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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-3
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
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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 Amount of filing fee
valuation * $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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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., 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(cent) 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.
In July 1999, 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.
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.
Not Applicable.
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Item 3. Past Contacts, Transactions or Negotiations with the Subject Company.
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 will exchange
their Common Stock of the Company for common stock of Alfa Leisure Acquisition
Corp. ("Acquisition Corp."). Following the exchange, the Company will be merged
into Acquisition Corp. 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) 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," the Company
plans to distribute its entire net income as dividends to its shareholders each
year.
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(e) There are no 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.
(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.
(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. Purchaser intends to use its available
cash balances to fund the exchange of shares for cash and associated fees and
expenses.
(b) Expenses estimated to be incurred in connection with the Rule 13e-3
transaction are itemized as follows:
<TABLE>
<S> <C>
Filing fees $ 232
Legal fees 20,000
Appraisal fees 37,500
Printing and mailing 2,500
Depositary fees 5,000
Miscellaneous 768
-------
$66,000
</TABLE>
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 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 consultant 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. The Rule 13e-3 transaction is being undertaken because of the financial
benefit of electing subchapter "S" status.
(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.
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.
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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 believes 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 considered the lack of trading market
for the securities, historical market prices for the Company's Common Stock, the
reports of Deloitte & Touche Corporate Finance 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.
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. The Board of
Directors did not find it practicable to, and did not attempt to, assign
relative weights to the specific factors considered by it.
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. The price
to be received by shareholders receiving cash in the merger of $2.75 exceeds
these prices.
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.
The Company has not made any determination as to the liquidation
value or going concern value of the Company. The Company has relied on the
opinion of Marshall & Stevens with respect to the value of the Company. The
opinion is described in detail under Item 9 below.
(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.
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(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.
(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.
(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.
(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.
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2. Inspected copies of the following documents:
- "Draft" Certificate of Ownership and Articles of
Merger dated _________, 1999 received on July 6, 1999.
- Internally prepared financial projections.
- Federal Tax Return for the year ended April 30, 1998.
- 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.
- Presentation of Independent Consultant outlining the
strategic process to create a market for the Company's
stock.
- Various product brochures and other literature
relative to the Company's services.
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
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sufficiently comparable to be considered alternative investment possibilities
making them useful benchmarks for valuation purposes as follows:
- Coachmen Industries, Inc.
- Fleetwood Enterprises
- Holiday RV Superstores, Inc.
- Monaco Coach Corp.
- National RV Holdings
- Rexhall Industries, Inc.
- Skyline Corp.
- Thor Industries, Inc.
- 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 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%,
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operating margins, income taxes at 40%, depreciation, capital
expenditures, working capital levels and capitalization rate, all of which are
critical to its Opinion.
<TABLE>
<CAPTION>
NET DEBT FREE CASH FLOW ("NDCF") PROJECTION
=====================================================================================================
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; 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
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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.
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) Not applicable.
(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
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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.
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.
11
<PAGE> 13
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 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
12
<PAGE> 14
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 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,
13
<PAGE> 15
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.
Item 17. Material to be Filed as Exhibits.
(a) Not applicable.
(b) Fairness opinion rendered by Marshall & Stevens Incorporated.
(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.
(e) Chapter 13 of the California General Corporation Law.
(f) None.
14
<PAGE> 16
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: July 28, 1999 ALFA LEISURE, INC.
By: /s/ MARK A. SCHWARTZ
------------------------------------
Mark A. Schwartz,
Chief Financial Officer
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
14(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
(as filed with the Company's most recent annual report on Form
10-K).
17(b) Fairness opinion rendered by Marshall & Stevens Incorporated.
17(d) Notice of Merger and Dissenter's Rights.
17(e) Chapter 13 of the California General Corporation Law.
</TABLE>
<PAGE> 1
EXHIBIT 14(a)(1)
<TABLE>
<CAPTION>
Alfa Leisure, Inc. Index to Consolidated Financial Statements:
- --------------------------------------------------------------
<S> <C>
Independent Auditor's Report .................................................2
Consolidated Balance Sheets as of
April 30, 1998 and 1997 ...................................................3
Consolidated Statements of Income
for the years ended April 30, 1998, 1997 and 1996 .........................4
Consolidated Statements of Stockholders'
Equity for the years ended April 30, 1998, 1997 and 1996 ..................5
Consolidated Statements of Cash Flows for the
years ended April 30 1998, 1997 and 1996 ..................................6
Notes to Consolidated Financial Statements ...................................8
</TABLE>
- 1 -
<PAGE> 2
EXHIBIT 14(a)(1)
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
- 2 -
<PAGE> 3
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.
