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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13E-3/A
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
ALFA LEISURE, INC.
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(Name of Issuer)
ALFA LEISURE, INC.
JOHNNIE R. CREAN
ALFA LEISURE ACQUISITION CORP.
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(Name of Person(s) Filing Statement)
Common Stock, no par value
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(Title of Class of Securities)
013394109
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(CUSIP Number of Class of Securities)
Karen Nicolai Winnett, Esq.
Oppenheimer Wolff & Donnelly LLP
500 Newport Center Drive, Suite 700, Newport Beach, CA 92660; 949/719-6000
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(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. [ ] The filing of solicitation materials or an information statement subject
to Regulation 14A [17 CFR 240.14a-1 to 240.14b-1], Regulation 14C [17 CFR
240.14c-1 to 240.14c-101] or Rule 13e-3(c) [Section 240.13e-3(c)] under
the Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of 1933.
c. [ ] A tender offer.
d. [X] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
Calculation of Filing Fee
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Transaction valuation* Amount of filing fee
$835,965 $232.40
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* Transaction valuation calculated by multiplying the number of shares which
the Company anticipates will be exchanged for cash in the proposed merger
(303,987 shares) times the amount of cash to be paid for the shares ($2.75
per share).
[ ] Check box if any part of the filing fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid:
Form or Registration Number:
Filing Party:
Date Filed:
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THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Item 1. Issuer and Class of Security Subject to the Transaction.
(a) Alfa Leisure, Inc. ("Company")
13501 5th Street
Chino, California 91710.
(b) The class of equity securities which is the subject of the Rule
13e-3 transaction is common stock, no par value ("Common Stock"). On July 22,
1999, the total number of outstanding shares of Common Stock was 3,039,872 and
the number of holders of record was approximately 385.
(c) The Common Stock is traded in the over-the-counter market, however,
there is currently no established public trading market for the shares. The
following bid and ask prices for the past eight calendar quarters are based on
very limited trading in the Common Stock:
<TABLE>
<CAPTION>
Quarter High/Ask Low/Bid
---------------- -------- -------
<S> <C> <C>
2nd Quarter 1999 $2.00 $2.00
1st Quarter 1999 2.25 1.25
4th Quarter 1998 1.75 .625
3rd Quarter 1998 1.50 .37
2nd Quarter 1998 .20 .20
1st Quarter 1998 .15 .15
4th Quarter 1997 N/A N/A
3rd Quarter 1997 .15 .15
</TABLE>
(d) The Company has never declared or paid any dividends on its Common
Stock. Alfa Leisure Acquisition Corp. ("Acquisition Corp.") which intends to
acquire the Company by merger intends to pay dividends in the amount of its
entire net income each year.
(e) Not applicable.
(f) Johnnie R. Crean, the Chairman of the Board of Directors and
President of the Company has purchased securities of the Company as follows: In
April 1998, Mr. Crean purchased 35,000 shares of Common Stock from two
stockholders of the Company for $.50 per share. In June and July 1998, Mr. Crean
purchased 10,266 shares of Common Stock of the Company pursuant to a tender
offer made by Mr. Crean to all shareholders other than himself for $.50 per
share.
In July 1998, Robert A. Rudolph, a director of the Company,
exercised an option to acquire 1,000 shares of Common Stock from the Company at
$.50 per share.
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No other purchases of securities have been made by the Company or
its affiliates since the commencement of the Company's second full fiscal year
preceding the date of this Schedule.
Item 2. Identity and Background.
This Schedule is jointly filed by the Company, Johnnie R. Crean and
Acquisition Corp.
The following information is provided for Johnnie R. Crean:
(a) Johnnie R. Crean
(b) Mr. Crean's business address is 13501 5th Street, Chino, California
91710.
(c) Mr. Crean's principal occupation and employment is as the President
and a director of the Company.
(d) Mr. Crean has been the President and a director of the Company
since 1986.
(e) During the last 5 years, Mr. Crean has not been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors).
(f) During the last 5 years, Mr. Crean has not been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction or
subject to a judgment, decree or final order enjoining violations of, or
prohibiting activities subject to, federal or state securities laws or subject
to a finding of any violations of such laws.
(g) Mr. Crean is a citizen of the United States.
The following information is provided for Acquisition Corp.
(a) Acquisition Corp.
(b) Acquisition Corp.'s business address is 13501 5th Street, Chino,
California 91710.
(c) Not applicable.
(d) Not applicable.
(e) During the last 5 years, Acquisition Corp. has not been convicted
in a criminal proceeding.
(f) During the last 5 years, Acquisition Corp. has not been a party to
a civil proceeding of a judicial or administrative body of competent
jurisdiction or subject to a judgment, decree or final order enjoining
violations of, or prohibiting activities subject to, federal or state securities
laws or subject to a finding of any violations of such laws.
(g) Acquisition Corp. is a California corporation.
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Item 3. Past Contacts, Transactions or Negotiations with the Subject Company.
(a) Mr. Crean has purchased securities of the Company as follows: In
April 1998, Mr. Crean purchased 35,000 shares of Common Stock from two
stockholders of the Company for $.50 per share. In June and July 1998, Mr. Crean
purchased 10,266 shares of Common Stock of the Company pursuant to a tender
offer made by Mr. Crean to all shareholders other than himself for $.50 per
share.
In January 1999, the Company engaged an independent consulting
firm in order to provide the Company's management with specific steps necessary
to create a market for the Company's stock. The consultant addressed potential
value scenarios and implications for the Company's market value, a process for
creating a market for the Company's stock and an overview of the current trends
of the small-cap market. The consultant presented its initial report on March
31, 1999 to Johnnie R. Crean and Mark Schwartz, the Company's Vice President of
Finance and Chief Financial Officer. Management believed that the presentation
did not fully address the scope of what the Company would need to do to create a
public market for its Common Stock. Management requested that the consultant re
work the report to provide the step by step process needed to accomplish the
goal. On April 6, 1999, the report was discussed at a meeting of the Company's
board of directors. All of the Company's directors and Mark Schwartz were
present at this meeting. On April 23, 1999, the independent consultant presented
its revised report to Johnnie Crean and Mark Schwartz. Based on the report, the
Company's management determined that it was unlikely that steps could be taken
by the Company which would result in the creation of a market for the Company's
stock.
In order to provide a return to shareholders, Johnnie R. Crean
proposed reducing the number of shareholders of the Company allowing the Company
to be taxed as a subchapter "S" corporation and to pay dividends to its
shareholders. The transaction structure as a merger of the Company into
Acquisition Corp. was established as a result of various discussions between
representatives of the independent consulting firm, legal counsel, Mr. Crean and
Mark Schwartz, the Company's Vice President Finance and Chief Financial Officer
during the period May to July 1999.
On July 2, 1999, the Company engaged Marshall & Stevens to
provide a fairness opinion for the proposed transaction.
Mr. Crean called a meeting of the board of directors of the
Company for July 20, 1999 to consider the proposed transaction. All of the
directors and a representative of Marshall & Stevens, Incorporated attended the
meeting and discussed the proposed transaction, the fairness of the transaction
and the price which shareholders receiving cash in the merger should receive.
Counsel for the Company was present during portions of the meeting. The board of
directors meeting was continued on July 21, 1999 at which time the board of
directors unanimously approved the transaction and the price which shareholders
receiving cash in the merger would receive. The price was determined based on a
number of factors set forth under Item 8 with the heaviest weight placed on the
report of the independent consultant and on the fairness opinion of Marshall &
Stevens Incorporated which established a range of value per share of the
Company's Common Stock. The board of directors of the Company selected the top
of the range as the price at which to cash out the remaining shareholders and
the selected shareholders who do not accept the offer to exchange their shares.
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Acquisition Corp. has offered selected shareholders of the
Company the opportunity to exchange the shares of Common Stock of the Company
owned by them for shares of common stock of Acquisition Corp. This offer was
made by means of an offering documents which was mailed to the selected
shareholders on July 28, 1999. The offer was made to all shareholders of the
Company who Acquisition Corp. believed were eligible subchapter S shareholders
and who held more than 16,000 shares of the Company's stock and to selected
other shareholders of the Company who were directors, employees and former
employees of the Company and former recreational vehicle dealers for the Company
and relatives of Johnnie R. Crean. Some of the selected shareholders have
contacted Mark Schwartz, the Company's Vice President Finance and Chief
Financial Officer, and Carol Smith, a director and employee of the Company, with
respect to such matters as how to obtain replacement stock certificates for lost
certificates and how to complete the forms to indicate they will become
Exchanging Shareholders. Mr. Crean has not had any other contact with the
selected shareholders concerning the transaction.
