurora, Colorado. The lease is effective December 1, 1995 and expires November 30, 2000. Monthly rent is $2,250. NSC uses the property for its leasing and sales office, and to store unleased containers. In January, 1996 NSC became the assignee of a lease for premises at 1819 W. Northwest Highway, Dallas, Texas. The property consists of approximately 8.16 acres of land with office and warehouse space. NSC uses the property for its leasing and sales office, as well as for storage of unleased containers and trailer vans. The lease terminates on December 31, 2000 and requires rent payments of $4,500 per month. NSC entered into a 5-year lease, commencing August 1, 1994 for approximately 2.25 acres of fenced-in land with a 2,400 square foot office building and a 2,800 square foot maintenance building. The property is located at 13390 I-35 South, Von Orney, Texas. One of the buildings is used as a leasing and sales office for NSC's San Antonio branch. The other building is used for repair and maintenance of containers. The land is 8 9 also used to store unleased containers and trailer vans. Monthly rent on the property totals $2,250. NSC has an option to renew the lease for an additional 5-year term. NSC relocated its Houston branch to 11827 Eastex Freeway, Houston, Texas. The property consists of approximately 8.81 acres of land, which will be used for storage of unleased containers and trailer vans. NSC purchased a modular office building to use as a leasing and sales office at this location. The lease term of the property is 36 months, commencing December 1, 1995, with monthly rent of $4,000. NSC's Houston branch was formerly located at 12350 Amelia, Houston, Texas. NSC leased a building and a 2.055 acre tract of land. The lease continues through June 10, 1999. Rent on the property is $1,200 per month. Also in Houston, NSC leases a building and a one acre tract of land in the James Hamilton Survey No. 53 in Harris County, Texas. On these premises, NSC refurbishes and stores purchased containers before they are transferred to the leasing branches. Current monthly rent is $1,900 and increases to $2,000 per month in August 1996. The lease commenced August 1, 1994 and terminates July 31, 1997. In May, 1995, NSC purchased 8 acres of land at 7180 Copper Queen, El Paso, Texas. The Company constructed a maintenance facility on the property for refurbishment and repair of its lease fleet. The facility is approximately 7,500 square feet and includes 2,688 square feet of office and warehouse space. NSC leases a 10 acre parcel of land at Lot #D, Block 4, Copperfield Industrial Park, El Paso, Texas. The Company uses the land for storage of its trailer vans. Monthly rent payments are $4,400. The lease commenced in November, 1996 and terminates in May, 1997, at which point it continues on a month-to- month basis. III. REAL ESTATE DEVELOPMENT A Sun Built sales office is located at 496 W. Windham Blvd., Green Valley, Arizona, in a model home at its Canyon View subdivision. The home is 1,010 square feet. The home and land were purchased by Sun Built for approximately $91,000. ITEM 3: LEGAL PROCEEDINGS The Company is subject to certain legal proceedings and claims that arise in the conduct of its business. In the opinion of management, the amount of liability, if any, as a result of these claims and proceedings is not likely to have a material effect on the financial condition or results of operations of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the shareholders of the Company during the fourth quarter of the 1996 fiscal year. 9 10 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Registrant's stock is traded over the counter through the National Association of Securities Dealers under the symbol CVCO. The following quotations reflect inter-dealer prices without retail mark-up or mark-down or commission and may not necessarily represent actual transactions. All prices have been adjusted (rounded to nearest 1/8) to reflect a three-for-two stock split effective December 1994.
BID ASKED ------------ ------------ HIGH LOW HIGH LOW ---- --- ---- --- YEAR ENDED SEPTEMBER 30, 1996 First Quarter........................................ 12 1/8 9 3/4 12 3/4 10 1/2 Second Quarter....................................... 14 3/4 11 1/2 15 1/4 12 1/4 Third Quarter........................................ 18 13 18 1/4 13 3/4 Fourth Quarter....................................... 19 3/4 13 5/8 20 3/8 14 3/8
BID ASKED ------------ ------------ HIGH LOW HIGH LOW ---- --- ---- --- YEAR ENDED SEPTEMBER 30, 1995 First Quarter........................................ 135/6 10 5/6 14 1/2 11 1/2 Second Quarter....................................... 12 9 3/4 13 10 1/4 Third Quarter........................................ 11 3/4 8 1/2 12 3/4 9 Fourth Quarter....................................... 10 3/8 8 3/4 11 1/4 9 3/4
(The source of the above quotation is NASDAQ.) (b) As of September 30, 1996, there were approximately 241 record holders of the Company's Common Stock. The Company has never paid dividends and has no plans to pay dividends in the foreseeable future in the event that the transactions contemplated by the Merger Agreement are not consummated for any reason. Certain financial covenants in loan agreements to which the Company is a party restrict the payment of dividends. See Note 5 of Notes to Consolidated Financial Statements. In the event that the transactions contemplated by the Merger Agreement are consummated, or alternatively, in the event that the Merger Agreement is terminated in certain circumstances, the Shareholder Parties and CREC have entered into certain agreements to cause the Company to pay dividends in certain circumstances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Form 10-K. ITEM 6: SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein. The selected financial data presented below have been derived from the Company's consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants, whose report covering the consolidated balance sheets as of September 30, 1996 and 1995 and the related consolidated statements of earnings and cash flows for each of the three years in the period ended September 30, 1996 also is included elsewhere herein. The consolidated statement of earnings data for the years ended September 30, 1993 and 1992 and the consolidated balance sheet data as of September 30, 1994, 1993, and 1992 are derived from audited financial statements not included herein. 10 11
FIVE YEAR SUMMARY OF FINANCIAL DATA YEARS ENDED SEPTEMBER 30, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ----------- ----------- ----------- Earnings Statement Data: Net sales................... $130,105,136 112,682,132 90,596,038 56,326,371 41,622,896 Net income from continuing operations............... $ 6,932,958 4,643,662 3,897,192 1,897,160 1,371,055 Income per share from continuing operations.... $ 2.05 1.37 1.15 .56 .41 Balance Sheet Data: Current assets.............. $ 29,007,479 23,626,576 26,091,140 11,035,719 9,996,586 Current liabilities......... $ 19,625,495 15,457,784 17,719,922 10,458,560 8,676,310 Working capital............. $ 9,381,984 8,168,792 8,371,218 577,159 1,320,276 Total assets................ $ 65,445,890 51,811,939 41,878,513 30,703,330 25,875,595 Long term obligations....... $ 17,149,739 13,970,960 6,013,047 7,853,985 7,209,131 Net stockholders' equity.... $ 28,670,656 22,383,195 18,145,544 11,467,392 9,325,115
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS: PROPOSED MERGER On December 4, 1996, Cavco entered into the Merger Agreement by and among Cavco, CREC, the Holding Company, the Merger Subsidiary and the Shareholder Parties. The Shareholder Parties are Al R. Ghelfi, the Chairman of Cavco, his spouse, Janet M. Ghelfi and Janal, an Arizona limited partnership. The general partners of Janal are trusts of which Al R. Ghelfi and Janet M. Ghelfi are the sole trustees. Janal is the holder of 1,650,000 shares of Cavco common stock, representing approximately 48.7% of the outstanding shares. Al R. Ghelfi and Janet M. Ghelfi individually hold, as their community property, an additional 180,729 shares of Cavco common stock, representing approximately 5.32% of the outstanding shares. The purpose of the Merger Agreement is to effect the acquisition by CREC, through its ownership of shares in the Holding Company, of approximately 78% of the equity interest in Cavco, with the remaining approximately 22% equity interest to be retained by the Shareholder Parties through their ownership of shares in the Holding Company. If the transactions contemplated by the Merger Agreement are consummated, all shares of Cavco Common Stock held by shareholders of Cavco other than the Shareholder Parties, together with 1,047,288 shares of Cavco Common Stock held by the Shareholder Parties, will be converted into the right to receive $26.75 in cash (or in the case of shareholders who exercise appraisal rights, the amount determined under applicable law), as more particularly described below. Consummation of the transactions set forth in the Merger Agreement is conditioned, among other things, upon the Merger Agreement being approved and adopted by the holders of a majority of the outstanding shares of Cavco Common Stock, expiration of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act, absence of any injunction or certain other legal matters restraining or prohibiting such transactions, the truth and accuracy of certain representations and warranties, compliance with certain covenants contained in the Merger Agreement and other usual and customary closing conditions. If the transactions contemplated by the Merger Agreement are consummated, the Merger Subsidiary will merge with and into Cavco (the "Merger"), the Shareholder Parties will contribute 783,441 shares of Cavco Common Stock to the Holding Company in exchange for Holding Company shares, and all other shares of Cavco Common Stock (other than shares held by shareholders who exercise appraisal rights under Arizona law) will be converted into the right to receive $26.75 per share in cash (the "Merger Consideration"). In exchange for Holding Company shares, CREC will contribute cash to the Holding Company in an amount sufficient to pay the Merger Consideration and any amounts payable to dissenting shareholders. Each Merger Subsidiary share that is outstanding will be converted into the right to receive one share of common stock in Cavco, as the surviving corporation, and the corporate existence of the Merger Subsidiary will cease. 11 12 Upon consummation of the transactions contemplated by the Merger Agreement, Cavco, as the surviving corporation, will be a wholly owned subsidiary of the Holding Company. CREC will hold approximately 78% of the common stock of the Holding Company, and the Shareholder Parties will hold the remaining approximately 22% of such common stock. CREC, the Holding Company and the Shareholder Parties have agreed to enter into a Shareholders' Agreement upon consummation of the Merger, pursuant to which all of their shares will be subject to certain transfer restrictions, and the shares held by the Shareholder Parties will be subject to certain put options (beginning in 2000) and certain call options (beginning in 2002) whereby CREC may acquire all of the Shareholder Parties' interest in the Holding Company on the terms and conditions set forth therein (the "Holding Company Shareholders' Agreement"). The Holding Company Shareholders' Agreement also provides for certain rights of the Shareholder Parties and CREC to designate directors, super-majority board approval requirements for significant actions and transactions and agreements relating to the payment of dividends. The descriptions set forth in this Report of the transactions contemplated by the Merger Agreement and the proposed Holding Company Shareholders' Agreement are qualified in their entirety by reference to the Merger Agreement, a copy of which is incorporated herein by reference as an Exhibit to this Report, and to the Holding Company Shareholders' Agreement, a copy of which is attached as Exhibit D to the Merger Agreement. The Merger Agreement provides that the Merger Agreement may be terminated by the parties in certain circumstances, including by mutual consent, or by either party in the event of (i) regulatory, governmental or judicial actions restraining or prohibiting the transaction, (ii) failure to obtain the required shareholder approval, (iii) a material violation or breach by the other party of the representations, warranties and covenants contained in the Merger Agreement, or (iv) failure to consummate the Merger by December 31, 1997. In addition, either party may terminate the Merger Agreement in the event the Board of Directors of Cavco shall have authorized Cavco to enter into an agreement with a third party with respect to an alternative acquisition proposal meeting certain conditions specified in the Merger Agreement, as summarized below. Cavco has agreed that, upon execution of the Merger Agreement and until the transactions contemplated thereby have been consummated (or until the Merger Agreement is terminated), neither