-3-
<PAGE> 4
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.
-4-
<PAGE> 5
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.
-5-
<PAGE> 6
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.
-6-
<PAGE> 7
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.
- 7 -
<PAGE> 8
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.
- 8 -
<PAGE> 9
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.
- 9 -
<PAGE> 10
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>
- 10 -
<PAGE> 11
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>
April 30,
Useful ----------------------------
Lives 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.
- 11 -
<PAGE> 12
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>
- 12 -
<PAGE> 13
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
========
- 13 -
<PAGE> 14
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 $213,201 of 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.
- 14 -
<PAGE> 15
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.
Weighted
Number Average Total
Of Shares Exercise Price Price
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
- 15 -
<PAGE> 16
9. Business Segments
-----------------
The Company is engaged principally in the business of manufacturing and selling
recreational vehicles. On June 30, 1997, the Financial Accounting Standards
Board issued Statement on Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (SFAS 131) effective
for fiscal years beginning after December 15, 1997. In accordance with the
selection criteria established by SFAS 131, the Company has determined that it
has one business segment.
- 16 -
<PAGE> 1
Exhibit 17(b)
FAIRNESS OPINION FOR
ALFA LEISURE, INC.
<PAGE> 2
July 19, 1999 File Reference: 11-11978
The Board of Directors of
Alfa Leisure, Inc.
13501 5th Street
Chino, California 91710
Attention: Mark Schwartz, CPA
Vice President Finance and Administration
It is our understanding that a "draft" Certificate of Ownership and Articles of
Merger (collectively, the "Agreement") dated ____, 1999, of ALFA Leisure
Acquisition Corp. will be certified by Johnnie R. Crean and Carol Smith whereby
Alfa Leisure, Inc. ("ALFA"), a Texas Corporation, will be merged ("Short Form
Merger") into Alfa Leisure Acquisition Corporation, a California corporation
("ALAC"). Pursuant to the Agreement each holder of ALFA common shares with the
exception of shares held by ALAC will be entitled to receive cash upon surrender
of their respective common stock certificates. The terms and conditions of the
Short Form Merger are more fully described in the aforementioned Agreement.
You have requested our opinion as to whether the per share cash consideration
("Merger Consideration") to be received in the Short Form Merger is fair to the
ALFA minority shareholders from a financial point of view pursuant to the terms
and subject to the conditions set forth in the Agreement. We have not been
engaged to give advice on whether the shareholders should engage in the
Transaction, nor have we been requested to seek or identify alternatives. The
date of this Opinion is July 19, 1999.
<PAGE> 3
The Board of Directors of
Alfa Leisure, Inc.
July 19, 1999
Page 2
"Market value" is defined as the price at which an asset or business enterprise
would change hands between a willing buyer and a willing seller when the former
is not under any compulsion to buy, the latter is not under any compulsion to
sell, and both parties are well informed about all pertinent facts of the asset
and the market for such asset. Market value is synonymous with the legal term
fair market value.
It is our understanding that you and any other recipient of our Opinion of
market value will consult with and rely solely upon your own legal counsel with
respect to said definition. No representation is made herein as to any legal
matter or the sufficiency of said definition for any purpose other than setting
forth the scope of this Opinion.
"Minority Interest" is defined as any number of shares that is less than a
controlling interest in a firm and does not represent a swing block of shares.
For purposes of this Opinion, any number of shares that constitutes less then a
50% of the total outstanding common stock (voting) is by definition a minority
interest.
"Controlling interest" is defined as any number of shares owned, either directly
or indirectly, that, when exercised, can influence the selection of the entity's
management group, the direction of existing or future operations (sale,
divestiture, or acquisition), the declaration of dividends, etc. Typically, this
interest constitutes a more than 50% interest in the outstanding common shares
(voting).
In connection with this opinion, we have made such reviews, analyses, and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we:
1. Analyzed and inspected ALFA's financial 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 10K as of April 30, 1999; and the interim internally
prepared financial statements for the period ended June 20, 1999,
identified by ALFA's Management as the most current financial
statements available.
2. Inspected copies of the following documents:
- "Draft" Certificate of Ownership and Articles of Merger of
ALFA Leisure Acquisition Corp. dated ___, 1999 received on
July 6, 1999.
- Internally prepared financial projection.
<PAGE> 4
The Board of Directors of
Alfa Leisure, Inc.