(b) Not Applicable.
Item 4. Terms of the Transaction.
(a) Johnnie R. Crean and certain other shareholders of the Company
collectively owning 90% or more of the Company's Common Stock (the "Exchanging
Shareholders") will exchange their Common Stock of the Company for common stock
of Acquisition Corp. Acquisition Corp. is a shell corporation with no assets and
no liabilities which was formed for the purpose of this transaction. Each
Exchanging Shareholder will receive one share of Acquisition Corp. stock for
each share of the Company's Common Stock which is being exchanged by the
Exchanging Shareholder. The Exchanging Shareholders will own 100% of the
outstanding common stock of Acquisition Corp. Following the exchange, the
Company will be merged into Acquisition Corp. with the result being that the
Exchanging Shareholders will own all of the assets and business previously owned
and operated by the Company.
Shares of common stock of the Company owned by all
shareholders of the Company other than Acquisition Corp. will be exchanged for
cash. Each shareholder receiving cash will receive $2.75 for each share of the
Company's common stock owned by such shareholder. The merger has been approved
by the Board of Directors of the Company and Acquisition Corp. Approval of the
Company's shareholders other than Acquisition is not required because the
Company will be a 90% owned subsidiary of Acquisition Corp.
(b) Acquisition Corp. has offered selected shareholders of the Company
the opportunity to exchange the shares of Common Stock of the Company owned by
them for shares of common stock of Acquisition Corp. This offer was made by
means of an offering documents which was mailed to the selected shareholders on
July 28, 1999. The offer was made to shareholders of the Company who Acquisition
Corp. believed were eligible subchapter S shareholders and who held more than
16,000 shares of the Company's stock and to selected other shareholders of the
Company who were directors, employees and former employees of the Company and
former recreational vehicle dealers for the Company or relatives of Johnnie R.
Crean. The selected shareholders have the opportunity to decide whether or not
to exchange their Common Stock of the Company for common stock of Acquisition
Corp. The remaining shareholders of the Company will not have this opportunity.
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In the merger, the shares of common stock of the Company owned
by Acquisition Corp. will be eliminated and the shares of common stock of the
Company owned by all other shareholders of the Company will be exchanged for
cash. Each shareholder receiving cash will receive $2.75 for each share of the
Company's common stock owned by such shareholder. The effect of the exchange and
merger is to cash out the minority shareholders of the Company and to allow
certain shareholders owning 90% or more of the Company to continue the business
of the Company.
Item 5. Plans or Proposals of the Issuer or Affiliate.
The purpose of the merger is to enable the Company to reduce the number
of shareholders of the Company so that the Company is eligible to file an
election to be taxed as a subchapter "S" corporation. The Company also intends
to terminate the registration of its common stock pursuant to section 12(g)(4)
of the Securities Exchange Act of 1934, as amended ("Exchange Act") and to
discontinue filing reports under the Exchange Act.
(a) There are no plans or proposals which are to occur after the Rule
13e-3 transaction which relate to or would result in an extraordinary corporate
transaction, such as a merger reorganization or liquidation, involving the
Company or its subsidiaries.
(b) There are no plans or proposals which are to occur after the Rule
13e-3 transaction which relate to or would result in a sale or transfer of a
material amount of assets of the Company or any of its subsidiaries.
(c) There are no plans or proposals which are to occur after the Rule
13e-3 transaction which relate to or would result in any change in the present
board of directors or management of the Company including, but not limited to,
any plans or proposals to change the number or term of directors or to fill any
existing vacancies on the board.
(d) Following the election to be taxed under subchapter "S,"
Acquisition Corp. plans to distribute its entire net income as dividends to its
shareholders each year.
(e) Acquisition Corp. intends to elect to be taxed under subchapter
"S". As a subchapter "S" corporation, Acquisition Corp. will generally be
treated in the same manner as a partnership for tax purposes. Acquisition Corp.
will not pay tax at the corporate level with certain limited exceptions. Its
profit and loss will be passed through to its shareholders and included on their
individual tax returns. There are no other plans or proposals which are to occur
after the Rule 13e-3 transaction which relate to or would result in any other
material change in the Company's corporate structure or business. The board of
directors and officers of Acquisition Corp. will be the same as the board of
directors and officers of the Company. The shareholders of Acquisition Corp.
will by the Exchanging Shareholders. Mr. Crean , his sister, brother,
sister-in-law and trusts for his children, nieces and nephews presently own
82.5% of the Company's Common Stock and are expected to own approximately 91.7%
of the Acquisition Corp. common stock.
(f) There are no plans or proposals which relate to or would result in
a class of securities of the Company to be delisted from a national securities
exchange or to cease to be authorized to be quoted in an inter-dealer quotation
system of a registered national securities association.
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(g) Following the merger, the Company intends to terminate the
registration of its common stock pursuant to section 12(g)(4) of the Exchange
Act.
Item 6. Source and Amounts of Funds or Other Consideration.
(a) The total amount of funds necessary for the exchange of shares for
cash in the merger, plus the fees and expenses related to the merger, is
estimated to be approximately $900,000. The Company intends to use its available
cash balances to fund the exchange of shares for cash and associated fees and
expenses. In the event the Company does not have sufficient available cash, Mr.
Crean has expressed his willingness to provide the Company with sufficient cash
to fund the exchange of shares for cash. The Company will not borrow funds for
the transaction.
(b) Expenses estimated to be incurred in connection with the Rule 13e-3
transaction are itemized as follows:
Filing fees $ 232
Legal fees 20,000
Appraisal fees 37,500
Printing and mailing 2,500
Depositary fees 5,000
Miscellaneous 768
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$66,000
=======
All expenses will be paid by the Company.
(c) Not applicable.
(d) Not applicable.
Item 7. Purposes, Alternatives, Reasons and Effects.
(a) The principal purpose of the merger is to enable the Company to
reduce the number of shareholders of the Company so that the Company is eligible
to file an election to be taxed as a subchapter "S" corporation. The offer was
made to shareholders of the Company who Acquisition Corp. believed were eligible
subchapter S shareholders and who held more than 16,000 shares of the Company's
stock and to selected other shareholders of the Company who were directors,
employees and former employees of the Company and former recreational vehicle
dealers for the Company or relatives of Johnnie R. Crean. The reason for
electing subchapter "S" status is to allow distributions of income to
shareholders without the double taxation which results from payment of dividends
by a corporation which has not elected subchapter "S" status since dividends are
not deductible by a corporation for tax purposes. The Company also intends to
terminate the registration of its common stock pursuant to section 12(g)(4) of
the Securities Exchange Act of 1934, as amended ("Exchange Act") and to
discontinue filing reports under the Exchange Act.
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(b) The Company engaged an independent consulting firm in order to
provide the Company's management with specific steps necessary to create a
market for the Company's stock. The consultant addressed potential value
scenarios and implications for the Company's market value, a process for
creating a market for the Company's stock and an overview of the current trends
of the small-cap market. Based on the consultant's presentation, the Company's
management determined that it was unlikely that steps could be taken by the
Company which would result in the creation of a market for the Company's stock.
In order to provide a return to shareholders, Johnnie R. Crean
proposed reducing the number of shareholders of the Company allowing the Company
to be taxed as a subchapter "S" corporation and to pay dividends to its
shareholders.
The Company considered a reverse stock split and rejected this
approach because the remaining shareholders would have included entities which
are not eligible subchapter "S" shareholders and would have prevented the
Company from achieving its goal of electing subchapter "S" status.
(c) The Rule 13e-3 transaction was structured to allow Johnnie R.
Crean, the Company's principal shareholder, to determine which shareholders of
the Company would exchange their Common Stock for shares of Acquisition Corp. in
the merger. Shareholders were selected based on the number of shares held
(larger holders being included), whether the shareholder was an eligible
subchapter "S" shareholder and based on relationships of the shareholders with
the Company and Mr. Crean. Shareholders of the Company who Acquisition Corp. and
Mr. Crean believed were eligible subchapter S shareholders and who held more
than 16,000 shares (approximately 1/2 of 1%) of the Company's stock and to
selected other shareholders of the Company who were directors, employees and
former employees of the Company and former recreational vehicle dealers for the
Company or relatives of Mr. Crean.
The Rule 13e-3 transaction is being undertaken because of the financial
benefit of electing subchapter "S" status. The reason for electing subchapter
"S" status is to allow distributions of income to shareholders without the
double taxation which results from payment of dividends by a corporation which
has not elected subchapter "S" status since dividends are not deductible by a
corporation for tax purposes.