Cavco nor its representatives will initiate any contact with, solicit, encourage or enter into or continue any discussions, negotiations, understandings or agreements with any third parties with respect to any other acquisition proposal or disclose any non-public information regarding Cavco or any of its businesses to such third parties. Notwithstanding the foregoing, to the extent that the Board of Directors of Cavco (or a committee thereof) reasonably determines based on the advice of its counsel that it is required to do so by virtue of its fiduciary obligations under applicable law, the Company may furnish and discuss non-public information concerning Cavco or its businesses in response to unsolicited requests therefor and may participate in discussions and negotiations and enter into agreements regarding an alternative transaction, provided certain conditions are met. In general, Cavco may furnish and discuss such information with any third party the Board of Directors reasonably determines is financially qualified to consummate a proposed transaction and may enter into negotiations with such a third party if (i) the consideration to be paid to the shareholders other than the Shareholder Parties under the alternative transaction exceeds by at least $1,000,000 the amount payable to such shareholders under the Merger Agreement; (ii) the alternative transaction is not subject to any conditions or limitations which make it not likely to be consummated; (iii) the terms and conditions of the alternative transaction are no less favorable to such shareholders than the transactions contemplated by the Merger Agreement, (iv) Cavco shall have timely notified CREC of the alternative transaction and (v) CREC shall not have delivered to Cavco a counteroffer topping such alternative transaction by at least $1,000,000 in consideration to the shareholders other than the Shareholder Parties (a "Topping Offer"). In general, Cavco may enter into an agreement with a third party with respect to such transaction if (i) the foregoing conditions are met, (ii) the third party offer has not been materially and adversely modified, (iii) at least ten days shall have passed since CREC was notified, and CREC shall not have responded with a Topping Offer and (iv) Cavco has paid to CREC certain termination fees and expenses described below. The Merger Agreement provides for payment to CREC by Cavco of a termination fee of $2,500,000 and reimbursement of certain expenses in an amount up to $300,000 in the event that the Merger Agreement is terminated by Cavco in order to accept an alternative proposal from a third party as described above, or if the 12 13 Merger Agreement is terminated for any other reason, other than (i) by mutual consent; (ii) certain governmental actions restraining or prohibiting the transaction; (iii) because the Merger has not been consummated by December 31, 1997 and CREC elects to terminate; or (iv) because Cavco and the Shareholder Parties have elected to terminate due to a material violation or breach by CREC. The Merger Agreement also provides for the payment to Cavco by CREC of a termination fee and reimbursement of expenses, in the same amounts, in the event that the Merger Agreement is terminated because (i) the Merger has not been consummated by December 31, 1997 and CREC elects to terminate, or (ii) Cavco and the Shareholder Parties elect to terminate due to a material violation or breach by CREC. The foregoing descriptions of certain provisions of the Merger Agreement are qualified in their entirety by reference to the Merger Agreement, a copy of which is incorporated herein by reference as an Exhibit to this Report. As stated above, one of the conditions for consummation of the transactions set forth in the Merger Agreement is the approval of the holders of a majority of the outstanding shares of Cavco common stock. On December 4, 1996, the Shareholder Parties entered into a Voting Agreement with CREC, whereby the Shareholder Parties agreed to vote all 1,830,729 shares of Cavco common stock owned by them (representing approximately 54% of the total shares presently outstanding) in favor of the Merger Agreement and against any inconsistent transactions. In addition, the Shareholder Parties have agreed to restrict their ability to sell or transfer any such shares or to grant any proxies or to enter into any other voting arrangements with respect to such shares. The descriptions set forth in this Report of the terms of the Voting Agreement are qualified in their entirety by reference to the Voting Agreement, a copy of which is incorporated herein by reference as an Exhibit to this Report. Also on December 4, 1996, the Shareholder Parties entered into a Stock Purchase Agreement with CREC, whereby the parties have agreed that in the event the Merger Agreement is terminated for any reason other than (i) by mutual consent, (ii) because the Merger has not been consummated by December 31, 1997 and CREC elects to terminate, or (iii) because of a material violation or breach by CREC, the Shareholder Parties will sell to CREC, and CREC will purchase from the Shareholder Parties, an aggregate of 1,047,288 shares of Cavco Common Stock (representing approximately 31% of the total shares presently outstanding) (the "Subject Share Purchase"). If the transactions contemplated by the Stock Purchase Agreement are consummated, the Shareholder Parties and CREC have agreed to enter into a Shareholders' Agreement with regard to their shares of Cavco Common Stock (the "Cavco Shareholders' Agreement") and to use their best efforts to cause the Company to become a party thereto. The Cavco Shareholders' Agreement provides for certain transfer restrictions on the Cavco Common Stock held by CREC and the Shareholder Parties and provides that such shares will be subject to certain put options (beginning in 2000) and certain call options (beginning in 2002) whereby CREC may acquire all of the Shareholder Parties' Cavco common stock on the terms and conditions set forth therein. The Cavco Shareholders' Agreement also provides certain agreements among the Shareholder Parties and CREC with respect to the election of directors, super-majority board approval requirements for significant actions and transactions and agreements relating to the payment of dividends. The descriptions set forth in this Report of the terms of the Stock Purchase Agreement and the proposed Cavco Shareholders' Agreement are qualified in their entirety by reference to the Stock Purchase Agreement, a copy of which is incorporated herein by reference as an Exhibit to this Report and to the Cavco Shareholders' Agreement, the form of which is attached as Exhibit B to the Stock Purchase Agreement. LIQUIDITY AND CAPITAL RESOURCES The Company ended fiscal 1996 with working capital of $9,381,984 compared to $8,168,792 at the end of fiscal 1995. The Company's cash position improved as a result of cash generated from operations and the receipt of proceeds from its long term funding source for additions to NSC's lease fleet. Uses of cash during 1996 included capital expenditures of $11.9 million, increases in notes receivable of $.4 million and additions to investments in partnerships of $.1 million. The Company increased its NSC lease fleet by $9.9 million and spent $2 million on property, plant and equipment additions. Property, plant and equipment additions include $590,000 spent on land and a building for NSC's El Paso location. Another 13 14 $210,000 was used to purchase delivery vehicles for NSC. The Company also spent approximately $520,000 on various computer programs, network and communication systems. The Company has a $4 million revolving bank line of credit that may be used from time to time to fund working capital needs. The Company borrowed and repaid $800,000 on this line during the year. Available borrowings are subject to a borrowing base formula based on inventories and accounts receivable. The Company had no amounts outstanding under the line of credit at the end of fiscal 1996. Sun Built has a $1,400,000 line of credit that is used to finance purchases of manufactured homes for its subdivisions. Repayments are made from proceeds on the sales of the homes. During fiscal 1996, Sun Built borrowed $1,977,776 and repaid $2,296,958 on its line of credit and approximately $700,000 remained available for borrowing at the end of fiscal 1996. NSC has a $15 million line of credit arrangement to support its lease fleet expansion. The lending institution advanced $7,000,000 during 1996. The Company repaid $2,333,323 on this line during 1996. The remaining $1,036,216 of long term debt repayments in fiscal 1996 were for mortgages and other loans of the Company. The Company received $1.2 million of proceeds from the sale of lease fleet units and $1.7 million of proceeds from collections on notes receivable in the normal course of its business during fiscal 1996. The Company plans capital expenditures in fiscal 1997 of approximately $4.8 million budgeted for construction of a new manufacturing facility in Belen, New Mexico, to be financed in part through industrial revenue bond financing currently under negotiation. The Company also plans to invest up to $500,000 in fiscal 1997 for computer software and system hardware upgrades. The Company believes that its existing cash, available borrowings, lines of credit, and cash generated from operations will be sufficient to meet capital expenditure, debt service and other liquidity requirements for the next fiscal year. During the past three years, inflation has not had a significant impact on the Company's operations. The Company has demonstrated its ability to adjust the manufacturing costs of its products through engineering changes and effective price negotiations, and has been able to adjust the selling price of its products in response to changing costs. RESULTS OF OPERATIONS Fiscal 1996 Compared to Fiscal 1995 Sales for fiscal 1996 were $130,105,136, an increase of $17,423,004 or 15.5% over the $112,682,132 reported for 1995. Manufacturing operations accounted for $11.3 million of the increase primarily as a result increased capacity due to plant expansion, improved productivity and improved market conditions. The leasing subsidiary contributed $3.3 million of the increase, as a result of expanding its lease fleet and adding 4 new branch locations. The real estate development subsidiary provided $2.8 million of the increase, as a result of completion of development activity, increased sales at its subdivisions and the sale of 50 homes to a customer in December 1995. Gross profit margins increased to 21.0% compared to 18.8 percent in 1995. Margins in the manufacturing operations increased to 19.2% in 1996 from 17.4% in 1995. Improved efficiencies and higher sales volumes lended to this increase. In addition, prior year margins were unfavorably affected by a low margin manufactured home model offered in the spring of 1995. The leasing operations achieved a 50.1% gross margin in fiscal 1996, compared to 51.4% in fiscal 1995. The real estate development operations had a gross margin of 15.4% in fiscal 1996, compared to 14.4% in fiscal 1995. Selling, general and administrative expenses increased overall by $2,298,858, or 18%, in fiscal 1996. Approximately $1.4 million of the increase is attributable to the leasing operations due to increases in wages, rent and other office costs as the subsidiary continues to develop its corporate office and open additional branch locations. In addition, a significant portion of this increase was due to a $369,000 aggregate increase in reserves established for trade accounts receivable and notes receivable in fiscal 1996. The increase related to management's assessment of collectibility based on increased experience with NSC leasing operations, and the effect of new customers and increased international business in Mexico in the leasing operations. Selling, general and administrative expense increases of $720,965 in the manufactured housing segment resulted 14 15 primarily from increased employee bonuses, which are based on the pre-tax operating profits of the Company. The $594,502 increase in interest expense in fiscal 1996 reflects increased finance costs incurred for expansion of the lease fleet. In fiscal 1996, net income was $6,237,461 or $1.84 per share, compared to $4,237,651 or $1.25 per share in fiscal 1995, an increase of approximately 47%. The increase in net income was a result of improved sales and gross margins and increased efficiencies. Income from continuing operations in fiscal 1996 was $6,932,958 or $2.05 per share, an approximately 49% increase of $2,289,296 or $.68 per share, over the $4,643,662, or $1.37 per share, reported in fiscal 1995. Losses from discontinued operations in fiscal 1996 totaled $695,497 ($339,942 from Action, $355,555 from CVC), compared to $406,011 in 1995 ($110,130 from Action, $295,881 from CVC). Fiscal 1995 Compared to Fiscal 1994 Sales for fiscal 1995 were $112,682,132, an increase of $22,086,094, or 24.4% sales of $90,596,038 in fiscal 1994. The leasing subsidiary provided approximately $5,000,000 in sales, or 23% of the increase. The manufactured housing operations accounted for the remaining increase. Plant expansions and upgrades to machinery allowed production levels to increase at all facilities. The new manufacturing facility added in May 1993 had the most significant favorable impact. Gross profit margins increased to 18.8% in fiscal 1995, compared to 18.1% in fiscal 1994. Margins in the manufactured housing operations decreased from 18.2% in fiscal 1994 to 17.4% in fiscal 1995, primarily due to the Company's offering of a series of low cost, low margin special floor plans in the spring. The decrease in manufacturing margins was more than offset in fiscal 1995 by the achievement of a 51.4% gross profit margin in the leasing operations. Selling, general and administrative expenses increased overall by $3,064,564, or 31%, in fiscal 1995. Most of the increase was due to expansion of the leasing operations in fiscal 1995. The $542,237 increase in interest expense reflects increased finance costs incurred from the Company's use of its lines of credit. In fiscal 1995, net income was $4,237,651 or $1.25 per share, compared to $6,605,678 or $1.95 per share in fiscal 1994, a decrease of approximately 36%. The decrease in net income was a result of the gain from the sale of discontinued leasing operations in fiscal 1994. Income from continuing operations in fiscal 1995 was $4,643,662 or $1.37 per share, an approximately 19% increase of $746,470 or $.22 per share, over the $3,897,192, or $1.15 per share, reported in fiscal 1994. Income from discontinued operations and from the gain on the sale of discontinued leasing operations in fiscal 1994 was $436,167 and $2,272,319, respectively, compared to a loss from discontinued operations in 1995 of $406,011. