Cavco Industries, Inc.

1001 North Central Avenue Suite 800
Phoenix, Arizona 85004
U.S.A.
Telephone: (602) 256-6263
Fax: (602) 256-6189
Web site: http://www.cavco.com

Public Company
Incorporated: 1968
Employees: 1,105
Sales: $128.9 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CVCO
NAIC: 321991 Manufactured Home (Mobile Home) Manufacturing

Cavco Industries, Inc. produces and markets manufactured homes, selling them wholesale through independent dealer outlets and through company-owned retail stores. Manufactured home products include park model homes under 400 square feet and single-wide and multi-section homes from 500 square feet to 2,700 square feet. Homes feature up to five bedrooms and three bathrooms, and floor plans can be custom designed. Basic I-Beam construction styles are offered under the Sun Villa Homes, Winrock Homes, Westcourt Homes, and Villager Litchfield brands. Luxury styles with cathedral ceilings are offered under the Profile Series, Vantage Series, Sun Built Homes, and Cavco Homes. The Santa Fe Series provides manufactured homes in the Southwest style, with a flat roof and stucco exterior. Cavco Cabins are designed in a rustic style to blend with natural surroundings. Like site-built homes, manufactured homes are equipped with appliances, light fixtures, custom wood cabinets, carpet, and other basic features. Optional amenities include skylights, custom fireplaces, bay window treatments, built-in entertainment centers, as well as many practical features, such as vinyl dual glaze windows and climate zone insulation. Cavco manufactures commercial structures used for offices, showrooms, and classrooms.

Success and Turmoil in Mobile Home Industry

Cavco Industries originated as a truck camper and travel trailer manufacturer, operating as an unincorporated association named Roadrunner Manufacturing Company. Founded in 1965, the company took the name Cavalier Manufacturing the following year. Cavalier began custom mobile home production in 1969, selling its products wholesale through dealerships in Arizona. Mobile home production became the sole focus of the company in 1973, when the original product lines were discontinued. Cavalier Manufacturing changed its name to Cavco Industries in 1974. That year Aldo Ghelfi retired as president and his son, Alfred Ghelfi, was promoted from simultaneous multiple positions of vice-president, secretary, and treasurer to the position of president.

Cavco grew with the mobile home industry during the late 1970s. The company opened a second plant in Phoenix in 1977 to meet the backlog of orders for double-wide mobile homes. In 1979 Cavco formed the Modular Housing Division, using the brand name Sun Built Homes to provide larger, multi-section homes for permanent residential site location. Cavco sales rose from $4.2 million in 1975 (fiscal year December 31) to $20.4 million in 1979 (fiscal year September 30).

Market conditions changed in the early 1980s, however, as high interest rates, a difficult financing environment, a weak real estate market, and general economic recession hindered sales of prefabricated homes. Cavco's revenues hovered at $13 million to $15 million annually between 1980 and 1982, but the company earned modest profits through the implementation of cost-saving measures. To offset a problematic market, Cavco introduced a lower-priced model under the Progressive Homes label and increased its advertising to gain a greater share of the Arizona market. The company experimented with site development as a means to increase sales and Sun Built Homes completed a 12-unit condominium development in early 1983.

While lower mortgage rates benefited site-built housing construction, the manufactured home industry continued to struggle. Cavco halted plans to enter the Texas market in 1985 and decided to diversify its businesses and product offerings. In 1986 the company began to manufacture relocatable commercial modular structures, primarily used by construction companies as work-site offices. A subsidiary, CVC Leasing, handled leasing and sales. CVC expanded quickly, opening sales and marketing offices in six Western states by 1989, in Arizona, Nevada, New Mexico, Colorado, Utah, and southern California. That year CVC Leasing reported revenues of $3.4 million from a fleet of 418 units.