The transaction is being undertaken at this time as a result of the
Company having used its available net operating losses and in response to the
report of an independent consultant which addressed potential value scenarios
and implications for the Company's market value, a process for creating a market
for the Company's stock and an overview of the current trends of the small-cap
market. Based on the consultant's report, the Company's management determined
that it was unlikely that steps could be taken by the Company which would result
in the creation of a market for the Company's stock.
The transaction will provide the opportunity for the Exchanging
Shareholders to receive a return on their investment in the Company's Common
Stock and will provide all other shareholders with cash in liquidation of their
investment in the Company's Common Stock.
(d) The merger transaction is not expected to have any affect on the
Company. The transaction has no federal income tax consequences to the Company.
The operations of the Company will be continued without significant change. The
merger will not result in any change in the present Board of Directors or
management of the Company.
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The shareholders of the Company will not be taxed on the
exchange of their Common Stock of the Company for the common stock of
Acquisition Corp. These shareholders will have basis in the shares of common
stock received in the exchange equal to the purchase price paid for the shares
of Common Stock of the Company. These shareholders will be benefited by the
merger because they will have the opportunity to receive distributions of the
net income of Acquisition Corp.
There has not been an active trading market for the Company's
common stock for many years and it is not anticipated that an active trading
market will develop. The effect of the transaction on the shareholders not
exchanging their Common Stock for Acquisition Corp. common stock will be to
force these shareholders to exchange common shares of the Company for cash.
These shareholders will have the benefit of liquidating their investment in the
Company but will lose the opportunity to share in any future growth in the
Company.
The receipt of cash in exchange for shares of the Company's
common stock pursuant to the merger will be a taxable transaction for federal
income tax purposes and may also be a taxable transaction under applicable
state, local, foreign and other tax laws. In general, for federal income tax
purposes, a shareholder should recognize gain or loss equal to the difference
between such shareholders' adjusted tax basis in the shares exchanged and the
amount of cash received in exchange therefore. Such a gain or loss generally
will be capital gain or loss if such shareholders' shares were held as a capital
asset and will be long term capital gain or loss if, on the date of sale, the
shares were held for more than twelve (12) months.
The foregoing discussion may not apply to shares acquired by a
shareholder pursuant to an employee stock plan or otherwise as compensation or
to shareholders who are not citizens or residents of the United States.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES,
EACH SHAREHOLDER IS STRONGLY URGED TO CONSULT HIS/HER TAX ADVISOR WITH RESPECT
TO THE TAX CONSEQUENCES TO HIM/HER OF THE OFFER, INCLUDING THE EFFECTS OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
Item 8. Fairness of the Transaction.
(a) The Company, Acquisition Corp. and Mr. Crean have each concluded
that the Rule 13e-3 transaction is fair to unaffiliated security holders.
(b) In considering whether the Rule 13e-3 transaction is fair to
unaffiliated security holders, the Company, Acquisition Corp. and Mr. Crean
considered the lack of trading market for the securities, historical market
prices for the Company's Common Stock, the reports of independent consultants
regarding the steps necessary to create a market for the Company's stock, the
historical and recent earnings performance of the Company, the Company's future
prospects, the benefit to the Company's principal shareholders of electing to be
taxed as a subchapter "S" corporation, the likelihood that the merger could be
consummated, noting the timing of and conditions to the merger, and the expected
effect of the announcement of the merger on relationships with the Company's
customers, employees, distributors, and suppliers, the terms and conditions of
the exchange and merger and the report of Marshall & Stevens Incorporated
("Marshall & Stevens") which was engaged by the Company to provide the Company
with an opinion with respect to the fairness of the proposed exchange price in
the transaction.
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There is only a limited trading market in the Company's Common
Stock. During the first six months of 1999 only 9,000 shares of the Company's
common stock was traded. The high/ask during this period ranged from $1.75 to
$2.25 and the low/bid during this period ranged from $1.25 to $1.375. Based on
the reports of the independent consultant, the Company's management, Acquisition
Corp. and Mr. Crean concluded that it was unlikely that an active trading market
in the Company's Common Stock could be established. The price to be received by
shareholders receiving cash in the merger of $2.75 exceeds the trading prices.
This factor supports the fairness of the transaction.
The historical and recent earnings performance of the Company
is not reflected in the market for the Company's Common Stock. This factor
supports the fairness of the transaction.
The Company's future prospects are believed to be good. The
Company is considering entering into the lower-price recreational vehicle
market. Evaluation of the Company's ability to design and produce a product
which will be competitive in this market is in the early stages and is likely to
require a capital infusion for new plant and equipment. The board of directors
of the Company, Acquisition Corp. and Mr. Crean concur that it is uncertain at
this time as to whether entering into this market will be profitable for the
Company. It cannot be determined whether this factor supports or detracts from
the fairness of the transaction.
The price to be received by the shareholders receiving cash in
the merger of $2.75 exceeds the Company's net book value. The Company's book
value at April 30, 1999 was $3,739,005 or $1.23 per share. This factor supports
the fairness of the transaction.
The Company has not made any determination as to the
liquidation value or going concern value of the Company. This factor does not
support or detract from the fairness of the transaction.
Mr. Crean has previously purchased shares of the Company's
common stock for $.50 per share. This factor supports the fairness of the
transaction.
The Exchanging Shareholders will benefit from the election to
be taxed as a subchapter "S" corporation because they will receive distributions
of income as a return on their investment in the Company. This supports the
fairness of the transaction to the Exchanging Shareholders but is not believed
to detract from the fairness of the transaction to the other shareholders.
It is not believed that the transaction will have any affect
on the Company's business or the relationship with its customers, employees,
distributors, and suppliers. This factor supports the fairness of the
transaction.
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The Company, Acquisition and Mr. Crean have each relied on the
opinion of Marshall & Stevens with respect to the value of the Company and have
each adopted the conclusions and analyses of Marshall & Stevens as set forth in
the opinion. The opinion is described in detail under Item 9 below.
Based upon an analysis of these factors, the Board of
Directors determined unanimously that the terms and conditions of the Merger
would be fair and in the best interests of the Company and its shareholders.
Acquisition Corp. and Mr. Crean concurred with this conclusion. The Board of
Directors of the Company, Acquisition Corp. and Mr. Crean did not find it
practicable to, and did not attempt to, assign relative weights to the specific
factors considered by them but significant weight was placed on the report of
the independent consultants and the fairness opinion of Marshall & Stevens.
(c) The structure of the transaction does not require the approval of a
majority of the unaffiliated security holders. Johnnie R. Crean owns 77.9% of
the Company's common stock and is able to approve the transaction without a vote
of unaffiliated security holders. California law provides that a corporation
such as Acquisition Corp. which will own 90% of the Common Stock of the Company
may merge the Company into itself without approval of the shareholders of the
Company. The shareholders receiving cash in the merger will have dissenter's
rights available to them in the transaction. The Company, Alfa Acquisition and
Mr. Crean believe that this statutory authority and the availability of
dissenters rights is sufficient to ensure the fairness of the transaction
without the approval of a majority of the unaffiliated security holders which is
not legally required.
(d) No unaffiliated representative has been retained by the directors
who are not employees of the Company to act on behalf of the unaffiliated
security holders for purposes of negotiating the terms of the merger or
preparing a report concerning the fairness of the transaction. The Company
retained Marshall & Stevens to prepare a report concerning the fairness of the
transaction. This fairness report was obtained for purposes of confirming the
fairness of the transaction to the unaffiliated security holders. The Company,
Alfa Acquisition and Mr. Crean believe that the statutory authority for the
transaction, the availability of dissenters rights and the obtaining of a
fairness report is sufficient to ensure the fairness of the transaction without
the need for an unaffiliated representative retained by the non-employee
director to act on behalf of the unaffiliated security holders.
(e) Approval of the sole director who is not an employee of the Company
was sought and obtained with respect to the transaction.
(f) During the preceding eighteen (18) months, no firm offers of which
the Company is aware have been made by any unaffiliated person for (i) the
merger or consolidation of the Company into or with such person or of such
person into or with the Company, (ii) the sale or transfer of all or any
substantial part of the assets of the Company or (iii) securities of the Company
which would enable the holder thereof to exercise control of the Company.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a) The Company has received an opinion from an outside party relating
to the fairness of the consideration to be offered to security holders of the
class of securities which is the subject of the Rule 13e-3 transaction.