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.............................................. 16 Consolidated Financial Statements: Consolidated Balance Sheets -- September 30, 1996 and 1995.......................... 17 Consolidated Statements of Earnings -- Years Ended September 30, 1996, 1995 and 1994............................................................................. 18 Consolidated Statements of Changes in Stockholders' Equity.......................... 19 Consolidated Statements of Cash Flows -- Years Ended September 30, 1996, 1995 and 1994............................................................................. 20 Notes to Consolidated Financial Statements............................................ 21 Schedule II Valuation and Qualifying Accounts -- Years Ended September 30, 1996, 1995 and 1994................................................................. 33
15 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cavco Industries, Inc.: We have audited the accompanying consolidated balance sheets of CAVCO INDUSTRIES, INC. (an Arizona corporation) and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Cavco Industries, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Phoenix, Arizona, December 4, 1996. 16 17 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND 1995 ASSETS
1996 1995 ----------- ---------- Current assets Cash and cash equivalents........................................ $13,298,107 8,140,730 Receivables Trade accounts, net of $719,000 and $280,000 reserve for uncollectible accounts in 1996 and 1995, respectively........ 2,662,340 3,164,862 Notes, net of $582,000 reserve in 1996........................ 377,241 511,302 Other......................................................... 145,714 509,369 ----------- ----------- Total receivables........................................ 3,185,295 4,185,533 ----------- ----------- Inventories Manufacturing: Work in process............................................. 852,716 807,949 Raw materials............................................... 3,869,300 2,971,581 Real estate held for sale..................................... 6,156,056 6,133,089 ----------- ----------- Total inventories........................................ 10,878,072 9,912,619 ----------- ----------- Prepaid expenses................................................. 619,791 834,713 Deferred tax charge.............................................. 1,026,214 552,981 ----------- ----------- Total current assets..................................... 29,007,479 23,626,576 ----------- ----------- Notes receivable, net of current portion........................... 1,501,685 1,162,415 Property, plant and equipment, at cost............................. 15,241,264 14,285,539 Less accumulated depreciation.................................... 5,246,987 4,666,351 ----------- ----------- Net property, plant and equipment........................ 9,994,277 9,619,188 ----------- ----------- Assets under lease................................................. 22,188,592 14,366,138 Less accumulated depreciation.................................... 876,594 596,007 ----------- ----------- Net assets under lease................................... 21,311,998 13,770,131 ----------- ----------- Investment in partnerships......................................... 2,644,075 2,534,703 Other assets....................................................... 986,376 1,098,926 ----------- ----------- $65,445,890 51,811,939 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable.................................................... $ 703,682 1,022,864 Current installments of long term debt........................... 3,409,763 2,444,248 Accounts payable................................................. 4,990,907 5,009,125 Accrued expenses................................................. 7,957,659 6,939,129 Income taxes..................................................... 2,563,484 42,418 ----------- ----------- Total current liabilities................................ 19,625,495 15,457,784 ----------- ----------- Long term debt, excluding current installments..................... 15,479,607 12,692,661 Deferred income taxes.............................................. 1,670,132 1,278,299 Stockholders' equity Common stock, $.05 par value; 8,000,000 shares authorized; 3,387,968 and 3,382,968 shares issued and outstanding in 1996 and 1995, respectively........................................ 169,399 169,149 Capital in excess of par value................................... 361,804 312,054 Retained earnings................................................ 28,139,453 21,901,992 ----------- ----------- Net stockholders' equity................................. 28,670,656 22,383,195 ----------- ----------- $65,445,890 51,811,939 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 17 18 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 ------------ ----------- ---------- Net sales............................................... $130,105,136 112,682,132 90,596,038 Cost of sales........................................... 102,801,345 91,469,469 74,238,342 ------------ ------------ ----------- Gross profit.......................................... 27,303,791 21,212,663 16,357,696 Selling, general and administrative expenses............ 15,197,212 12,898,354 9,833,790 ------------ ------------ ----------- Operating income...................................... 12,106,579 8,314,309 6,523,906 ------------ ------------ ----------- Other income (expense): Interest income....................................... 519,802 287,385 175,957 Interest expense...................................... (1,590,054) (995,552) (453,315) Miscellaneous......................................... 521,431 152,940 156,444 ------------ ------------ ----------- (548,821) (555,227) (120,914) ------------ ------------ ----------- Income from continuing operations before income taxes... 11,557,758 7,759,082 6,402,992 Income taxes.......................................... 4,624,800 3,115,420 2,505,800 ------------ ------------ ----------- Income from continuing operations....................... 6,932,958 4,643,662 3,897,192 ------------ ------------ ----------- Discontinued operations: Income (loss) from operations of Action (less income taxes of ($55,400), ($73,420) and $21,300 for 1996, 1995 and 1994, respectively)....................... (83,002) (110,130) 31,660 Loss on sale of Action (less income taxes of ($171,300))........................................ (256,940) -- -- Income (loss) from operations of CVC Leasing (less income taxes of ($237,100), ($194,000) and $260,800 for 1996, 1995 and 1994, respectively)............. (355,555) (295,881) 404,507 Gain on sale of CVC (less income taxes of $1,465,000)........................................ -- -- 2,272,319 ------------ ------------ ----------- Net income.............................................. $ 6,237,461 4,237,651 6,605,678 ============ ============ =========== Income per share from continuing operations............. $ 2.05 1.37 1.15 Income (loss) per share from operations of discontinued Action subsidiary..................................... (.02) (.03) .01 Loss per share from sale of Action subsidiary........... (.08) -- -- Income (loss) per share from operations of discontinued CVC division.......................................... (.11) (.09) .12 Income per share from gain on sale of CVC division...... -- -- .67 ------------ ------------ ----------- Net income per share.................................... $ 1.84 1.25 1.95 ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 18 19 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
COMMON STOCK -------------------- ADDITIONAL UNREALIZED NET NUMBER PAID IN RETAINED LOSS ON STOCKHOLDERS' OF SHARES AMOUNT CAPITAL EARNINGS EARNINGS EQUITY --------- -------- ---------- ---------- ---------- ------------- September 30, 1993............. 3,382,968 $169,149 312,054 11,058,663 (72,474) $ 11,467,392 Add: Net income................ 6,605,678 6,605,678 Net unrealized loss....... 72,474 72,474 --------- -------- ------- ---------- ------- ----------- September 30, 1994............. 3,382,968 169,149 312,054 17,664,341 0 18,145,544 Add: Net income................ 4,237,651 4,237,651 --------- -------- ------- ---------- ------- ----------- September 30, 1995............. 3,382,968 169,149 312,054 21,901,992 0 22,383,195 Add: Net income................ 6,237,461 6,237,461 Stock Options Exercised... 5,000 250 49,750 50,000 --------- -------- ------- ---------- ------- ----------- September 30, 1996............. 3,387,968 $169,399 361,804 28,139,453 0 $ 28,670,656 ========= ======== ======= ========== ======= ===========
The accompanying notes are an integral part of these consolidated financial statements. 19 20 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ---------- Cash flows from operating activities: Net income............................................. $ 6,237,461 4,237,651 6,605,678 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of CVC Leasing division................ -- -- -- Depreciation and amortization expense............... 1,775,595 1,681,630 703,401 Provision for losses on receivables................. 288,675 75,000 -- Provision for deferred income taxes................. (81,400) 703,929 (55,900) Gain on sales of assets under lease................. (605,755) (389,409) -- Change in assets and liabilities: (Increase) decrease in receivables.................. (645,753) (1,745,872) 827,900 (Increase) decrease in manufacturing inventories.... (942,486) (641,325) (3,739,014) (Increase) decrease in real estate held for sale.... 99,033 (1,067,249) (2,833,311) (Increase) decrease in prepaid expenses............. 214,922 (373,198) 117,989 (Increase) decrease in other assets................. 17,777 (241,244) (481,330) Increase (decrease) in accounts payable............. (18,218) 244,338 1,591,790 Increase (decrease) in accrued expenses............. 1,147,227 883,953 2,071,614 Increase (decrease) in income taxes................. 2,773,173 (2,808,006) 1,640,552 Increase (decrease) in lease deposits and other liabilities....................................... 2,358 94,172 199,420 Net cash flows from discontinued operations............ 769,668 2,446,475 (4,433,653) ----------- ------------ ----------- Net cash provided by operating activities...... 11,032,277 3,100,845 2,215,136 ----------- ------------ ----------- Cash flows from investing activities: Purchases of property, plant and equipment............. (2,014,579) (2,292,217) (1,962,510) Proceeds from sales of property, plant and equipment... 297,466 111,254 -- Additions to assets under lease........................ (9,897,421) (11,292,377) (8,182,092) Proceeds from sales of assets under lease.............. 1,231,099 2,713,985 773,288 Increase in notes receivable........................... (419,500) -- (78,500) Proceeds from collections on notes receivable.......... 1,676,128 1,352,273 420,328 Additions to investment in partnerships................ (109,372) (1,212,979) (1,298,172) Net proceeds from sale of CVC Leasing division......... -- -- 10,464,504 ----------- ------------ ----------- Net cash provided by (used for) investing activities................................... (9,236,179) (10,620,061) 136,846 ----------- ------------ ----------- Cash flows from financing activities: Borrowing under lines of credit........................ 