Cavco was offered an opportunity in healthcare utilization review and cost management and in 1987 founded Action Health Care, Inc. At Action Health Care registered nurses consulted with physicians to evaluate proposed treatment in contrast to national norms as described on a computer database. Through reviews of length of hospital stay, outpatient care, and other issues, health insurance providers sought to maximize care while minimizing costs. Within three years Action Health Care served more than 40 clients and opened an office in southern California.

Creative Marketing in the 1990s

While Cavco succeeded in finding new sources of revenue, the market for manufactured housing in the United States remained stagnant, prompting Cavco to introduce a new product and to enter new markets. Cavco succeeded selling "park models," mobile homes of less than 400 square feet, but with all the amenities of a travel trailer. Retirees liked the park models as an affordable second home for recreation, and Cavco quickly became the largest manufacturer of park model homes in the United States.

Cavco expanded its dealer network to markets outside Arizona for the first time, including New Mexico, Colorado, and California, and found new opportunities overseas. Through Operation Independence, a nonprofit organization promoting trade with Israel, Cavco obtained a $4 million contract to manufacture 420 mobile homes to be used to house Jewish immigrants from the former Soviet Union. Each 480-square-foot unit met specific requirements of the Israeli government, including proper electrical wiring and outlets. Cavco delivered the homes to an intermediary in Houston in January 1991, which resold the units to the government of Israel. The contract option added another 770 units, for $5.6 million, pushing Cavco sales to $42.5 million in 1991. This foray into international markets prompted Cavco to seek other opportunities abroad, resulting in an exclusive dealer relationship with Auto Borg Enterprises in Japan.

As the manufactured home industry showed signs of improvement in the United States, Cavco founded Sun Built Homes, Inc. in 1991 to develop manufactured housing subdivisions, as well as to sell the homes directly to potential residents of manufactured housing subdivisions. Cavco initiated the Canyon View and Lynx Creek subdivisions in Green Valley and Dewey, Arizona, respectively.

As the market for manufactured homes thrived again during the early 1990s, Cavco opened a third manufacturing facility in Goodyear, Arizona, in May 1993. Products sold from that facility increased revenues 17 percent, while manufactured home sales increased 30 percent overall, to $53.4 million. A larger dealer network supported the revenue increase, with Cavco products sold through 75 dealers in Arizona, 11 in New Mexico, seven each in Colorado and California, five each in Nevada and Texas, two in Oregon, and four each in Utah, Washington, and Idaho, six in British Columbia, Canada, and two in Japan. Also, Cavco succeeded in enlarging its share of the Arizona market, from 23 percent in 1987 to 35 percent in 1993, becoming the largest producer of manufactured homes in Arizona. The average retail price was $22,000 for a park model home and $37,500 for residential homes; prices ranged from $12,000 to $99,000.

In 1994 Cavco signed a two-year agreement with Auto Borg Enterprises, the exclusive dealer of Cavco homes in Japan, to market park model homes under the name Cavco Homes-Japan. Cavco built the manufactured homes to meet Japanese preferences, for instance, a shoebox at the front door to accommodate the custom of removing shoes before entering a residence. Auto Borg purchased 12 home models for its showroom.

CVC Leasing began to lease security storage containers in 1993, leading Cavco to sell the relocatable commercial structures leasing operation in 1994. Cavco applied $20.2 million from the sale of CVC Leasing to pay debt on assets sold and costs of the sale; a net gain of $3.7 million funded a new subdivision development and expansion of the container fleet. Cavco formed National Security Containers (NSC) to operate the security storage container business and added trailer van leasing as well. NSC refurbished containers at a facility in Texas, and then leased them through offices in San Antonio, Houston, Dallas, El Paso, and Phoenix. Cavco opened offices in Colorado and Louisiana in late 1995.

While manufactured housing and lease containers generated positive cash flow, Action Health Care operated unprofitably with fluctuating sales despite the company's efforts to increase business. Cavco decided to exit the business, selling assets at a loss in August 1996.