July 19, 1999
Page 3
- Federal Tax Return for the year ended April 30, 1998.
- Fairness opinion prepared by William R. Black dated March 31,
1998. According to this fairness opinion, a per share
consideration of $0.50 was considered fair from a financial
point of view.
- Presentation by an independent consultant outlining the
strategic process to create a market for the company stock by
introduction of a new low end trailer product line, etc.
- Various product brochures and other literature relative to
ALFA's services.
3. Performed a search of companies considered comparable to ALFA
utilizing Moody's and Compustat's Databases and Mergerstat Review
1999.
4. Analyzed weekly stock prices for ALFA utilizing Bloomberg LP.
5. Visited ALFA 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 ALFA.
In rendering our Opinion, we have not independently verified the accuracy and
completeness of the information supplied to us with respect to ALFA and do not
assume any responsibility with respect to it. We advise the recipients of this
Opinion that nothing has come to our attention in the course of this engagement
that has caused us to believe it unreasonable to utilize and rely upon the
expectations and representations of ALFA's Management regarding ALFA's future
performance. In addition, we have not considered the tax impact on the
individual shareholders receiving cash payment for their ALFA shares and our
Opinion is based on business, economic, market and other conditions as they
exist as of the Date of this Opinion.
This Opinion has been prepared for the Board of Directors of ALFA in connection
with its consideration of the Merger and may not be used for any other purpose
without Marshall and Stevens Incorporated's express, prior, written consent;
provided that, this Opinion may be included in the proxy statement sent by ALFA
to its shareholders concerning the merger so
<PAGE> 5
The Board of Directors of
Alfa Leisure, Inc.
July 19, 1999
Page 4
long as the Opinion is reproduced in full in such proxy statement and any
summary of the Opinion in the proxy statement is reasonably acceptable to
Marshall & Stevens Incorporated. Other than the Opinion, Marshall & Stevens
Incorporated has not been engaged to render any other financial services and our
fee for this service is not contingent upon the consummation of the
aforementioned transaction.
Based upon and subject to the attached summary of our analyses and the
assumptions and limiting conditions, it is our opinion that as of the date of
this Opinion, the Merger Consideration to be received by the ALFA minority
shareholders in the range of $2.72 to $2.75 per share is fair to the ALFA
minority shareholders from a financial point of view to such shareholders
pursuant to the terms and subject to the conditions set forth in the Agreement.
Very truly yours,
MARSHALL & STEVENS INCORPORATED
MS/tb
<PAGE> 6
ASSUMPTIONS AND LIMITING CONDITIONS
MANAGEMENT
The Opinion expressed herein assumes the continuation of prudent management
policies over whatever period of time is deemed reasonable and necessary to
maintain the character and integrity of ALFA or the underlying assets.
PURPOSE
We have presented Marshall & Stevens Incorporated's considered Opinion based on
the facts and data obtained during the course of this investigation. This report
has been prepared for the sole purpose stated herein and shall not be used for
any other purpose.
UNEXPECTED CONDITIONS
We assume there are no hidden or unexpected conditions associated with ALFA or
the underlying assets that might adversely affect value. We also assume no
responsibility for changes in market condition which may require an adjustment
to our Opinion.
HAZARDOUS SUBSTANCES
Hazardous substances, if present within a business, can introduce an actual or
potential liability that may adversely affect the marketability and value of
ALFA or the underlying assets. In this Opinion, no consideration has been given
to such liability or its impact on value.
CONTINGENT LIABILITIES
Our conclusions do not consider the impact of any contingent liabilities of the
Company, either known or unknown, except as discussed in the Opinion. According
to ALFA's Management, as of the date of this Opinion, no pending litigation nor
other asserted or unasserted contingent liabilities exist.
FUTURE EVENTS/PROJECTIONS
The reader is advised that this Opinion is heavily dependent upon future events
with respect to industry performance, economic conditions, and the ability of
ALFA to meet certain operating projections. In this opinion, the operating
projections have been developed from information supplied by ALFA Management.
The operating projections incorporate various assumptions including, but not
limited to, net sales, net sales growth, profit margins, income taxes,
depreciation, capital expenditures, working capital levels, and discount rates,
all of which are critical to the Opinion. The operating projections are deemed
to be reasonable and valid at the date of this Opinion; however, there is no
assurance or implied guarantee that the assumed facts will be validated or that
the circumstances will actually occur. We reserve the right to make adjustments
to the Opinion herein reported as may be required by any modifications in the
prospective outlook for the economy, the industry, and/or the operations of
ALFA.