2,777,776 7,989,543 7,442,376 Repayment of lines of credit........................... (3,096,958) (8,621,169) (6,990,149) Proceeds from long-term debt........................... 7,000,000 8,603,857 5,598,713 Repayment of long-term debt............................ (3,369,539) (1,318,885) (775,126) Proceeds from issuance of common stock................. 50,000 -- -- ----------- ------------ ----------- Net cash provided by financing activities...... 3,361,279 6,653,346 5,275,814 ----------- ------------ ----------- Increase (decrease) in cash and cash equivalents....... 5,157,377 (865,870) 7,627,796 Cash and cash equivalents at beginning of year...... 8,140,730 9,006,600 1,378,804 ----------- ------------ ----------- Cash and cash equivalents at end of year............ $13,298,107 8,140,730 9,006,600 =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 20 21 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996, 1995, AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements of Cavco Industries, Inc. (the Company) for 1996, 1995 and 1994 include the accounts of Cavco Industries, Inc. and its wholly-owned subsidiaries, Sun Built Homes, Inc. (Sun Built) and National Security Containers, Inc. (NSC). In July, 1996 the Company formed a new subsidiary, Cavco Industries of New Mexico, Inc. The Company is building a manufacturing facility, which is scheduled to begin production in fiscal 1997. All material intercompany transactions have been eliminated in the consolidation. (b) Inventories Inventories are stated at the lower of cost or market (net realizable value). Cost is determined by using standard cost (which approximates actual cost on a first-in, first-out basis) for finished goods and work-in process and actual cost on a first-in, first-out basis for raw materials. (c) Product Warranty The Company's products carry a one-year warranty on structural components to the original retail customer. The Company also warrants certain nonstructural components for 90 days. The warranty covers defective materials and workmanship. The Company's experience allows it to reasonably estimate the amount of warranty expense expected to be incurred for products sold. Warranty expense for the years ended September 30, 1996, 1995 and 1994 was $2,017,788, $1,946,297 and $1,664,204, respectively. (d) Real Estate Held for Sale Real estate held for sale consists primarily of land purchased by Sun Built and homes manufactured by the Company for sale in residential subdivisions. Sun Built capitalizes certain interest costs incurred with developing the land, and such interest will be included in cost of sales as property is sold to the buyer. The amount of interest capitalized during the years ended September 30, 1996 and 1995 was $56,997 and $127,732, respectively. In most cases, the customer obtains financing from an outside source and pays cash for the purchase. In accordance with rules established by Statement of Financial Accounting Standards No. 66 (Accounting for Sales of Real Estate), revenues are recognized upon close of sale, when the property has transferred to the buyer. (e) Investment in Partnerships In November, 1992, the Company formed PDG/Prescott Development Group, L.L.C., a limited liability company, with another company for the purpose of developing a manufactured housing subdivision. The Company is a 50% partner in the LLC and accounts for its investment on the equity method. The Company's investment in the LLC was $2,370,461 and $2,275,313 at September 30, 1996 and 1995, respectively. In August, 1994, Sun Built formed Rural Southwest, L.L.C., a limited liability company, with another company. Sun Built is a 50% owner in a LLC formed in August, 1994, to develop a manufactured housing subdivision. Sun Built accounts for its investment on the equity method. Its investment was $273,614 and $259,390 at September 30, 1996 and 1995, respectively. 21 22 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (f) Revenue Recognition The Company recognizes product revenue upon shipment of product. Revenue from services is recognized when services are performed. Lease income is recognized over the terms of the leases. (g) Statement of Cash Flows For purpose of these statements, cash and cash equivalents include cash on hand and cash in short-term investments with original maturities of less than three months (primarily money market funds). Information that does not result in cash receipts or cash payments in the period, but which affects the financing and investing activities of the Company is included in supplemental disclosures as follows. Supplemental Disclosures of Non-cash Investing and Financing Activities: In 1996, the Company sold $1,238,182 of lease assets for notes receivable. The Company purchased $122,000 of real estate held for sale, financed by long term debt. Also in 1996, the Company sold the majority of the assets of its Action subsidiary and received a $442,000 note, with respect to which the Company established a reserve of $332,000. In 1995, the Company sold $523,276 of lease assets for notes receivable. The Company purchased $541,600 of real estate held for sale, financed by long term debt. Inventory held for sale or lease of $2,207,197 was transferred into assets under lease. In 1994, the Company sold $1,015,133 of lease assets for notes receivable. The Company purchased $470,118 of lease assets financed by notes payable. The Company purchased $818,784 of real estate held for sale, assuming $414,384 in notes payable and financing $404,400 by long term debt. Also in 1994, the Company sold its CVC Leasing division. See Note 13 for detail of non-cash items. Supplemental disclosure of Cash Flow information:
1996 1995 1994 ---------- ---------- ---------- Cash paid during the year for: Interest..................................... $1,622,675 1,020,766 1,109,739 Income Taxes................................. $1,720,234 2,540,433 2,394,904
(h) Depreciation of Assets Under Lease During 1996 the Company completed a review of its depreciation estimates for assets under lease. The Company determined that the actual lives of the assets were generally longer than the useful lives used for depreciation purposes. The Company also recognized that the assets retained a salvage value. Therefore, the Company extended the estimated useful lives of the assets under lease and incorporated a salvage value. The effect of this change in estimate reduced depreciation expense for the year ended September 30, 1996 by $531,366 and increased net income from continuing operations by approximately $318,800, or $.09 per share. (i) Accounting Statements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS"), No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which the Company will be required to implement effective for the fiscal year ending September 30, 1997. SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) from an asset to be held and used is less than the carrying value of the asset, an impairment loss must be recognized in the amount of the difference between the carrying value and fair value. Assets to be disposed of must be valued at the 22 23 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) lower of carrying value or fair value less costs to sell. Management of the Company believes that if SFAS No. 121 were implemented currently, no material impairment loss would be recognized. (j) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at September 30, 1996 and 1995, and the reported amounts of revenues and expenses during the three years in the period ended September 30, 1996. Actual results could differ from those estimates. (k) Accounting for Stock Based Compensation The Financial Accounting Standards Board has adopted SFAS No. 123, which must be adopted by the Company in fiscal 1997. As permitted by SFAS No. 123, the Company will continue to account for transactions with its directors and employees pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Companies which choose this alternative method are required to disclose the pro forma effects on earnings and earnings per share as if the effects of stock-based compensation had been accounted for in the financial statements. Management has not yet calculated the effects of those pro forma adjustments. (l) Reclassifications Certain amounts from prior years' financial statements have been reclassified to conform to the current year presentation. (2) ACCOUNTS AND NOTES RECEIVABLE Notes receivable include amounts due under finance leases ($1,780,686 and $1,633,607 at September 30, 1996 and 1995, respectively) and amounts due from sales of real estate held for sale ($200,000 and $16,610 at September 30, 1996 and 1995, respectively). The finance leases are secured by the related assets under lease, and the notes on real estate sales are secured by deeds of trust. Also included in notes receivable is the balance on a line of credit extended to a dealer ($38,240 and $23,500 at September 30, 1996 and 1995, respectively) and a $442,000 note receivable related to the sale of Action in 1996, net of a $332,000 reserve. See "Note 13 -- Discontinued Operations". Remaining reserves established relate primarily to the leasing operation and remaining accounts outstanding from the discontinued CVC operations. Accounts receivable and notes receivable were analyzed as of the end of each of the years presented and reserves were established based upon factors such as age of outstanding balances and management's ongoing analysis of the prospect of collecting the accounts. The significant increase in reserves for fiscal 1996 related to management's assessment of collectability based on increased experience with the NSC leasing operations, and the effect of new customers and increased international business in Mexico in the leasing operations. 23 24 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate maturities of the notes receivable for the five years subsequent to September 30, 1996 are as follows: 1997..................................................... $ 959,241 1998..................................................... 612,326 1999..................................................... 259,555 2000..................................................... 179,351 2001..................................................... 144,446 Thereafter............................................... 306,007 ---------- $2,460,926 ==========
The Company's customer base is widely dispersed geographically. No single customer accounts for over 10% of the receivables balance at September 30, 1996. (3) PROPERTY, PLANT AND EQUIPMENT Depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or the terms of the respective leases, whichever is shorter. Repair and maintenance costs are expensed as incurred. A summary of property, plant and equipment, at cost, follows:
AVERAGE SEPTEMBER 30, DEPRECIABLE --------------------------- LIVES (YEARS) 1996 1995 -------------- ----------- ----------- Land...................................... -- $ 2,759,158 2,455,801 Buildings................................. 15-30 2,500,201 2,115,744 Plant equipment........................... 5-10 3,287,115 3,035,233 Office equipment.......................... 3-10 1,596,623 1,909,801 Automotive equipment...................... 3 1,693,223 1,868,784 Building and leasehold improvements....... 3-20 3,001,618 2,892,126 Construction in progress.................. -- 403,326 8,050 ----------- $15,241,264 14,285,539 ===========
(4) NOTES PAYABLE The Company has a $4,000,000 revolving line of credit with a bank, with an interest rate of prime plus 1/2%, expiring on January 31, 1997. This line of credit is secured by the Company's inventories and accounts receivable. Sun Built has a $1,400,000 line of credit with a financial institution, with an interest rate of prime plus 1%, expiring in January 1997. This line of credit is secured by certain real estate held for sale. During 1995 NSC utilized a temporary line of credit to fund additions to assets under lease. The maximum borrowed during the year was $2,750,000 at an average interest rate of 9.40%. The line was paid off in June 1995. 24 25 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pertinent information with respect to the bank lines of credit is as follows:
SEPTEMBER 30, ------------------------------------- 1996 1995 1994 --------- --------- --------- Company line of credit: Outstanding balance at year end................. -- -- -- Interest rate at year end....................... 8.75% 9.25% 8.25% Maximum credit available........................ 4,000,000 4,000,000 3,500,000 Maximum borrowing during year................... 800,000 3,750,000 3,500,000 Average outstanding borrowings(a)............... 10,959 1,220,000 1,539,726 Average yearly interest rate(a)................... 9.25% 9.5% 7.3%
- --------------- (a) The average outstanding borrowings during the periods were calculated by dividing the weighted average daily balance by 365. The average yearly interest rate during the period was calculated by dividing the interest expense by the average outstanding borrowings.