The manufactured housing industry flourished with the housing industry as a whole during the 1990s, especially as quality improvements in manufactured homes made them indistinguishable from site-built homes. In September 1996 Cavco announced plans to build its fourth manufacturing plant, on a 23-acre site near Albuquerque. After its completion in the spring of 1997, Cavco manufactured ten houses per day at maximum capacity at the 143,000-square-foot facility, producing single-wide and double-wide manufactured homes for the Colorado and New Mexico markets.

Company Perspectives:

Quality is built into every Cavco home. Beginning with the high quality materials used in construction to the complete system tests before shipment and every step in between, emphasis is on durability and lasting value. Beauty is more than skin deep in a Cavco home. Consistent quality is monitored by the ongoing structural and cosmetic audits performed by qualified factory people.

Through a joint project with the Arizona Public Service Remote Solar Option, Cavco improved the design of window and exterior wall construction and electrical appliances and light fixtures on its manufactured homes to accommodate asolar energy system. Through the program Arizona's utility company provided customers in remote locations an alternative to power line extension or use of an electrical generator. Cavco became the first manufactured home builder to be approved for participation in the project. Cavco debuted the energy-efficient homes at the Arizona Manufactured Home Show in January 1997, and then placed model homes at two shopping centers, one each in Tucson and Mesa.

1996 Merger with Centex Providing Capital for Vertical Integration

In December 1996 Cavco merged with the Centex Corporation, through Centex's acquisition of 80 percent of Cavco's outstanding stock. At $26.75 per share, the $75 million transaction paid shareholders above market rates. Centex, a large homebuilder and mortgage provider, acquired Cavco as a low-cost complement to its existing home-building operations. While Cavco provided a ready market for Centex's financial services, Cavco would benefit from Centex's expertise in subdivision development and capital for expansion. The merger combined companies of vastly different size, however. In 1996 Cavco generated $130.1 million and net income of $6.2 million from 4,893 homes delivered, while Centex generated $3.1 billion in revenues and $53.4 million net income from more than 12,000 site-built homes. Centex maintained existing executive management at Cavco, including Brent Ghelfi, who replaced his father as president and chief executive officer earlier in 1996.

Under changed ownership, Cavco sought to increase revenue and to retain profits through the integration of manufacturing, retail sales, and financing. With the formation of Centex Finance Company in late 1997, retail dealers of Cavco products gained a financing option from a company with strong leverage capabilities. Centex Finance offered loans to all Arizona manufactured home dealers through its main office in Phoenix, while marketing representatives in Denver, Salt Lake City, and Albuquerque expanded the company's geographic reach. Cavco entered the retail market with the February 1998 acquisition of AAA Homes, Inc., the largest retailer of manufactured homes in Arizona, with revenues of $40 million in 1997. AAA Homes operated sales centers in Tucson, Sierra Vista, Casa Grande, Yuma, Mesa, and Apache Junction, Arizona, and sales offices in Fort Collins, Colorado, and Albuquerque.

Cavco entered the Texas market in 1998 with a complete plan for manufacturing, retailing, and financing. Centex Finance opened an in office in Dallas, and Cavco began construction on a facility at acquired land in Sequin, near San Antonio, for the manufacture of multi-section homes. The acquisition of Boerne Homes, Inc., also near San Antonio, provided Cavco with a retail outlet, as well as a management base for further retail expansion; founder Doug Bunnell became Regional Manager of Cavco's retail division.

As production began at the Sequin facility in January 1999, Centex sold National Security Containers, receiving $8 million in redeemable preferred stock and $17.5 million in cash, providing funds for expansion of Cavco's retail network. The Cavco Retail Group opened stores in New Mexico, south central Texas, Colorado, and Arizona, for a total of 23 retail outlets in operation by the end of March 31, 2000.