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(b)(1) The Company retained Marshall & Stevens to provide an opinion
with respect to the fairness of the amount of cash to be exchanged for shares in
the merger from a financial point of view. Marshall & Stevens holds itself out
as a national leader in the field of professional appraisal and valuation
consultation.
(b)(2) Marshall & Stevens was established in 1932 and has offices
throughout the United States. Its appraisal practice encompasses all types of
properties and businesses, including merger valuation counseling. It also
provides expert witness testimony regarding valuation decisions.
(b)(3) Marshall & Stevens was selected based on its qualifications, the
time period estimated to complete the analysis and fairness opinion and the
cost.
(b)(4) No material relationship exists or is contemplated between (i)
Marshall & Stevens and (ii) the Company. The Company has paid Marshall & Stevens
Incorporated a fee of $37,500 for its services in valuing the Company and
providing the fairness opinion.
(b)(5) Marshall & Stevens concluded that the per share consideration to
be received by the shareholders receiving cash in the merger in a range of $2.72
to $2.75 is fair to such shareholders from a financial point of view. Following
this conclusion by Marshall & Stevens independent of the Company, the board of
directors of the Company determined that the price would be $2.75 per share.
(b)(6) In arriving at its opinion, Marshall & Stevens made such
reviews, analyses, and inquiries as it deemed necessary and appropriate under
the circumstances. Among other things, it did the following:
1. Analyzed and inspected the Company's statements for
the fiscal years ended April 30, 1997 through 1999
audited by Deloitte and Touche LLP; June 30, 1995 and
1996 audited by Coopers & Lybrand LLP; Form 10-K for
the year ended April 30, 1999; and the interim
internally prepared financial statements for the
period ended June 20, 1999, identified by the
management as the most current financial statements
available.
2. Inspected copies of the following documents:
o "Draft" Certificate of Ownership and Articles of
Merger dated _________, 1999 received on July 6,
1999.
o Internally prepared financial projections.
o Federal Tax Return for the year ended April 30,
1998.
o Fairness opinion prepared by William R. Black
dated March 31, 1998. According to this fairness
opinion, a per share price of $.50 was considered
fair to the minority shareholders.
o Presentation of Independent Consultant outlining
the strategic process to create a market for the
Company's stock.
o Various product brochures and other literature
relative to the Company's services.
11
<PAGE> 13
3. Performed a search of companies considered comparable
to the Company provided by Moody's and Compustat's
Databases and Mergerstat Review 1998.
4. Analyzed weekly stock prices for the Company provided
by Bloomberg LP.
5. Visited the Company's headquarters and conducted
telephone interviews with and relied upon the
representations of Vice President of Finance and
Administration, Mark Schwartz, concerning the
operations, financial condition, future prospects,
and projected operations and performance of the
Company.
There was no limitation imposed by the Company or any affiliate on the scope of
Marshall & Steven's investigation.
In preparing its opinion, Marshall & Stevens performed a variety of
financial and comparative analyses. Marshall & Stevens made assumptions in
conjunction with management with respect to assets, financial conditions, and
other matters, many of which are beyond the control of the Company.
The analyses made in conjunction with its opinion included those
factors and considerations specified in IRS Revenue Ruling 59-60. This ruling is
most commonly prescribed as a guide for the valuation of closely held businesses
or thinly traded public companies and securities.
SELECTED COMPARABLE COMPANY ANALYSIS. The comparable company analysis
requires that an analysis be made of publicly traded companies considered
comparable to the appraised company with regard to industry, performance, and/or
markets exploited. This analysis is predicated on the theory that the market
value of a company can be estimated by deriving market multiples from publicly
traded companies that relate their stock prices to earnings, cash flows, or
other measures and then applying these market multiples to the respective
earnings, cash flows, or other measures of the appraised company.
Marshall & Stevens conducted a search of Moody's database of over
15,000 publicly traded companies to determine if any could be utilized in its
analysis. After screening applicable SIC codes and other relevant criteria,
Marshall & Stevens selected public companies that most closely resembled the
Company in terms of lines of business and markets served. While this screening
process did not provide any public companies that were identical in all respects
to the Company, it did provide several that were sufficiently comparable to be
considered alternative investment possibilities making them useful benchmarks
for valuation purposes as follows:
o Coachmen Industries, Inc.
o Fleetwood Enterprises
o Holiday RV Superstores, Inc. o Monaco Coach Corp.
o National RV Holdings o Rexhall Industries, Inc.
o Skyline Corp.
o Thor Industries, Inc.
o Winnebago Industries
Marshall & Stevens computed market value multiples of invested
capital-to-earnings before interest and taxes (EBIT), invested
capital-to-earnings before interest taxes, depreciation and amortization
(EBITDA) of the aforementioned public companies, invested capital-to-debt free
net
12
<PAGE> 14
income and market value to net income and applied these multiples to the
corresponding earnings measures for the Company based on the latest fiscal year.
These multiples ranged from: 1) market value-to-net income, High 22.2, Median
13.3 and Low 7.4; 2) invested capital-to-EBITDA multiple, High 14.0, Median 8.5
and Low 5.8; 3) invested capital-to-EBIT, High 16.4, Median 9.7 and Low 6.1; and
4) invested capital-to-debt free net income, High 21.9, Median 13.3, and Low
9.4.
Marshall & Stevens utilized these invested capital multiples (also
referred to as debt-free multiples) because they permit it to value the Company
irrespective of the variations inherent in its capital structure and income tax
rates as compared to the public companies. Marshall & Stevens also utilized the
market value to net income multiples, since management believes that this
multiple is a valid indicator of market value in the recreational vehicle
segment of the leisure time industry.
Since the common stock of the Company is thinly traded, its shares are
characterized as having limited identity and as lacking solid market shares.
Historically, publicly traded companies tend to be larger, more sophisticated
with solid market shares and often strong public identities, so they are more
likely to command correspondingly higher multiples. Marshall & Stevens therefore
chose multiples below the median range to apply to the corresponding financial
measures for the Company. Marshall & Stevens also considered the Company's size,
diversification, financial condition, revenue growth and performance relative to
Fleetwood Enterprises and Rexhall Industries, Inc.
After multiplying the respective revenue measures of the Company by the
selected multiples and then subtracting any interest-bearing debt, if
applicable, Marshall & Stevens generated a preliminary indicated equity value,
which represents the aggregate minority value (minority interests traded in the
public marketplace) of the Company before estimated marketability discounts.
As a result of its analysis using comparable publicly traded companies
prior to a discount for marketability, the indicated market value of the
shareholders' equity of the Company on a controlling interest basis, as of July
19, 1999, was $8,600,000.
DISCOUNTED CASH FLOW ANALYSIS. Marshall & Stevens performed a
discounted cash flow analysis of projected net debt-free cash flow (EBIT less
taxes, capital expenditures, changes in working capital plus noncash charges) of
ALFA based on certain operating and financial assumptions provided by ALFA
Management. This projection incorporated various assumptions as to revenue
growth of 5%, operating margins, income taxes at 40%, depreciation, capital
expenditures, working capital levels and capitalization rate, all of which are
critical to its Opinion.
NET DEBT FREE CASH FLOW ("NDCF") PROJECTION
<TABLE>
<CAPTION>
Actual April 30,
($000s) 1999 2000 2001 2002 2003 2004
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $39,147 $43,400 $45,000 $47,250 $49,613 $52,093
EBIT 1,475 2,203 2,282 2,291 2,406 2,526
NDCF N/A 861 971 1,180 1,269 1,362
</TABLE>
In summary, the above projection is forward-looking information prepared by
management and thus, is heavily dependent and contingent upon future events with
respect to industry performance, economic conditions, and the ability of the
Company to meet these cash flow projections. Overall, this projection reflects
significant increases in revenues and earnings before interest and taxes (EBIT)
when compared to historical operations.
This debt-free cash flow was capitalized at a capitalization rate of
17% by utilization of the weighted average cost of capital (WACC). The WACC is a
function of (1) cost of debt; (2) cost of equity;
13
<PAGE> 15
(3) industry capital structure; and (4) cumulative federal and state taxes. The
cost of equity considers such factors as equity risk premiums, inflation rates,
interest rates, and the inherent business risk of the Company and the industry
as a whole. Marshall & Stevens then added a residual year (year beyond the
discrete projection time period to reflect the going concern value of ALFA into
perpetuity) to derive a present value. From this present value, Marshall &
Steven subtracted the interest-bearing debt to arrive at an equity value.
As a result of its analysis using net debt free cash flow prior to a
discount for marketability, Marshall & Stevens determined that the indicated
market value of the shareholders' equity of the Company on a minority interest
basis, as of July 19, 1999, was $9,000,000.