SEPTEMBER 30, ------------------------------------- 1996 1995 1994 --------- --------- --------- Sun Built line of credit: Outstanding balance at year end................. 703,682 1,022,864 1,184,372 Interest rate at year end....................... 9.75% 9.75% 9.5% Maximum credit available........................ 1,400,000 1,375,000 1,184,372 Maximum borrowing during year................... 1,389,364 1,360,570 1,184,372 Average outstanding borrowings(b)............... 1,062,850 1,178,397 597,614 Average interest rate for year(b)............... 9.16% 10.32% 8.15%
- --------------- (b) Average outstanding borrowings during the periods were calculated by dividing the month-end balances (including beginning of year) by 13. Average yearly interest rates were calculated by dividing the interest expense by the average outstanding borrowings. A summary of long-term debt is as follows:
SEPTEMBER 30, ------------------------- 1996 1995 ----------- ----------- Notes payable to a financial institution, due in monthly installments of $216,667 plus interest ranging from 8.63% to 9.06%, secured by assets under lease and related accounts receivable of NSC. The notes are amortized over a five year period and are due and payable in July 2000, January 2001 and October 2001. (See (b) below). .......... $12,266,658 7,599,981 Convertible note trust, interest payable quarterly at 8%, unsecured, balance due and payable in April 1999. (See (a) below).................................................... 4,100,000 4,100,000 Mortgage note payable, due in monthly installments of $8,070 plus interest at prime plus 1%, (9.25% at September 30, 1996) secured by deed of trust on real estate. The mortgage is amortized over a 13-year term, with the balance due and payable in August 2002. (See (b) below). .................................................. 1,154,068 1,250,913
25 26 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, ------------------------- 1996 1995 ----------- ----------- Notes payable to a title company, due in monthly installments of $5,555 including interest at 10%, secured by real estate held for sale, balances due and payable ranging from March 1997 to January 1999................... 489,459 589,268 Note payable to bank, due in monthly installments of $19,259 including interest at 9.755%, secured by plant equipment, due and payable in September, 1998. ...................... 402,522 584,598 Note payable due in monthly installments of $2,601, including interest at a rate of 9%, secured by a deed of trust. The note is amortized over a 30-year term and is due and payable in July, 2011............................. 287,989 293,009 Note payable due in monthly installments of $3,416, including interest at a rate of 13% secured by a deed of trust. The note is amortized over a 15-year term and is due and payable in November, 2000. ....................... 131,347 153,663 Notes payable to finance companies, due in monthly installments totaling $2,447, including interest at various rates ranging between 6.6% and 11.5%, balances due and payable ranging from January 1997 to October 1998, secured by automotive and office equipment. .............. 29,584 88,205 Note payable to bank, due in monthly installments of $27,778 plus interest at prime plus 1/2%, (8.75% at September 30, 1996) secured by plant equipment, due and payable in October, 1996. ........................................... 27,743 361,088 Note payable to bank, paid in Sept. 1996. .................. -- 116,184 ----------- ----------- 18,889,370 15,136,909 Less current portion........................................ 3,409,763 2,444,248 ----------- ----------- Long term debt, net of current portion...................... $15,479,607 12,692,661 ========== ==========
- --------------- (a) At any time during the term of the note, all or any portion of the principal balance is convertible, at the Company's option, into shares of the Company's Common Stock at $16 per share, if the trading price of Common Stock exceeds $20 per share for a period of at least 20 trading days prior to the conversion. The Company also has an option to prepay up to one half of the outstanding principal balance of the loan after October, 1995. Such prepayment can be made in Common Stock, at $16 per share, if the stock price exceeds $16 per share for a period of at least 20 trading days prior to the payment date. See Note 16 of Notes to Consolidated Financial Statements -- "Subsequent Events." (b) Certain of the Company's loan agreements require compliance with financial covenants, the most significant of which specify a minimum current ratio, minimum owner's equity, working capital, debt coverage ratio, debt service coverage ratio, and minimum tangible net worth. The agreements also state that any dividends to stockholders must be approved by the lending institution. At September 30, 1996, the Company was not in compliance with the covenant related to debt service coverage ratio for one of its subsidiaries. The Company obtained a waiver from the bank. 26 27 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate maturities of long-term debt for the five years subsequent to September 30, 1996 are as follows: 1997.................................................... $ 3,409,763 1998.................................................... 3,685,009 1999.................................................... 7,350,292 2000.................................................... 2,608,159 2001.................................................... 911,427 Thereafter.............................................. 924,720 ----------- $18,889,370 ===========
(6) INCOME TAXES Components of income tax expense are as follows:
CURRENT DEFERRED TOTAL ---------- -------- --------- 1996: Federal........................................ $3,202,500 63,900 3,266,400 State.......................................... 877,100 17,500 894,600 ---------- --------- ---------- $4,079,600 81,400 4,161,000 ========== ========= ========== 1995: Federal........................................ $1,683,500 552,800 2,236,300 State.......................................... 460,500 151,200 611,700 ---------- --------- ---------- $2,144,000 704,000 2,848,000 ========== ========= ========== 1994: Federal........................................ $3,696,400 (357,900) 3,338,500 State.......................................... 1,012,400 (98,000) 914,400 ---------- --------- ---------- $4,708,800 (455,900) 4,252,900 ========== ========= ==========
Income tax expense amounted to $4,161,000 for the year ended September 30, 1996 (an effective rate of 40.0%) $2,848,000 for the year ended September 30, 1995 (an effective rate of 40.1%) and $4,252,900 for the year ended September 30, 1994 (an effective rate of 39.2%). The actual tax expense differs from the "expected" tax expense (computed by applying the U.S. Federal corporate tax rates to earnings before income tax) as follows:
1996 1995 1994 ---- ---- ---- Federal corporate tax rate..................................... 34.0% 34.0 34.0 State income taxes, net of federal income tax benefit.......... 6.1 6.1 6.1 Other.......................................................... (0.1) -- (0.9) ---- ---- ---- Effective tax rate............................................. 40.0% 40.1 39.2 ==== ==== ====
27 28 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets and liabilities represent the estimated future tax effects attributable to timing differences in the recognition of revenue and expense items for financial statement and tax return purposes. The components of the Company's deferred income tax benefits and liabilities follows:
SEPTEMBER 30, -------------------------- 1996 1995 ----------- ---------- Current: Accrued warranty expense................................. $ 404,545 355,104 Reserve for uncollectible accounts....................... 515,272 110,924 Deferred rent............................................ 17,723 48,011 Accrued vacation and holiday............................. 47,382 40,471 Accrued bonuses.......................................... 21,438 15,067 Accrued state tax deduction.............................. 19,854 (16,596) ----------- ----------- Deferred tax charge.............................. $ 1,026,214 552,981 =========== =========== Long-term: Excess of tax over book depreciation..................... $(1,774,067) (1,310,517) Loss in partnership...................................... (33,221) (43,827) Advance rents received................................... (16,709) Excess of tax over book amortization of intangibles...... 57,806 30,862 Excess of book gain over tax gain on sale of assets...... 61,892 61,892 Loss on marketable securities............................ 17,458 -- ----------- ----------- Deferred tax liability........................... $(1,670,132) (1,278,299) =========== ===========
(7) EMPLOYEE BENEFIT PLANS The Company's profit sharing plan is a defined contribution plan which covers all employees. After two years of service have been completed, employees begin participation on the first day of the sixth month or the first day of the plan year, whichever is earlier. Participants are 100% vested immediately upon entry into the Plan. The Plan was designed to comply with the requirements of ERISA. Contributions to the Plan are determined annually by the Board of Directors. The Company contributed $100,000 and $200,000 to the Plan for the years ended September 30, 1995 and 1994, respectively. There was no contribution to the Plan for the year ended September 30, 1996. The Company adopted a 401(k) plan in January, 1995. All employees are eligible to participate after completing four months of service, and may begin participation on the following January 1 or July 1, whichever is earlier. Participants may defer and contribute up to 15% of annual compensation (subject to limits set by the Internal Revenue Service) to the 401(k) plan. The Company matches 25% of the employee's contribution, up to 6% of his or her compensation. The Company contributed $120,631 to the 401(k) plan for the year ended September 30, 1996 and $68,924 for the year ended September 30, 1995. (8) STOCKHOLDERS' EQUITY The number of shares used in computing earnings per common share was 3,383,173 for 1996 and 3,382,968 for 1995 and 1994. The number of shares reflects a three-for-two stock split effective December, 1994. Fully diluted earnings per share are the same as primary earnings per share. In August 1995, the Company entered into a qualified stock option purchase agreement with an employee. The agreement allows the employee to purchase up to 50,000 shares of the Company's Common Stock at $10 per share (fair market value at the date of the grant). The options vest at 10% per year, beginning 28 29 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) on September 1, 1996. In September 1996, the employee exercised his vested options and purchased 5000 shares for $50,000. (9) FINANCING ARRANGEMENTS AND COMMITMENTS The Company is contingently liable under terms of repurchase agreements covering dealer floor plan financing arrangements. These arrangements, which are customary in the industry, provide for the repurchase of products sold to dealers in the event of default on payments by the dealer. The risk of loss is spread over numerous dealers and financing institutions and is further offset by the resale value of repurchased units. The Company has not incurred any significant losses from these arrangements since inception. During 1996 and 1995, the Company entered into financing arrangements whereby certain dealers would be assisted in obtaining financing for purchases of Cavco manufactured homes. The Company has guaranteed the flooring lines extended to the dealers by the financing institutions. The Company's maximum liability to financial institutions was $500,000 in 1996 and $6,500,000 in 1995. The Company is the guarantor on a loan agreement which allowed PDG/Prescott Development Group, L.L.C. formed in November, 1992 (see Note 1) to borrow $3,750,000 from investors. The loan is paid out over five years, based on scheduled sales of lots. The amount guaranteed by the Company has been offset by proceeds received on the lot sales, leaving a balance of $2,720,145 and $3,177,285 at September 30, 1996 and 1995, respectively. (10) LEASES The Company occupies certain land and office buildings and uses certain equipment under lease arrangements classified as operating leases. Real estate taxes, insurance and maintenance expenses are obligations of the Company. At September 30, 1996, future minimum lease payments due under noncancellable operating leases, excluding executory costs, are as follows:
YEAR ENDING SEPTEMBER 30 AMOUNT --------------------------------------------------------- ---------- 1997..................................................... $ 902,414 1998..................................................... 492,837 1999..................................................... 246,848 2000..................................................... 139,767 2001..................................................... 29,208 ---------- Total.......................................... $1,811,074 ==========
Total rental expense for 1996, 1995 and 1994 was $1,112,787, $1,051,884 and $902,332, respectively. (11) INDUSTRY SEGMENT INFORMATION The Company operates principally in three industries: Manufactured Housing, Leasing, and Real Estate Development. Operations are conducted in Arizona and, to a much lesser extent, the Company operates or sells to dealers for resale in Nevada, Colorado, Idaho, California, Utah, Washington, New Mexico, Oregon, Texas, Canada and Japan. Operating profit consists of total revenue less cost of sales and operating expenses. None of the following have been included in the computation of gross operating profit: general corporate expenses, non-operating income and expenses and income taxes. 29 30 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Identifiable assets are those assets used in the operations of each industry segment. General corporate assets primarily consist of cash, temporary investments, deferred tax benefits and other current assets. Information with respect to industry segments as of September 30, 1996, 1995 and 1994 is set forth as follows:
REAL MANUFACTURED LEASING ESTATE GENERAL HOUSING OPERATIONS DEVELOP'T CORPORATE TOTAL ------------ ---------- --------- ---------- ----------- 1996 Sales to unaffiliated customers.... $114,833,294 8,315,739 6,906,103 -- 130,105,136 Operating profit (loss)............ 13,052,622 650,242 262,198 (1,858,483) 12,106,579 Identifiable assets................ 12,090,632 28,309,303 7,164,970 17,880,985 65,445,890 Depreciation and amortization...... 732,204 840,783 25,118 220,720 1,818,825 Capital expenditures............... 485,464 13,262,338 -- 48,943 13,796,745 1995 Sales to unaffiliated customers.... $103,560,443 5,037,282 4,084,407 -- 112,682,132 Operating profit (loss)............ 9,439,956 421,795 15,213 (1,562,655) 8,314,309 Identifiable assets................ 11,914,234 19,416,794 7,026,052 13,454,859 51,811,939 Depreciation and amortization...... 674,658 786,370 35,678 230,990 1,727,696 Capital expenditures............... 1,089,116 12,438,891 28,507 28,080 13,584,594 1994 Sales to unaffiliated customers.... $ 85,969,747 -- 4,626,291 -- 90,596,038 Operating profit (loss)............ 7,692,540 -- 177,379 (1,346,013) 6,523,906 Identifiable assets................ 10,501,021 13,175,553 5,448,625 12,753,314 41,878,513 Depreciation and amortization...... 521,786 661,824 29,049 162,874 1,375,533 Capital expenditures............... 1,181,074 8,665,060 137,846 160,622 10,144,602
No customers accounted for more than 10% of sales for the year ended September 30, 1996. Sales to one manufactured housing customer amounted to $18,129,289, or 15.5% of sales for the year ended September 30, 1995. Sales to two manufactured housing customers amounted to $17,388,700 and $10,999,677 (18.9% and 11.9% of sales, respectively) for the year ended September 30, 1994. Results for leasing operations in 1994, under CVC Leasing, are included in discontinued operations. Leasing operations for 1995 and 1996 reflect the results of NSC. (12) ACCRUED EXPENSES A summary of accrued expenses follows:
SEPTEMBER 30, ------------------------ 1996 1995 ---------- --------- Wages........................................................ $1,126,611 964,821 Sales promotion programs..................................... 2,923,682 2,427,033 Accrued warranty............................................. 1,021,172 896,372 Industrial insurance......................................... 1,422,566 1,308,813 Property taxes............................................... 458,113 326,315 Other........................................................ 1,005,515 1,015,775 ---------- ---------- $7,957,659 6,939,129 ========== ==========
30 31 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) DISCONTINUED OPERATIONS On August 1, 1994, the Company sold the relocatable mobile and modular commercial structures and related buildings and equipment of its CVC leasing division for $20.1 million, to an unrelated company. Approximately $8.0 million was used to pay off notes payable associated with the assets sold; a $1.2 million note receivable was due from the purchaser; net cash proceeds totaled $10.9 million. The net value of assets sold, plus other costs related to the sale, amounted to $16.4 million, resulting in a net gain of $3.7 million. Net income (loss) from CVC leasing operations is included in the consolidated statements of income under "discontinued operations". Revenues from such operations were $15,000 for 1996, $2,072,569 for 1995 and $8,253,530 for 1994. Revenues in 1995 and 1996 were produced from the sales of jobs that were in progress when the division was sold. Assets and liabilities related to CVC remaining on the balance sheet as of September 30, 1996 include trade accounts receivable ($280,322), balance remaining from purchaser of CVC ($72,568) and rent due on CVC properties ($44,738). Assets and liabilities related to CVC remaining on the balance sheet as of September 30, 1995 include trade accounts receivable ($378,406), balance remaining from purchaser of CVC ($509,369), and rent due on CVC properties ($121,191). On September 30, 1996, the Company sold the accounts receivable, related service contracts and office equipment of its subsidiary, Action Healthcare Management Systems, Inc. (Action), to an unrelated company for a $442,000 note, with respect to which the Company established a reserve of $332,000. The net book value of assets sold, plus other costs related to the sale, amounted to $538,240, resulting in a pretax loss of $428,240. The $442,000 note to the Company bears interest at 8%, and is amortized over a 10-year period, with the entire unpaid balance due and payable in October 2001. Net income (loss) from Action is included in the consolidated statements of income under "discontinued operations". Revenues from Action were $576,991 for 1996, $1,026,230 for 1995 and $1,465,525 for 1994. Other than the $442,000 note receivable from the purchaser, net of the applicable $332,000 reserve, there are no material assets or liabilities related to Action remaining on the balance sheet as of September 30, 1996. (14) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and other payables approximate fair value because of the short maturity of these financial instruments. Notes payable bear interest at market rates, therefore the carrying amounts of the outstanding borrowings approximate fair value. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. (15) SUPPLEMENTAL FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended September 30, 1996 and 1995 is set forth below. Earnings per share were adjusted to reflect the three-for-two stock split effective December 1994. Amounts differ from amounts previously reported on the Company's Form 10-Q Reports due to reclassification of discontinued operations of the Company's Action subsidiary. 31 32 CAVCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH ----------- ---------- ---------- ---------- 1996 Net sales.............................. $30,689,331 33,341,439 33,016,732 33,057,634 Gross profit........................... $ 6,484,942 6,126,555 5,930,941 8,761,353 Net income from continuing operations........................... $ 1,722,501 1,355,685 1,424,925 2,429,847 Income per share from continuing operations........................... $ .51 .40 .42 .72 1995 Net sales.............................. $30,140,661 28,506,700 25,914,959 29,146,042 Gross profit........................... $ 6,042,484 4,984,232 3,972,700 6,495,106 Net income from continuing operations........................... $ 1,628,149 956,026 499,164 1,450,193 Income per share from continuing operations........................ $ .48 .28 .15 .43
(16) SUBSEQUENT EVENTS On December 5, 1996, the Company announced that it has entered into a Merger Agreement which provides for the sale of approximately 78% of the equity interest in the Company to an unrelated company. The Merger Agreement has been approved by the Boards of Directors of both companies. The Merger Agreement is subject to approval by Cavco shareholders, certain regulatory filings and other conditions. The Company expects the Merger to be completed by the end of its second fiscal quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information concerning the transactions contemplated by the Merger Agreement. In November 1996, the Company made a cash prepayment of $2,050,000 of the $4,100,000 unpaid principal balance of the Convertible Note due April 1, 1999, as permitted by the terms of the Note. See Note 5 above. 32 33 SCHEDULE II CAVCO INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS SEPTEMBER 30, 1996, 1995 AND 1994 SEPTEMBER 30, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - --------------------------------- -------- ---------- ------------ ---------- ---------- BALANCE ADDITIONS AT --------------------------- BEGINNING CHARGED TO CHARGED TO BALANCE AT OF COSTS AND DISCONTINUED END OF DESCRIPTION PERIOD EXPENSES OPERATIONS DEDUCTIONS PERIOD - --------------------------------- -------- ---------- ------------ ---------- ---------- Accounts receivable.............. $280,000 189,000 250,000 $ 719,000 Notes receivable................. -- 100,000 482,000 582,000 -------- ------- ------- -------- ---------- Totals......................... $280,000 289,000 732,000 $1,301,000
SEPTEMBER 30, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - --------------------------------- -------- ---------- ------------ ---------- ---------- BALANCE ADDITIONS AT --------------------------- BEGINNING CHARGED TO CHARGED TO BALANCE AT OF COSTS AND DISCONTINUED END OF DESCRIPTION PERIOD EXPENSES OPERATIONS DEDUCTIONS PERIOD - --------------------------------- -------- ---------- ------------ ---------- ---------- Accounts receivable.............. $125,000 75,000 80,000 $ 280,000
SEPTEMBER 30, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - --------------------------------- -------- ---------- ------------ ---------- ---------- BALANCE ADDITIONS AT --------------------------- BEGINNING CHARGED TO CHARGED TO BALANCE AT OF COSTS AND DISCONTINUED END OF DESCRIPTION PERIOD EXPENSES OPERATIONS DEDUCTIONS PERIOD - --------------------------------- -------- ---------- ------------ ---------- ---------- Accounts receivable.............. $ 0 125,000 $ 125,000
33 34 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with the Company's independent accountants on accounting and financial disclosure matters. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's directors and executive officers as of September 30, 1996 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - ----------------------------- --- --------------------------------------------------------- Al R. Ghelfi................. 57 Chairman of the Board, Chief Executive Officer, Director Brent Ghelfi................. 35 Executive Vice President and Chief Operating Officer, Director Ruth Smith................... 66 Secretary and Director Robert Wold.................. 78 Director William Blandin.............. 47 Director Stephen H. Kleemann.......... 52 Director Robert Ward.................. 46 Vice President, Treasurer and Chief Financial Officer Wendell Hargis............... 41 Vice President of Manufacturing Operations James Samuel Parlette........ 43 Vice President of Sales and Marketing