While a slowing economy and higher interest rates negatively impacted the housing market as a whole, a new federal law hampered manufactured home financing in particular. Personal loans, referred to as chattel loans, had been the primary form of financing used by manufactured home buyers, but the new law required a real estate mortgage, with the home attached permanently to specific land. Though mortgage financing offered lower interest rates, the costs for private mortgage insurance and requirements for foundation preparations more than offset the savings. The poor financing practices of one manufactured home company led to creation of the law, but impacted the entire industry as about 75 percent of chattel loans were effected. The financing issue, along with declining market conditions, led to an excess inventory in the manufactured housing industry.

At Cavco the combination of industry oversupply and new retail outlets shifted its base of revenues. In fiscal 2000, retail sales increased 53 percent, but overall sales rose only 3 percent, to $183.5 million. Cavco responded by closing the Belen plant in August 2000 and the Seguin plant in March 2001. Centex formed Factory Liquidators as a new sales outlet, with 75 percent of inventory being acquired from failed dealerships. Retail and wholesale sales declined about 30 percent each in 2001, however; net homes delivered declined from 5,950 in 2000 to 4,242 in 2001. Revenues declined to $123 million and resulted in an operating loss of $6.9 million. Cost controls and improvements to production efficiency temporarily stalled losses in 2002, but continuing poor sales in a slow economy led to an operating loss of $11.4 million for 2003, prompting Cavco to close several retail dealerships.

Key Dates:

1969:: Cavalier Manufacturing begins to produce mobile homes.
1974:: The company is renamed Cavco Industries.
1979:: Sales more than quadruple from 1975 to $20.4 million.
1986:: Cavco begins to manufacture and lease relocatable commercial structures.
1990:: Poor U.S. market conditions prompt Cavco to seek international sales.
1993:: Cavco opens a third manufacturing facility to meet demand for manufactured housing.
1996:: Cavco merges with Centex Corporation.
1998:: Cavco enters retail field with acquisition of AAA Homes.
2001:: Market conditions deteriorate, leading to operating losses.
2003:: Cavco becomes an independent company again.

Cavco Independent Again in 2003

After an evaluation of Cavco's performance and the minor place Cavco operations had in Centex's overall business, in April 2003 Centex decided to spin off Cavco as an independent company. The share distribution, noted as a tax-free dividend, was completed June 30, with Joseph Stegmayer as chief executive officer. While sales increased slightly in late 2003, Stegmayer planned to proceed cautiously.

Principal Subsidiaries

Cavco Retail Group, Inc.; Sun Built Homes, Inc.

Principal Competitors

Champion Enterprises, Inc.; Fleetwood Enterprises, Inc.; Palm Harbor Homes, Inc.; Reorganized Sale OKWD, Inc.; Skyline Corporation.

Cavco Industries, Inc.

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Cavco Industries, Inc.

1001 North Central Avenue Suite 800
Phoenix, Arizona 85004
U.S.A.
Telephone: (602) 256-6263
Fax: (602) 256-6189
Web site: http://www.cavco.com

Public Company
Incorporated: 1968
Employees: 1,105
Sales: $128.9 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CVCO
NAIC: 321991 Manufactured Home (Mobile Home) Manufacturing

Success and Turmoil in Mobile Home Industry

Creative Marketing in the 1990s

Company Perspectives:

1996 Merger with Centex Providing Capital for Vertical Integration

Key Dates:

1969:: Cavalier Manufacturing begins to produce mobile homes.
1974:: The company is renamed Cavco Industries.
1979:: Sales more than quadruple from 1975 to $20.4 million.
1986:: Cavco begins to manufacture and lease relocatable commercial structures.
1990:: Poor U.S. market conditions prompt Cavco to seek international sales.
1993:: Cavco opens a third manufacturing facility to meet demand for manufactured housing.
1996:: Cavco merges with Centex Corporation.
1998:: Cavco enters retail field with acquisition of AAA Homes.
2001:: Market conditions deteriorate, leading to operating losses.
2003:: Cavco becomes an independent company again.