RECAPITULATION.
<TABLE>
<CAPTION>
ANALYSIS MARKET VALUE
-------- ------------
<S> <C>
Selected Comparable Company $8,600,000
Discounted Cash Flow $9,000,000
</TABLE>
In deriving a final conclusion, Marshall & Stevens reconciled the value
indications by weighting their relative significance depending upon the
circumstances and the quantity of reliable market data. The selected comparable
company analysis reflects the consensus of many investors relative to the
historical profitability of public companies considered comparable to the
Company. The discounted cash flow analysis considers the future profit potential
coupled with the riskiness of that return, and avoids the difficulty in
identifying public companies considered comparable to the Company. In its
analyses, Marshall & Stevens applied various sensitivity weightings to the
Selected Comparable Company analysis and Discounted Cash Flow analysis: 50-50%
and 30-70%, respectively.
Marshall & Stevens also considered the stock trading price of $2.00 as
of April 23, 1999 for 300 shares (the most currently available trading price
proximate to the opinion date). Another transaction was reported on July 9, 1999
at the bid price of $2.125 per share for 1,000 shares. According to
documentation furnished by the Company from American Stock Transfer & Trust
Company, this July transaction appears to have been misreported by Bloomberg LP.
In actuality, 1,000 shares (subject to Rule 144) of the Company were issued as a
result of the exercise of 1,000 stock options at $0.50 per share by shareholder,
Robert Rudolph, on July 9, 1999. Thus, no sales transactions appear to have
occurred subsequent to April 23, 1999.
The impact of marketability on the market value of the common stock has
been analyzed and commented upon by a number of sources. Various restricted
stock studies initial public offering studies and court cases indicate that
marketability discounts can be significant ranging from 25% to 45%. However, the
Company's common shares are more liquid than closely held shares, since they are
publicly traded, but still suffer some impaired marketability due to limited
visibility. Additionally, the sale of a large block of shares (estimated at
greater than 10%) could also depress the per share price. Marshall & Stevens
analyzed the differential between the ask (high) and bid (low) pricing spreads
for the Company's common shares from February 9, 1998 through July 19, 1999 and
determined that the differential spread was 7.4%. In Marshall & Stevens opinion,
a marketability discount of 5% would be appropriate.
14
<PAGE> 16
Marshall & Stevens also included the impact of dilution triggered by
the potential exercise of the vested stock options outstanding as of the Opinion
date. The proceeds from the exercise of 26,000 options (130,000 issued, 20%
vested) at an exercise price of $0.50 will be $13,000.
Based on the information and analyses summarized in its report, its
various sensitivity weightings and a discount for marketability, it is Marshall
& Stevens' opinion that the market value of the stockholders' equity of the
Company, on a fully diluted minority interest basis, as of July 19, 1999, ranges
from $8,370,000 to $8,450,000 or $2.72 to $2.75 per share.
Based on its analysis, Marshall & Stevens rendered its opinion that the
proposed cash amount to be paid in exchange for shares in the merger of $2.75
per share is fair from a financial point of view to the shareholders of the
Company which will receive cash in the merger.
(c) A copy of the opinion of Marshall & Stevens Opinion will be
provided to each shareholder of the Company.
Item 10. Interest in Securities of the Issuer.
(a) Mr. Crean beneficially owns 2,367,239 shares or 77.9% of the
Company's Common Stock including 2,282,408 shares held in a living trust over
which Mr. Crean has sole voting and investment power and including 43,200 shares
held by trusts for the benefit of the children of Mr. Crean of which Mr. Crean
is co-trustee.
Alfa Acquisition does not beneficially own any shares of the
Company's Common Stock but will become the owner of 90% or more of the Company's
Common Stock prior to completion of the transaction.
(b) Not applicable.
Item 11. Contracts, Arrangements or Understandings with Respect to the Issuer's
Securities.
On March 31, 1992, the Company obtained a line of credit in the amount
of $2,000,000 (the "Loan") from Merlin Financial, Inc., a Nevada corporation
("Merlin"). This Loan is guaranteed by Mr. Crean. The use of proceeds of the
Loan was restricted to the following: (1) up to $550,000 to Mr. Crean and any
other existing secured lenders to pay off all existing secured loans, (2)
payments to unsecured trade creditors as determined by the Company, (3) fire
insurance upon the assets and business naming Merlin as a loss payee with
coverage equal to the replacement cost of the assets and business interruption
insurance sufficient to pay Merlin as well as other vendors necessary to
continue operations of the Company's business for six months, (4) reimbursement
to Merlin of all attorneys' fees paid by Merlin in respect of the Loan and (5)
the balance for working capital of the Company.
The Loan is payable upon demand by Merlin pursuant to a 90 day written
notice. The Company has received a written representation from Merlin that a
demand for principal payment will not be made through the end of fiscal year
2000. The interest rate on the Loan is the Bank of America prime plus 1%, or
such lesser rate permitted by California law. Interest is payable monthly on the
outstanding principal and any unpaid interest is added to the Loan principal.
Any default by the Company in repayment of the Loan entitles Merlin to demand
immediate repayment of the Loan balance and to pursue all remedies available.
15
<PAGE> 17
The Loan is intended to serve as a line of credit and the Company is
obligated to reduce the principal balance as much and as frequently as possible
and as Merlin may instruct from time to time. The security for the Loan is a
first priority lien on all of the Company's assets, both tangible and
intangible, as well as the personal guarantee of Mr. Crean. Mr. Crean's
guarantee is secured by the pledge of all of his shares of common stock of the
Company.
Item 12. Present Intention and Recommendation of Certain Persons with Regard to
the Transaction.
(a) No executive officer, director or affiliate of the Company or any
person enumerated in instruction C of this statement will receive cash in
exchange for shares of common stock of the Company in the merger. There is no
vote of executive officers, directors or affiliates of the Company or any person
enumerated in instruction C of this statement in connection with the merger.
(b) No executive officer, director or affiliate of the Company or any
person enumerated in instruction C of this statement have made a recommendation
in support of or opposed to the Rule 13e-3 transaction. The Board of Directors
of the Company have determined that the merger is fair from a financial point of
view to the shareholders receiving cash in the merger.
Item 13. Other Provisions of the Transaction.
(a) If the merger is completed, certain of the record holders of the
Company's Common Stock who object to the merger may have the right to dissent
with respect to the merger and, subject to certain conditions, receive a cash
payment equal to the fair market value of their shares under the California
General Corporation Law.
In order to perfect his or her dissenter's rights, a record holder of
the Company's Common Stock must (i) vote his or her dissenting shares against
the merger, (ii) make written demand upon the Company to purchase his or her
dissenting shares not later than the date of the shareholders meeting held to
approve the merger, (iii) submit the stock certificates representing his or her
dissenting shares to the Company, for notation that they represent dissenting
shares, within thirty days after the mailing by the Company to shareholders who
voted against the merger of a notice stating that the merger has been approved
by the shareholders, and (iv) file an action in court within six months after
the date on which notice stating that the merger has been approved by the
shareholders is mailed to the Company's shareholders who voted against the
merger, but only if the Company and the shareholder are unable to reach
agreement on the price to be paid for the dissenting shares, all as more
particularly described below. Failure to take any of the required steps
described herein may result in a loss of such dissenters' rights.
Dissenters' rights cannot be validly exercised by persons other than
the record holders of the Company's Common Stock, regardless of the beneficial
ownership thereof. Persons who are beneficial owners of the Company's Common
Stock but whose shares are held of record by another person, such as a broker, a
bank or a nominee, should instruct the record holder to follow the procedure
outlined below if they wish to dissent from the merger with respect to any or
all of their shares.
Under Sections 1300 to 1312 of the California General Corporation Law,
any shareholder of record of the Company who votes any or all of his or her
shares against the merger and who intends to exercise his or her dissenter's
rights must, on or before the date of the shareholders meeting held to
16
<PAGE> 18
approve the merger, submit to the Company at its principal executive offices,
13501 5th Street, Chino, California 91710, Attention: Secretary, a written
demand that the Company purchase for cash some or all of his or her shares voted
against the merger, which demand shall state the number of shares which he or
she demands that the Company purchase and the amount which the shareholder
claims to be the fair market value of those shares as of July 21, 1999, the day
before the first announcement of the terms of the proposed merger, excluding any
appreciation or depreciation because of the proposed merger.