<PAGE> 7
ASSUMPTIONS AND LIMITING CONDITIONS
TITLE
No investigation of legal title was made, and we render no opinion as to
ownership of ALFA or the underlying assets.
DATE OF VALUE
The date of this Opinion is July 19, 1999. The dollar amount of any value
reported is based on the purchasing power of the U.S. dollar as of that date.
The appraiser assumes no responsibility for economic or physical factors
occurring subsequent to the date of value which may affect the opinions
reported.
VISITATION
ALFA was visited on July 9, 1999. When the date of our visit differs from the
date of our Opinion, we assume no material change in the operations of ALFA or
the underlying assets unless otherwise noted in the report.
TRADING PRICE
Based upon our analysis of the trading history of ALFA, the common stock is
thinly traded, and may not be fully indicative of actual market value of the
underlying assets or shares. We have been informed that ALFA does not have a
market maker. The common stock transactions most proximate to the date of this
Opinion occurred on April 23, 1999 at $2.00 for 300 shares and on July 9, 1999
at $2.125 for 1,000 shares. According to documentation furnished by ALFA
Management 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 ALFA 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. As of the date of this Opinion, the bid/ask prices were $1.50 and $2.375
per share, respectively, as provided by Bloomberg LP.
NON-APPRAISAL EXPERTISE
No opinion is intended to be expressed for matters that require legal or
specialized expertise, investigation, or knowledge beyond that customarily
employed by appraisers.
INFORMATION AND DATA
Information supplied by others that was considered in this valuation is from
sources believed to be reliable, and no further responsibility is assumed for
its accuracy. We reserve the right to make such adjustments to the valuation
herein reported based upon consideration of additional or more reliable data
that may become available subsequent to the issuance of this report.
LITIGATION SUPPORT
Depositions, expert testimony, attendance in court, and all preparations/support
for same arising from this Opinion shall not be required unless arrangements for
such services have been previously made.
<PAGE> 8
SUMMARY OF OUR ANALYSES
In preparing our Opinion, we performed a variety of financial and comparative
analyses. A fairness opinion is a complex analytical process involving various
subjective determinations as to the most relevant valuation methods and the
application of these methods. Our financial analyses should be considered as a
whole; selecting only portions of these analyses could create a misleading view
of our opinion. We made assumptions in conjunction with Management with respect
to assets, financial conditions, and other matters, many of which are beyond the
control of ALFA. Thus, the estimates of value arrived at by such analyses and
the valuation results from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
The analyses made in conjunction with our 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.
We conducted a search of Moody's database of over 15,000 publicly traded
companies to determine if any could be utilized in our analysis. After screening
applicable SIC codes and other relevant criteria, we selected public companies
that most closely resembled ALFA 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 ALFA, it did provide several that were
sufficiently comparable to be considered alternative investment possibilities
making them useful benchmarks for valuation purposes as follows:
- Coachmen Industries, Inc.
- Fleetwood Enterprises
- Holiday RV Superstores, Inc.
- Monaco Coach Corp
- National RV Holdings
- Rexhall Industries,Inc.
- Skyline Corp
- Thor Industries, Inc.
- Winnebago Industries
<PAGE> 9
SUMMARY OF OUR ANALYSES
We 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 income and market value to net income and
applied these multiples to the corresponding earnings measures for ALFA 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.
We utilized these invested capital multiples (also referred to as debt-free
multiples) because they permit us to value ALFA irrespective of the variations
inherent in its capital structure and income tax rates as compared to the public
companies. We also utilized the market value to net income multiple, since ALFA
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 ALFA 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, more diversified (manufacturers of motorhomes, buses, etc.) and
often strong public identities, so they are more likely to command
correspondingly higher multiples. We have therefore chosen multiples below the
median range to apply to the corresponding financial measures for ALFA. We also
considered ALFA's size, diversification, financial condition, revenue growth and
performance relative to Fleetwood Enterprises and Rexhall Industries, Inc.
After multiplying the respective revenue measures of ALFA by the selected
multiples and then subtracting any interest-bearing debt, if applicable, we
generate a preliminary indicated equity value, which represents the aggregate
minority value (minority interests traded in the public marketplace) of ALFA
before estimated marketability discounts.
As a result of our analysis using comparable publicly traded companies prior to
a discount for marketability, the indicated market value of the shareholders'
equity of ALFA on a minority interest basis, as of July 19, 1999, was
$8,600,000.