AL R. GHELFI is the Chairman of the Board of Directors and served as President and Chief Executive Officer of the Company from 1974 through October 1996. In 1968, when the Company was formed, through 1973, Mr. Ghelfi was Vice President, Secretary and Treasurer of the Company. He has served as a Director since inception. He works full-time for the Company. Mr. Ghelfi is also the Chairman of the Board of Directors of Sun Built and NSC. Al Ghelfi is the father of Brent Ghelfi. BRENT GHELFI served as Executive Vice President and Chief Operating Officer during fiscal 1996 and was named President and Chief Executive Officer of Cavco in October 1996. Mr. Ghelfi has served as a Director of the Company since February 1995. He previously served the Company as Vice President and General Counsel. He has been employed by the Company since January 1995 and works full time for the Company. In addition to his duties as President and Chief Executive Officer for Cavco, he is also the President of Sun Built. Prior to joining Cavco, he was a partner with the Phoenix law firm of Meyer, Hendricks, Victor, Osborn & Maledon, specializing in corporate litigation and labor law. He was with the law firm for more than six years. Brent Ghelfi is the son of Alfred R. Ghelfi. RUTH SMITH has been the Secretary and a Director of the Company since 1974. She came to the Company in 1968 and, except for one year, has been with the Company since that time. She now works part-time for the Company. ROBERT WOLD has been a Director of the Company since 1991. Mr. Wold is the president of Manufactured Housing Counselors, Inc., a management consulting firm specializing in manufactured buildings. The Company retains Manufactured Housing Counselors, Inc. as an operations consultant. WILLIAM R. BLANDIN has been a Director of the Company since 1985. He also served as Executive Vice President of the Company from 1984 through October 1996. STEPHEN H. KLEEMANN has been a Director of the Company since 1984. Mr. Kleemann is a principal in Kleemann Capital Management, Inc., a financial consulting company in Santa Barbara, California. The Company retains Kleemann Capital Management, Inc. as a financial consultant. ROBERT WARD is Vice President, Treasurer and Chief Financial Officer of the Company. He has been employed by the Company since 1978. He works full-time for the Company. He became Treasurer of the 34 35 Company in 1984 and Vice President and Chief Financial Officer in 1990. Mr. Ward also serves as Secretary, Treasurer and a director of Sun Built and NSC. WENDELL HARGIS was named Executive Vice President of the Company in October 1996. He has been employed by the Company since 1988 and held the position of Vice President of Manufacturing Operations from 1992 through October 1996. He works full-time for the Company. JAMES SAMUEL PARLETTE is the Vice President of Sales and Marketing, a position he has held since March 1996. Formerly the General Sales Manager of the Company's Litchfield division, Mr. Parlette has been with the Company since 1993. Prior to joining Cavco, Mr. Parlette was a division manager for Universal Forest Products at its Chandler, Arizona division from 1988 to 1993 and a general sales manager for Palm Harbor Homes, Inc. at its Austin, Texas facility from 1982 to 1988. 35 36 ITEM 11: EXECUTIVE COMPENSATION SUMMARY OF EXECUTIVE COMPENSATION The following table sets forth information with respect to the cash compensation paid by the Company and its subsidiaries, as well as other compensation, during the Company's last three fiscal years, to the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers ("Named Executive Officers") in all capacities in which they serve. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION - ------------------------------------------------------------------------------------------------------------ SECURITIES ALL OTHER FISCAL YEAR UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION ENDED SALARY ($) BONUS ($) OPTIONS (#) ($)(1) - --------------------------------- ----------- ---------- --------- ----------- ------------ Al R. Ghelfi..................... 1996 149,932 384,420 112,369(2) Chairman, Chief Executive 1995 146,276 281,407 49,412 Officer, Director 1994 146,276 514,823 51,723 William R. Blandin............... 1996 200,000 128,596 6,347 Executive Vice President, 1995 79,420 495,324 13,573 Director 1994 70,928 635,009 12,220 Robert Ward...................... 1996 54,725 308,311 12,706 Vice President, Treasurer, 1995 53,341 225,584 11,430 Chief Financial Officer 1994 53,341 222,726 8,976 Brent Ghelfi..................... 1996 78,000 391,144 4,754 Vice President -- General 1995 52,500 149,064 -- Counsel, Chief Operating Officer Wendell Hargis................... 1996 72,700 467,663 50,000 28,618(3) Vice President of 1995 70,928 247,434 9,283 Manufacturing Operations 1994 70,928 301,538 6,776 Samuel Parlette.................. 1996 69,000 190,248 5,893 Vice President of 1995 40,000 95,588 -- Sales and Marketing 1994 40,000 94,143 --
- --------------- (1) Includes profit sharing and 401(k) contributions, medical insurance payments, travel allowances, personal use of Company vehicles and charges for the portion of group life insurance premium paid by the Company. (2) Includes $61,873 premiums on insurance policies with a $12,000,000 death benefit, paid by the registrant, in which the executive officer will receive an interest in cash surrender value under the policy. (3) Includes $20,500 premiums on an insurance policy with a $60,000 death benefit, paid by the registrant, in which the executive officer will receive an interest in cash surrender value under the policy. 36 37 OPTION GRANTS, EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth certain information regarding stock option grants to the Named Executive Officers: OPTION GRANTS
INDIVIDUAL GRANTS ------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL PERCENT OF RATES OF STOCK NUMBER OF TOTAL PRICE APPRECIATION SECURITIES OPTIONS FOR OPTION UNDERLYING GRANTED TO EXERCISE OR TERM($)(3) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------- NAME GRANTED (#) FISCAL YEAR ($/SHARE)(2) DATE 5% 10% - -------------------------- ------------ ------------- ------------- ---------- -------- -------- Wendell Hargis............ 50,000(1) 100% $ 10.00 08/18/05 $314,448 $796,873
- --------------- (1) The options granted are incentive stock options issued in fiscal 1995, effective as of August 18, 1995 under the Company's 1985 Incentive Stock Option Plan (the "Plan"). Ten percent of these options become exercisable on August 18 in each year, beginning August 18, 1996. Under the Plan, the Company has the right to accelerate the vesting of these options in connection with certain mergers and other transactions, including but not limited to the Merger, in which case the options are cancelled if not exercised within 30 days. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments: Proposed Merger." (2) The exercise price per share was equal to the fair market value of the Common Stock on the date of grant, as determined by the Board of Directors. (3) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date and are not presented to forecast possible future appreciation, if any, in the price of the Common Stock. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares. The actual gains, if any, on the stock option exercise will depend on the future performance of the Common Stock, the optionee's continued employment through applicable vesting periods and the date on which the options are exercised. AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS SHARES YEAR END (#) AT FISCAL YEAR END ($)(2) ACQUIRED ON VALUE ------------------------- -------------------------- NAME EXERCISE (#) REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------------- ------------ --------------- ------------------------- -------------------------- Wendell Hargis........... 5,000 $49,390 0/45,000 $ 0/$427,500
- --------------- (1) The "Value Realized" reflects the appreciation on the date of exercise, based on the excess of the fair market value of the shares on the date of exercise over the exercise price. These amounts do not necessarily reflect cash realized upon the sale of those shares, as an executive officer may keep the shares exercised, or sell them at a different time and price. (2) The "Value" set forth in this column is based on the difference between the fair market value at September 30, 1996 ($19.50 per share bid price as reported by the National Association of Securities Dealers) and the option exercise price, multiplied by the number of shares underlying the option. 37 38 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Robert Wold, a member of the Company's compensation committee, is President of Manufactured Housing Counselors, Inc., a management consulting firm specializing in manufactured buildings, which is retained by the Company as an operations consultant. The Company paid approximately $40,000 to Manufactured Housing Counselors, Inc. for consulting services in fiscal 1996. Stephen H. Kleemann, a member of the Company's compensation committee, is a principal in a financial consulting company known as Kleemann Capital Management, Inc., which is retained by the Company as a financial consultant. The Company paid approximately $48,000 to Kleemann Capital Management, Inc. for consulting services in fiscal 1996. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS On December 4, 1996, Cavco and Al Ghelfi, the Chairman of Cavco, agreed to enter into a Consulting Agreement, which will become effective upon the consummation of the transactions contemplated by the Merger Agreement or alternatively, upon consummation of the Subject Share Purchase, as the case may be. The term of the Consulting Agreement is five years; however, either party may accelerate the expiration date if CREC acquires all of the Shareholder Parties' Cavco common stock. During the term of the Consulting Agreement, Al Ghelfi has agreed to provide consulting services requested by the Board of Directors of Cavco in connection with its business. Upon effectiveness of the Consulting Agreement, Al Ghelfi will be entitled to receive consulting fees, reimbursement of expenses and certain group benefits, on the terms and conditions specified in the Consulting Agreement. The Consulting Agreement also provides that Al Ghelfi will not engage in certain activities competitive with the business of Cavco for a period of three (3) years following termination of the Consulting Agreement in certain circumstances. The description set forth in this Report of the terms of the Consulting Agreement is qualified in its entirety by reference to the Consulting Agreement, a copy of which is incorporated herein by reference as an Exhibit to this Report. On December 4, 1996, Cavco and Brent Ghelfi, the President and Chief Executive Officer of Cavco, agreed to enter into a five-year Employment Agreement, which will become effective upon consummation of the transactions contemplated by the Merger Agreement or alternatively, upon consummation of the Subject Share Purchase, as the case may be. During the term of the Employment Agreement, Brent Ghelfi has agreed to continue to serve as Chief Executive Officer of the Company, subject to the direction of the Board of Directors. Upon effectiveness of the Employment Agreement, Brent Ghelfi will be entitled to receive salary and cash bonuses, reimbursement of expenses, and other specified individual and group benefits, pursuant to the terms and conditions set forth in the Employment Agreement, and in addition, will be entitled to receive certain options to purchase shares of common stock of Centex Corporation, the parent company of CREC. The Employment Agreement also provides that Brent Ghelfi will not engage in certain activities competitive with the business of Cavco for a period of three (3) years following termination of the Employment Agreement in certain circumstances. The description set forth in this Report of the terms of the Employment Agreement is qualified in its entirety by reference to the Employment Agreement, a copy of which is incorporated herein by reference as an Exhibit to this Report. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Report for additional information concerning the transactions contemplated by Merger Agreement. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE During the 1996 fiscal year, Wendell Hargis, then Executive Vice President of Manufacturing Operations, exercised an option to purchase 5,000 shares of Cavco Common Stock. A beneficial ownership report on Form 4 was not timely filed to report the exercise of such option. See "Executive Compensation." In February 1995, Brent Ghelfi was elected Vice President and Wendell Hargis was elected Vice President of Manufacturing Operations of the Company and in March 1996, James Samuel Parlette was elected Vice President of Sales and Marketing of the Company. An initial statement of beneficial ownership on Form 3 was not timely filed to report any of these events. 38 39 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners The following table sets forth information as of November 29, 1996, with respect to beneficial ownership of the Company's Common Stock by each person, including any "group" as that term is used in Section 13(d) of the Securities Exchange Act of 1934, who is known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock.
AMOUNT AND NATURE NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1) --------------------- ---------------------------------- ----------------- ---------- $.05 Par Value....... Al R. Ghelfi 1,830,729 shares(2) 54.04% Common Stock 5655 N. Camelback Canyon Dr. Phoenix, AZ 85018 $.05 Par Value....... Stephen H. Kleemann 272,025 shares 8.03% Common Stock 526 Via Sinuosa Santa Barbara, CA 93110 $.05 Par Value....... FMR Corp. 238,550 shares(3) 7.04% Common Stock 82 Devonshire St. Boston, MA 02109
(b) Security Ownership of Management The following table sets forth information as of November 29, 1996, with respect to beneficial ownership of the Company's Common Stock by each Named Executive Officer, each director, and all directors and officers as a group.