Dissenters' rights may not be perfected with respect to any shares
unless such shares are voted against the merger. A record shareholder may vote
part of the shares which he or she is entitled to vote in favor of or in
abstention with respect to the merger without jeopardizing appraisal rights as
to shares voted against the merger; however, if a record shareholder votes part
of the shares he or she is entitled to vote in favor of the merger and fails to
specify the number of shares he or she is voting in favor of the merger, it is
conclusively presumed under California law that his or her approving vote is
with respect to all shares which he or she is entitled to vote. A vote to
abstain will not constitute a vote against the merger. Further, voting against
the merger will not of itself, absent compliance with the other provisions
summarized herein, satisfy the requirements of the California General
Corporation Law for exercise of dissenters' rights.
Within ten (10) days after the approval of the merger by the
shareholders, the shareholders who voted against the merger and made a timely
demand for purchase and who are entitled to require the Company to purchase
their shares, will be notified by the Company of such approval and the Company
will offer all of these shareholders a cash price for their shares that the
Company considers to be the fair market value of the shares on the day before
the terms of the merger were first announced, excluding any appreciation or
depreciation because of the proposed merger. The notice will also contain a
brief description of the procedures to exercise their rights to have the Company
purchase their Common Stock and will attach a copy of the relevant provisions of
the California General Corporation Law.
A dissenting shareholder must submit to the Company or its transfer
agent at the addresses set forth above, within thirty days after the Company
mails to him or her notice of shareholder approval of the merger, certificates
representing the dissenting shares which he or she demands that the Company
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. The notice of shareholder approval of the
merger will specify the date by which the submission of certificates for
endorsement must be made to the Company, and a submission made after such date
will not be effective for any purpose. No other notices will be given by the
Company of any dates upon which any shareholder action is required to exercise
dissenters' rights.
If the Company and a dissenting shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the Company, upon
surrender of the certificates evidencing such shares, will make payment of that
amount (plus interest thereon from the date of such agreement) within thirty
days after such agreement or within thirty days after the satisfaction of any
statutory or contractual conditions, whichever is later. Any agreement fixing
the fair market value of any dissenting shares between a dissenting shareholder
and the Company shall be filed with the Secretary of the Company.
If the Company denies that the shares are dissenting shares, or the
Company and the dissenting shareholder fail to agree on the fair market value of
the shares, the dissenting shareholder may, within six months after the date on
which notice of shareholder approval of the merger was mailed to the
shareholder, but not thereafter, file a complaint in the Superior Court of the
County of Orange, State of California, requesting that the Court determine
whether the shares are dissenting shares and the fair market value of such
dissenting shares. The costs of the action will be assessed or apportioned as
the
17
<PAGE> 19
Court considers equitable, but, if the appraised fair market value is determined
to exceed the price offered to the shareholder by the Company, the Company will
be required to pay the costs of the action and may be required to pay counsel
fees.
A dissenting shareholder may not withdraw his or her dissent or demand
for payment without the consent of the Company by its Board of Directors. The
rights of dissenting shareholders to demand payment terminates if, among other
things, the merger is abandoned or if the shares are transferred prior to
submission for endorsement as dissenting shares.
Any demands, notices, certificates or other documents required to be
delivered to the Company may be sent to: Alfa Leisure, Inc., 13501 5th Street,
Chino, California 91710, Attention: Secretary.
(b) Unaffiliated security holders may obtain access to the corporate
files of the Company (at the expense of the Company) by contacting the Company.
(c) Not applicable.
Item 14. Financial Information.
(a) (1) Audited financial statements of the Company as of April 30,
1999 and 1998 and for the fiscal years ended April 30, 1999 and 1998 required to
be filed with the Company's most recent annual report on Form 10-K are attached
hereto.
(2) Not Applicable.
(3) Not applicable.
(4) The Company's book value per share as of April 30, 1999 was
$1.23.
(b) Not applicable.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) It is anticipated that the Company may utilize the Company's
facilities and administrative personnel to mail written materials and to respond
to shareholder inquiries.
(b) The Company does not intend to employ, retain or compensate persons
to make solicitations or recommendations in connection with the Rule 13e-3
transaction. Brokers, dealers, commercial banks and trust companies will be
reimbursed by the Company for customary mailing and handling expenses incurred
by them in forwarding offering materials to their customers.
Item 16. Additional Information.
Not applicable.
18
<PAGE> 20
Item 17. Material to be Filed as Exhibits.
(a) Not applicable.
(b) Fairness opinion rendered by Marshall & Stevens Incorporated
incorporated by reference to Schedule 13E-3, Item 17 filed by Alfa Leisure,
Inc. on July 28, 1999.
(c) Loan Agreement, Promissory Note, Security Agreement, UCC-1,
Assignment of Sublease, Certificate of Borrower, Guaranty, Pledge Agreement,
Escrow Letter, Lease Assignment and Stock Assignment Separate From Certificate
are incorporated by reference to Schedule 14D-1, Item 11(c) filed by Mr. Crean
on May 12, 1994.
(d) Notice of Merger and Dissenter's Rights incorporated by reference
to Schedule 13E-3, Item 17 filed by Alfa Leisure, Inc. on July 28, 1999.
(e) Chapter 13 of the California General Corporation Law incorporated
by reference to Schedule 13E-3, Item 17 filed by Alfa Leisure, Inc. on July 28,
1999.
(f) None.
19
<PAGE> 21
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Date: August 30, 1999 ALFA LEISURE, INC.
By: /s/ MARK A. SCHWARTZ
----------------------------------
Mark A. Schwartz,
Chief Financial Officer
ALFA LEISURE ACQUISITION CORP.
By: /s/ MARK A. SCHWARTZ
----------------------------------
Mark A. Schwartz,
Chief Financial Officer
/s/ JOHNNIE R. CREAN
---------------------------------------
Johnnie R. Crean
20
<PAGE> 22
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Alfa Leisure, Inc.
We have audited the accompanying consolidated balance sheets of Alfa Leisure,
Inc. and subsidiary (the "Company") as of April 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended April 30, 1999. 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, such financial statements present fairly, in all material
respects, the financial position of the Company at April 30, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended April 30, 1999 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Los Angeles, California
June 18, 1999
21
<PAGE> 23
ALFA LEISURE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
April 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 80,727 $ 410,671
Restricted cash 126,260 150,247
Accounts receivable 1,922,919 1,614,276
Inventories 1,626,516 1,415,794
Prepaid expenses and other current assets 98,143 139,623
Deferred income tax asset - current 144,008 7,438
---------- ----------
Total Current Assets 3,998,573 3,738,049
Property, plant and equipment, net 2,308,933 1,300,407
Other assets and deposits 45,000 50,064
Deferred income tax asset 566,832 470,403
---------- ----------
Total Assets $6,919,338 $5,558,923
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $1,876,356 $1,271,896
Accrued expenses 521,733 596,805
Accrued compensation 555,428 586,028
Note payable to President 218,616 0
---------- ----------
Total Current Liabilities 3,172,133 2,454,729
Deferred income 8,200 8,200
---------- ----------
Total Liabilities 3,180,333 2,462,929
Commitments and Contingencies (Note 6)
---------- ----------
Stockholders' equity:
Common stock, authorized 30,000,000 shares
of no par value; issued and
outstanding 3,048,137 shares at
April 30, 1999 and April 30, 1998
respectively 62,000 62,000
Note receivable from President 0 (363,236)
Retained earnings 3,677,005 3,397,230
---------- ----------
Total Stockholders' Equity 3,739,005 3,095,994
---------- ----------
Total Liabilities and
Stockholders' Equity $6,919,338 $5,558,923
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
ALFA LEISURE, INC.