<PAGE> 10
SUMMARY OF OUR ANALYSES
DISCOUNTED CASH FLOW ANALYSIS. We 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 the Opinion.
<TABLE>
<CAPTION>
NET DEBT FREE CASH FLOW ("NDCF") PROJECTION
===================================================================================
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 discounted and summed at a discount rate assumption
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; 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 ALFA and the industry as a whole. We 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, we subtracted the interest-bearing debt to
arrive at an equity value.
As a result of our analysis utilizing net debt free cash flow prior to a
discount for marketability, the indicated market value of the shareholders'
equity of ALFA on a minority interest basis, as of July 19, 1999, was
$9,000,000.
<TABLE>
<CAPTION>
RECAPITULATION.
================================================================================
ANALYSIS MARKET VALUE
- --------------------------------------------------------------------------------
<S> <C>
Selected Comparable Company $8,600,000
Discounted Cash Flow 9,000,000
================================================================================
</TABLE>
In deriving a final conclusion, we reconciled the value indications by weighting
their relative significance depending upon the circumstances and the quantity of
reliable market data. The
<PAGE> 11
SUMMARY OF OUR ANALYSES
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 our analyses, we have applied various sensitivity weightings to the
Selected Comparable Company and Discounted Cash Flow analyses: 1) 50-50% and
30-70%, respectively.
We also considered the per share trading price of $2.00 for ALFA common shares
as of April 23, 1999 for 300 shares (the most currently available actual sales
transaction 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 ALFA Management 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 ALFA 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 in closely
held companies 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, Alfa'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. We
analyzed the differential between the ask (high) and bid (low) pricing spreads
for the ALFA's common shares from February 9, 1998 through July 19, 1999 and
determined that the differential spread was 7.4%. In our opinion, a
marketability discount of 5% would be appropriate.
We 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.
Therefore, based on the information and analyses summarized in this report, our
various sensitivity weightings and a discount for marketability, it is our
opinion that the market value of the shareholders' equity of the business
enterprise known as Alfa Leisure, Inc., 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.
<PAGE> 1
Exhibit 17(d)
ALFA LEISURE, INC.
13501 5TH STREET
CHINO, CALIFORNIA 91710
August ___, 1999
Dear Shareholder:
The Board of Directors of Alfa Leisure Acquisition Corp., a California
corporation which owns in excess of 90% of the Common Stock of Alfa Leisure,
Inc. (the "Company") has approved the merger of Alfa Leisure, Inc. into Alfa
Leisure Acquisition Corp. (the "Merger")
In the Merger, shareholders of the Company (other than Alfa Leisure
Acquisition Corp. and shareholders who perfect dissenter's rights) will receive
payment in cash in the amount of $2.75, without interest, for each share of the
Company's common stock owned by them. The Merger is expected to become effective
on or after September ___, 1999.
The following information is provided to you in connection with the
Merger:
1. Schedule 13E-3 filed with the Securities and Exchange Commission.
2. Opinion of Marshall & Steven's Incorporated, as to the fairness from
a financial point of view of the consideration to be paid to the shareholders
receiving cash for their shares.
3. Chapter 13 of the California General Corporation Law (Dissenter's
Rights Statutes).
SHAREHOLDERS WILL RECEIVE APPROPRIATE INSTRUCTIONS FOR EXCHANGING THEIR
STOCK CERTIFICATES FOR CASH. PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT
THIS TIME.
Shareholders of the Company who comply with the procedures of Chapter 13
of the California General Corporation Law, which includes, among other things,
voting against the Merger and making written demand upon the Company no later
than the date on which the Merger is expected to become effective (September
___, 1999), as more fully described in the accompanying Schedule 13E-3 and
dissenter's rights statutes, will be entitled, if the Merger is consummated, to
certain appraisal rights with respect to their shares.
Sincerely,
Johnnie R. Crean, President
<PAGE> 1
Exhibit 17(e)
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (0) of Section
25100 or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision does not apply
to any shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided, further,
that this provision does not apply to any class of shares described in
subparagraph (A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B)if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
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(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder. the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates
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representing any shares which the shareholder demands that the corporation
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 or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder demands
that the corporation purchase. Upon subsequent transfers of the dissenting
shares on the books of the corporation, the new certificates, initial
transaction statement, and other written statements issued therefor shall bear a
like statement, together with the name of the original dissenting holder of the
shares.
1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
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(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities only upon
the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
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1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months alter the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand/for purchase of the dissenting shares.
1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
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1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) 1f one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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