AMOUNT AND NATURE NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1) --------------------- ---------------------------------- ----------------- ---------- $.05 Par Value....... Al R. Ghelfi 1,830,729 shares(2) 54.04% Common Stock 5655 N. Camelback Canyon Dr. Phoenix, AZ 85018 $.05 Par Value....... Stephen H. Kleemann 272,025 shares 8.03% Common Stock 526 Via Sinuosa Santa Barbara, CA 93110 $.05 Par Value....... Ruth Smith 42,340 shares(4) 1.25% Common Stock 19016 N. 88th Dr. Peoria, AZ 85382 $.05 Par Value....... Wendell Hargis 5,000 shares(5) * Common Stock 1711 N. Lindsay Rd. Mesa, AZ 85213 $.05 Par Value....... Robert Ward 3,750 shares * Common Stock 4409 E. Kirkland Phoenix, AZ 85024 $.05 Par Value....... Brent Ghelfi 2,049 shares(6) * Common Stock 5707 N. 4th Place Phoenix, AZ 85012 $.05 Par Value....... William Blandin -- -- Common Stock 1124 E. Silverwood Dr. Phoenix, AZ 85048
39 40
AMOUNT AND NATURE NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1) --------------------- ---------------------------------- ----------------- ---------- $.05 Par Value....... Robert Wold -- -- Common Stock 13709 W. Parada Dr. Sun City West, AZ 85375 $.05 Par Value....... All Executive Officers and Common Stock Directors as a Group (9 persons) 2,153,844 shares 63.57%
- --------------- * Represents less than 1% of outstanding shares. (1) Based on 3,387,968 shares of the Company's $.05 par value common stock issued and outstanding. (2) Represents (i) 1,650,000 shares held by Janal Limited Partnership, the sole general partners of which are trusts in which Al Ghelfi and his spouse, Janet M. Ghelfi, are the sole trustees, and (ii) 180,729 shares held by Al Ghelfi and Janet M. Ghelfi as community property. (3) As reported on the February 14, 1996 Schedule 13G filed by FMR Corp. (4) 38,840 of the shares shown are held in joint tenancy with spouse, Robert J. Smith. (5) On August 18, 1995, the Company granted Mr. Hargis an option under its 1985 Incentive Stock Option Plan to purchase 50,000 shares of Common Stock for $10.00 per share. This option becomes exercisable with respect to 5,000 shares per year during its ten-year term. In August 1996, Mr. Hargis exercised this option with respect to 5,000 shares. See "Executive Compensation" in Part III of this Form 10-K. (6) Brent Ghelfi holds limited partnership interests representing 0.124% of the outstanding partnership interests in Janal and, pursuant to the partnership agreement of Janal, has the right to direct the vote with respect to a pro rata portion of the 1,650,000 shares of Common Stock held by Janal. Brent Ghelfi does not have dispositive power with respect to any shares held by Janal. (c) Changes in Control See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments: Proposed Merger" in Part II of this Form 10-K, incorporated herein by reference, for a description of arrangements known to the Company the operation of which may at a subsequent date result in a change of control of the Company ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments: Proposed Merger" in Part II of this Form 10-K and "Executive Compensation -- Employment Contracts, Termination of Employment and Change-in-Control Arrangements" and "-- Compensation Committee Interlocks and Insider Participation" in Part III of this Form 10-K, incorporated herein by reference. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Annual Report on Form 10-K: 1. Financial statements -- See Index to Consolidated Financial Statements at Item 8 of this Form 10-K. 2. Financial statement schedules -- See Index to Consolidated Financial Statements at Item 8 of this Form 10-K. 40 41 3. Exhibits -- The following Exhibits are filed herewith or incorporated herein by reference. The Company hereby agrees to furnish supplementally to the Commission a copy of any schedule omitted from any such Exhibit.
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger dated as of December 4, 1996, among Centex Real Estate Corporation, a Nevada corporation, MFH Holding Company, a Nevada corporation, MFH Acquisition Company, an Arizona corporation, Cavco Industries, Inc., an Arizona corporation, Al R. Ghelfi, Janet M. Ghelfi and Janal Limited Partnership, an Arizona limited partnership, incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 12, 1996 and filed with the Commission on December 16, 1996 (File No. 0-8822) (the "1996 Form 8-K"). 3.1 Articles of Incorporation of the Company and amendments to the Articles of Incorporation attached as an Exhibit to the Company's Form 10 dated September 30, 1978, incorporated herein by reference. 3.2 Bylaws of the Company and amendments to Bylaws attached as an Exhibit to the Company's Form 10 dated September 10, 1978, incorporated herein by reference. 3.3. Amended Articles of Incorporation and Bylaws dated March, 1981 attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1981, incorporated herein by reference. 3.4 Amended Articles of Incorporation and Bylaws dated April, 1992 attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1992, incorporated herein by reference. 3.5 Amended Articles of Incorporation and Bylaws dated November 1994, attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1994, incorporated herein by reference. 10.1(2) 1985 Incentive Stock Option Plan, dated August 18, 1985, attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1985, incorporated herein by reference. 10.2 PDG/Prescott Development Group, L.L.C. Operating Agreement attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1993, incorporated herein by reference. 10.3 PDG/Prescott Development Group, L.L.C. Loan Agreement, attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1993, incorporated herein by reference. 10.4 PDG/Prescott Development Group, L.L.C. Irrevocable Guarantee attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1993, incorporated herein by reference. 10.5 Cavco Convertible Note Trust Agreement, Loan Agreement and Promissory Note dated April 12, 1994 attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1994, incorporated herein by reference. 10.6(1)(2) Incentive Stock Option Agreement between the Company and Wendell Hargis dated August 18, 1995. 10.7(1) Asset Purchase Agreement dated September 20, 1996 between Action Healthcare Management Services, Inc. and Vanilla, Inc. 10.8(1)(2) Form of Indemnification Agreement between the Company and each of its directors dated as of December 2, 1996.
41 42
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------- 10.9(2) Consulting Agreement dated as of December 4, 1996, by and between Cavco Industries, Inc., an Arizona corporation, and Al R. Ghelfi, incorporated herein by reference to Exhibit 99.3 to the 1996 Form 8-K. 10.10 (2) Employment Agreement dated as of December 4, 1996, by and between Cavco Industries, Inc., an Arizona corporation, and Brent M. Ghelfi, incorporated herein by reference to Exhibit 99.4 to the 1996 Form 8-K. 10.11 (1) Standard Industrial Lease -- Multi-Tenant dated February 1, 1993 by and between Loral Corporation and Cavco Industries, Inc. 21(1) Subsidiaries of the registrant 27 Financial Data Schedule 99.1 Voting Agreement dated as of December 4, 1996, between Centex Real Estate Corporation, a Nevada corporation, and Al R. Ghelfi, Janet M. Ghelfi and Janal Limited Partnership, an Arizona limited partnership, incorporated herein by reference to Exhibit 99.1 to the 1996 Form 8-K. 99.2 Stock Purchase Agreement dated as of December 4, 1996, between Centex Real Estate Corporation, a Nevada Corporation, and Al R. Ghelfi, Janet M. Ghelfi and Janal Limited Partnership, an Arizona limited partnership, incorporated herein by reference to Exhibit 99.2 to the 1996 Form 8-K.
- --------------- (1) Filed with the Company's Form 10-K for the fiscal year ended September 30, 1996, filed on December 27, 1996. (2) Management contract or compensatory plan (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the year ended September 30, 1996. (c) Exhibits The list of Exhibits required by Item 601 of Regulation S-K is included in Item 14(a)(3) above. (d) Financial Statement Schedules See Item 14(a)(2) above. 42 43 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, this 28th day of February, 1997. Cavco Industries, Inc. By: /s/ BRENT GHELFI ------------------------------------ Brent Ghelfi, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: By: /s/ AL GHELFI Chairman of the Board, Director February 28, 1997 - ------------------------------------------ Al Ghelfi By: /s/ BRENT GHELFI President, Chief Executive February 28, 1997 - ------------------------------------------ Officer, Director Brent Ghelfi By: /s/ RUTH SMITH Senior Vice President, February 28, 1997 - ------------------------------------------ Secretary, Director Ruth Smith By: /s/ ROBERT WARD Vice President, Principal February 28, 1997 - ------------------------------------------ Financial and Accounting Robert Ward Officer Director - ------------------------------------------ William Blandin By: /s/ STEPHEN KLEEMANN Director February 28, 1997 - ------------------------------------------ Stephen Kleemann By: /s/ ROBERT WOLD Director February 28, 1997 - ------------------------------------------ Robert Wold
43 44 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ----------- ------------------------------------------------------------------------ ---- 2.1 Agreement and Plan of Merger dated as of December 4, 1996, among Centex Real Estate Corporation, a Nevada corporation, MFH Holding Company, a Nevada corporation, MFH Acquisition Company, an Arizona corporation, Cavco Industries, Inc., an Arizona corporation, Al R. Ghelfi, Janet M. Ghelfi and Janal Limited Partnership, an Arizona limited partnership, incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 12, 1996 and filed with the Commission on December 16, 1996 (File No. 0-8822) (the "1996 Form 8-K"). 3.1 Articles of Incorporation of the Company and amendments to the Articles of Incorporation attached as an Exhibit to the Company's Form 10 dated September 30, 1978, incorporated herein by reference. 3.2 Bylaws of the Company and amendments to Bylaws attached as an Exhibit to the Company's Form 10 dated September 10, 1978, incorporated herein by reference. 3.3 Amended Articles of Incorporation and Bylaws dated March, 1981 attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1981, incorporated herein by reference. 3.4 Amended Articles of Incorporation and Bylaws dated April, 1992 attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1992, incorporated herein by reference. 3.5 Amended Articles of Incorporation and Bylaws dated November 1994, attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1994, incorporated herein by reference. 10.1 1985 Incentive Stock Option Plan, dated August 18, 1985, attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1985, incorporated herein by reference. 10.2 PDG/Prescott Development Group, L.L.C. Operating Agreement attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1993, incorporated herein by reference. 10.3 PDG/Prescott Development Group, L.L.C. Loan Agreement, attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1993, incorporated herein by reference. 10.4 PDG/Prescott Development Group, L.L.C. Irrevocable Guarantee attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1993, incorporated herein by reference. 10.5 Cavco Convertible Note Trust Agreement, Loan Agreement and Promissory Note dated April 12, 1994 attached as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 1994, incorporated herein by reference. 10.6(1)(2) Incentive Stock Option Agreement between the Company and Wendell Hargis dated August 18, 1995. 10.7(1) Asset Purchase Agreement dated September 20, 1996 between Action Healthcare Management Services, Inc. and Vanilla, Inc. 10.8(1)(2) Form of Indemnification Agreement between the Company and each of its directors dated as of December 2, 1996. 10.9(2) Consulting Agreement dated as of December 4, 1996, by and between Cavco Industries, Inc., an Arizona corporation, and Al R. Ghelfi, incorporated herein by reference to Exhibit 99.3 to the 1996 Form 8-K.
44 45
EXHIBIT NO. DESCRIPTION PAGE - ----------- ------------------------------------------------------------------------ ---- 10.10(2) Employment Agreement dated as of December 4, 1996, by and between Cavco Industries, Inc., an Arizona corporation, and Brent M. Ghelfi, incorporated herein by reference to Exhibit 99.4 to the 1996 Form 8-K. 10.11(1) Standard Industrial Lease -- Multi-Tenant dated February 1, 1993 by and between Loral Corporation and Cavco Industries, Inc. 21(1) Subsidiaries of the registrant 27 Financial Data Schedule 99.1 Voting Agreement dated as of December 4, 1996, between Centex Real Estate Corporation, a Nevada corporation, and Al R. Ghelfi, Janet M. Ghelfi and Janal Limited Partnership, an Arizona limited partnership, incorporated herein by reference to Exhibit 99.1 to the 1996 Form 8-K. 99.2 Stock Purchase Agreement dated as of December 4, 1996, between Centex Real Estate Corporation, a Nevada Corporation, and Al R. Ghelfi, Janet M. Ghelfi and Janal Limited Partnership, an Arizona limited partnership, incorporated herein by reference to Exhibit 99.2 tothe 1996 Form 8-K.
- --------------- (1) Filed with the Company's Form 10-K for the fiscal year ended September 30, 1996, filed on December 27, 1996. (2) Management contract or compensatory plan 45 -----END PRIVACY-ENHANCED MESSAGE-----