CONSOLIDATED STATEMENTS OF INCOME
----------------
<TABLE>
<CAPTION>
For the Years Ended April 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales $39,146,987 $36,025,591 $28,590,285
Cost of sales 34,100,426 31,186,855 24,951,677
----------- ----------- -----------
Gross profit 5,046,561 4,838,736 3,638,608
Selling, general and administrative 3,571,871 3,249,093 3,002,621
----------- ----------- -----------
Income from operations 1,474,690 1,589,643 635,987
Interest and other expense 16,767 79,672 197,411
----------- ----------- -----------
Income before income taxes 1,457,923 1,509,971 438,576
Provision for income taxes 568,378 165,342 109,032
----------- ----------- -----------
Net income $ 889,545 $ 1,344,629 $ 329,544
=========== =========== ===========
Net income per share - basic
and diluted $ .29 $ .44 $ .11
=========== =========== ===========
Weighted average shares
outstanding - basic
and diluted 3,048,137 3,048,137 3,050,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
ALFA LEISURE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended April 30, 1999, 1998 and 1997
----------------
<TABLE>
<CAPTION>
Common Stock
-------------------
Note receivable Retained
Shares Amount from President earnings
--------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Balance, April 30, 1996 3,050,000 $ 62,000 $ (402,390) $1,723,057
Net advances to president (37,402)
Net income 329,544
Cancellation of shares (1,863)
---------- ---------- ---------- ----------
Balance, April 30, 1997 3,048,137 62,000 (437,792) 2,052,601
Net income 1,344,629
Net reductions from president 76,556
---------- ---------- ---------- ----------
Balance, April 30, 1998 3,048,137 62,000 (363,236) 3,397,230
Net income 889,545
Net advances to president (119,526)
Capital distribution (Note 3) 482,762 (609,770)
---------- ---------- ---------- ----------
Balance, April 30, 1999 3,048,137 $ 62,000 $ 0 $3,677,005
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
ALFA LEISURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------
<TABLE>
<CAPTION>
For the Years Ended April 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 889,545 $ 1,344,629 $ 329,544
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 247,996 174,221 12,887
Changes in operating assets and liabilities:
Deferred income taxes 170,717 53,555 8,874
Accounts receivable (308,643) 154,877 47,500
Inventories (210,722) (116,153) 395,157
Prepaids and other assets 41,480 (29,128) (64,938)
Accounts payable 691,074 (644,715) 115,501
Accrued compensation (30,600) 167,554 31,213
Accrued expenses (161,686) 180,964 4,377
----------- ----------- -----------
Net cash provided by
operating activities 1,329,161 1,285,804 996,115
----------- ----------- -----------
Cash flow from investing activities:
Acquisition of property, plant and equipment (1,360,238) (371,474) (95,350)
Deposits 5,064 0 (10,000)
Restricted cash 23,987 (897) 59,792
----------- ----------- -----------
Net cash used in investing activities (1,331,187) (372,371) (45,558)
----------- ----------- -----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
ALFA LEISURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
----------------
<TABLE>
<CAPTION>
For the Years Ended April 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease in notes payable $ (81,384) $ 0 $ 0
to President
Net (increase) decrease in note receivable
from President 363,236 76,556 (37,402)
Principal payments on line of credit 0 (972,500) (1,025,000)
Capital distribution (Note 3) (609,770) 0 0
----------- ----------- -----------
Net cash (used in) financing activities (327,918) (895,944) (1,062,402)
----------- ----------- -----------
Net (decrease) increase in cash (329,944) 17,489 (111,845)
Cash and cash equivalents at
beginning of year 410,671 393,182 505,027
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 80,727 $ 410,671 $ 393,182
=========== =========== ===========
Supplemental cash flow disclosures:
Interest paid $ 16,767 $ 79,672 $ 192,482
=========== =========== ===========
Income taxes paid $ 402,000 $ 111,141 $ 111,490
=========== =========== ===========
</TABLE>
Supplemental Investing and Financing Activities - In connection with the
purchase of land and buildings from a corporation owned by the Company's
Chairman, for $1,575,000, $300,000 was paid in the form of a promissory note due
upon demand (see Note 3).
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------
1. Summary of Significant Accounting Policies:
-------------------------------------------
General:
- --------
The Company manufactures and sells recreational vehicles which are distributed
by independent dealers located throughout the United States but concentrated in
the western and southwestern portions of the United States.
Consolidation:
- --------------
The consolidated financial statements include the accounts of Alfa Leisure, Inc.
and its inactive, wholly owned subsidiary Brougham International, Inc.,
collectively the "Company".
Accounting Periods:
- -------------------
The Company's fiscal year ends on the Sunday in April falling between the 17th
and the 23rd. Fiscal 1999 ended on April 18, 1999, fiscal 1998 ended April 19,
1998 and fiscal 1997 ended on April 20, 1997. While the financial statements
reflect operations of the Company as of and for the periods ending on those
dates, they have been presented as if the Company's fiscal year ends on April 30
of each year to simplify the presentation.
Cash Equivalents and Restricted Cash:
- -------------------------------------
Cash equivalents are highly liquid investments that are readily convertible into
known amounts of cash and have maturity's at acquisition of three months or
less.
Restricted cash balances consist of funds held as collateral for the Company to
be bonded, as required by various state agencies for licensing procedures. For
purposes of the statements of cash flows, these amounts are not considered cash
equivalents.
Inventories:
- ------------
Inventories are stated at the lower of cost (determined using the first-in,
first out method), or market.
Property, Plant and Equipment:
- ------------------------------
Property, plant and equipment are stated at cost. Depreciation and amortization
of property, plant and equipment are provided over the estimated useful lives of
the assets which range from two to twenty six years. Leasehold improvements are
amortized over the lives of the respective leases, or the service lives of the
improvements, whichever is shorter. Accelerated and straight-line methods of
depreciation are used for both financial reporting and income tax reporting
purposes. Upon sale or disposition of assets, any gain or loss is included in
the statement of operations.
27
<PAGE> 29
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
-------------
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, the
related asset would be written down to its estimated value.
Normal repairs and maintenance are charged to expense as incurred whereas
significant improvements that materially increase values or extend useful lives
are capitalized and depreciated over the estimated useful lives of the related
assets.
Net Income per Share:
- ---------------------
Basic earnings per share is computed by dividing income available to
shareholders of beneficial interest by the weighted average number of shares
outstanding for the period. Diluted earnings per common share does not differ
from that presented.
Income Taxes:
- -------------
Deferred income taxes reflect the tax consequences in future years of
differences between the tax bases of assets and liabilities and the
corresponding bases used for financial reporting purposes.
Advertising Expenses:
- ---------------------
Advertising costs are expensed when incurred. Advertising expense for the years
ended April 30, 1999, 1998 and 1997 were $210,144, $123,788 and $86,762
respectively.
Research and Development Costs:
- -------------------------------
Research and development costs are expensed when incurred. Research and
development costs for the years ended April 30, 1999, 1998 and 1997 were
$349,706, $290,655 and $176,760 respectively.
Management 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 and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
28
<PAGE> 30
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
-------------
Fair Value of Financial Instruments:
- ------------------------------------
Statement of Financial Accounting Standards No. 107 (SFAS No. 107), Disclosures
about Fair Market Value of Financial Instruments, requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. Financial instruments are generally
defined by SFAS No. 107 as cash, evidence of ownership interest in equity, or a
contractual obligation that both conveys to one entity a right to receive cash
or other financial instruments from another entity and impose on the other
entity the obligation to deliver cash or other financial instruments to the
first entity. Cash, restricted cash, accounts receivable and accounts payable
are carried at the approximate fair value because of the short maturities of
these instruments. The fair value of the note payable to President cannot be
determined due to the related party nature of the agreement.
Concentration of Credit Risk:
- -----------------------------
Financial instruments that subject the Company to credit risk consist primarily
of accounts receivable. Concentration of credit risk with respect to accounts
receivable is generally diversified due to the number of entities composing the
Company's customer base and their geographic dispersion. The Company performs
ongoing credit evaluations of its customers for potential credit loss exposure.
2. Inventories:
------------
Inventories are stated as follows:
<TABLE>
<CAPTION>
April 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw materials $ 951,174 $ 869,762
Work in process 644,589 514,728
Finished products 30,753 31,304
---------- ----------
Total inventories $1,626,516 $1,415,794
========== ==========
</TABLE>
29
<PAGE> 31
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
-------------
3. Property, Plant and Equipment:
------------------------------
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
Useful
Lives April 30,
------------ ----------------------------
1999 1998
----------- -----------
<S> <C> <C> <C>
Land $ 603,282 $ 332,262
Buildings 26 years 1,200,961 895,097
Machinery and equipment 2 to 7 years 1,387,158 1,019,523
Transportation equipment 5 years 292,518 242,608
Furniture and office equipment 5 years 615,047 377,012
Leasehold improvements 5 years 261,520 237,460
----------- -----------
4,360,486 3,103,962
Less: Accumulated depreciation
and amortization (2,051,553) (1,803,555)
----------- -----------
Net property, plant and equipment $ 2,308,933 $ 1,300,407
=========== ===========
</TABLE>
The Company has a manufacturing facility in Benton, Louisiana which the Company
is not currently using. The net book value of these premises is $367,219 and
$350,530 at April 30, 1999 and 1998 respectively. This facility was leased to a
tenant beginning April 1, 1995 for five years at $4,100 per month.
In January 1999 the Company acquired the land and buildings where its executive
offices and principal manufacturing facilities in Chino are located. It was
purchased from Hercules Land Holding, Inc. a corporation owned by the Company's
chairman, president and principal shareholder. The purchase price of $1,575,000
was paid $1,275,000 in cash and $300,000 in a promissory note due upon demand.
The note pays monthly interest at Wells Fargo Bank's prime interest rate. The
purchase price was based on fair market value as determined by an independent
appraisal. The net assets were recorded at $561,514, which was the carrying
value of Hercules Land Holding, Inc. The difference between the carrying value
of the property by Hercules and the purchase price was $1,013,486. This amount
less the deferred taxes of $403,716 which relates to the step up in tax basis,
was recorded as a capital distribution and was included as a reduction in
retained earnings on the balance sheet. In conjunction with this transaction the
note receivable from the president, which was classified as a component of
stockholders' equity, was paid off.
30
<PAGE> 32
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
---------------------
4. Line of Credit:
---------------
In April 1992, the Company entered into a line of credit agreement with Merlin
Financial, Inc. set at a maximum amount of $ 2,000,000, of which no borrowings
were outstanding at April 30, 1999 and 1998, respectively. Interest is at Bank
of America's prime rate plus 1%.
In January 1998 the Company established a $1,000,000 line of credit with Wells
Fargo Bank. The line of credit bears interest at Wells Fargo Bank's prime rate
plus 1%. Interest is payable monthly. In January 1999 the Company renewed its
line of credit with Wells Fargo Bank for an additional two years. The line was
increased from $1,000,000 to $1,750,000. The interest rate was reduced to Wells
Fargo Bank's prime rate. All other terms and conditions remained the same. There
were no amounts outstanding at April 30, 1999 and 1998, respectively. The
Company will draw against the Merlin Financial, Inc. line of credit only after
the Wells Fargo Bank line of credit is fully utilized.
Substantially all the assets of the Company are pledged as collateral for the
line of credit, first to Wells Fargo Bank, and secondly to Merlin Financial,
Inc.
5. Income Taxes:
-------------
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
For the Years Ended April 30,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
State $ 88,333 $ 99,086 $ 117,906
Federal 309,328 12,701 0
Deferred:
State 13,924 1,230 14,736
Federal 156,793 52,325 (23,610)
--------- --------- ---------
Totals $ 568,378 $ 165,342 $ 109,032
========= ========= =========
</TABLE>
The reconciliation of the effective tax rates and U. S. Statutory tax rates are
as follows:
<TABLE>
<CAPTION>
For the Years Ended April 30,
--------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax provision at statutory rate $ 495,694 $ 513,390 $ 149,116
Decrease in the valuation allowance 0 (370,000) (129,996)
State taxes, net of federal benefit 64,753 66,209 87,544
Other 7,931 (44,257) 2,368
--------- --------- ---------
$ 568,378 $ 165,342 $ 109,032
========= ========= =========
</TABLE>
31
<PAGE> 33
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
---------------------
The net operating loss carryforward for federal income tax purposes was fully
utilized in fiscal 1999.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
For the Years Ended April 30,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards $ 0 $ 186,490
Basis difference in fixed assets 490,296 111,460
State taxes 20,698 (16,901)
Accrued liabilities 196,333 116,430
Charitable contributions 0 27,340
Tax credits 0 49,471
Deferred income 3,513 3,551
--------- ---------
$ 710,840 $ 477,841
========= =========
</TABLE>
6. Commitments and Contingencies:
------------------------------
Operating Leases:
-----------------
In January 1999, the Company acquired the land and buildings where its executive
offices and principal manufacturing facilities in Chino are located (see Note
3). It was purchased from Hercules Land Holding, Inc., a corporation owned by
the Company's chairman, president and principal shareholder. Through January
1999, the Company paid rent to Hercules in the amount of $12,932 per month. The
Company leases additional manufacturing facilities under agreements classified
as operating leases. The leases require fixed monthly payments. One of the
Company's manufacturing facilities is leased at an annual rate of $42,000, from
an unrelated party. This lease expires June 1, 2001. A second lease was entered
into, with an unrelated party, on another of the Company's facilities effective
March 1, 1998 at an annual lease rate of $43,500. This lease expires February
28, 2001. Future minimum lease payments on these leases at April 30, 1999 are as
follows:
Year ended April 30,
--------------------
2000 $ 50,500
2001 78,250
2002 3,500
--------
$132,250
32
<PAGE> 34
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
---------------------
Rent expense for the years ended April 30, 1999, 1998 and 1997 was $212,838,
$207,429 and $195,576 respectively of which $116,388, $155,184 and $156,780
respectively, was paid to the Company's president.
Financing Arrangements:
- -----------------------
The Company is contingently liable under the terms of the repurchase agreements
established with financing institutions to provide inventory financing for
dealers of the Company's products. The maximum exposure related to repurchase
agreements was approximately $9.6 million and $9.1 million at April 30, 1999 and
1998, respectively. The risk of loss under these agreements is spread over many
dealers and financing institutions and is reduced by the resale value of any
products that may be repurchased. The Company has historically experienced no
significant losses under these agreements.
Warranty Reserve:
- -----------------
The Company provides a warranty against defects in materials and workmanship for
one year following the date of sale. Estimated costs of product warranties
relating to sales during the year have been accrued and charged to operations
during the year the products were sold. The Company has included $198,856,
$212,678 and $213,201of accrued warranty costs in accrued expenses at April 30,
1999, 1998 and 1997, respectively.
Litigation:
- -----------
The Company is involved in several routine litigation matters incidental to its
business. Such litigation matters, when ultimately determined, will not, in the
opinion of management, have a material effect on the financial position or the
results of operations of the Company.
Employment Agreement:
- ---------------------
The Company has an annual employment agreement with its president that expires
on December 31, 1999. The agreement automatically extends for additional annual
periods unless canceled by either party before October 31 of each year. The
agreement provides for a fixed annual salary subject to an annual cost of living
adjustment. Such salary amounted to $225,476, $248,428 and $253,332 in the
fiscal years ended April 30, 1999, 1998 and 1997, respectively.
In addition, the agreement provides for a bonus in an amount equal to 10 % of
pretax income before accrual for amounts to be paid by the Company under its
management bonus plan. The agreement also provides for the right of the
Company's President to purchase each year up to two travel trailers manufactured
by the Company for an amount equal to the Company's cost. One trailer was
purchased in fiscal 1998, and no trailers were purchased in fiscal 1999 and
1997.
Under a bonus program for salaried employees, which includes the President,
bonus expense was recognized in the amounts of $630,105, $587,221 and $241,459,
in fiscal 1999, 1998 and 1997, respectively.
33
<PAGE> 35
ALFA LEISURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
---------------------
7. Stock Options:
--------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123).
A total of 300,000 shares are reserved for issuance under the Company's
incentive stock option plan for employees and directors. In May 1998, 130,000
options were issued to employees and directors. These options vest 20% per year
over five years, and expire in May 2008. The options have an exercise price of
$.50 per share.
<TABLE>
<CAPTION>
Weighted
Number Average Total
Of Shares Exercise Price Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option
at April 30, 1998 0 0 0
Granted 130,000 $ .50 $65,000
Exercised 0 0 0
Forfeited 0 0 0
- --------------------------------------------------------------------------------
Shares under option
at April 30, 1999 130,000 $ .50 $65,000
- --------------------------------------------------------------------------------
Shares exercisable
at April 30, 1999 0 0 0
- --------------------------------------------------------------------------------
</TABLE>
The fair value of options granted is estimated on the date of grant using the
Black Scholes option pricing model. The following weighted average assumptions
were used: no dividend yield, no volatility as there is seldom trading in the
Company's stock, risk free interest rate of 5.5% and an expected term of 10
years. The weighted average fair value of options granted in fiscal 1999 was
$0.21 per share. Had the Company accounted for stock options in accordance with
SFAS 123, the reduction in net income and net income per share would not have
been material.
8. Note Receivable/Payable President
---------------------------------
At April 30, 1998 and 1997, the Company had a note receivable from its president
and principal stockholder amounting to $ 363,236 and $ 439,792 respectively. In
January 1999 the Company acquired the land and buildings where its executive
offices and principal manufacturing facilities in Chino are located. It was
purchased from Hercules Land Holding, Inc., a corporation owned by the Company's
president and principal shareholder. At that time, the note receivable from its
president was paid off, and a $300,000 note payable to the president was issued.
The note payable is due upon demand and pays monthly interest at Wells Fargo
Bank's prime interest rate. At April 30, 1999, the note payable totaled
$218,616.
34
