The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) enables the Company’s stockholders to vote on an advisory (non-binding) basis regarding the compensation of the Company’s named executive officers (commonly referred to as “Say on Pay”). For a comprehensive description of our executive compensation program and compensation philosophy, please refer to the Company’s CD&A beginning on page 15. Although the advisory vote is non-binding, the Compensation Committee and the Board will review the results of the vote and consider the outcome when making future decisions concerning our executive compensation program.
In deciding how to vote on this proposal, the Board points out the following factors, many of which are more fully discussed in the CD&A:
Our executive compensation programs are designed to depend significantly on the achievement of performance goals that the Committee believes drive long-term stockholder value;
Our pay practices are designed not to encourage management to take unacceptable risks;
Our Compensation Committee reviews peer group compensation to confirm that our programs are not outside the norm among peer group companies (See “Benchmarking” on page 16); and
We believe the Company’s executive compensation programs are well suited to promote the Company’s objectives in both the short and long-term.
The Board of Directors believes that the compensation of our Named Executive Officers is appropriate and recommends a vote “FOR” the following advisory resolution:
RESOLVED, that the stockholders of the Company approve, on an advisory basis, the compensation of the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the Summary Compensation Table, and the related compensation tables, notes and narrative set forth in this proxy statement.
PROPOSAL 4: AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION
The board of directors of Cavco proposes to amend the restated certificate of incorporation of Cavco to increase the number of authorized shares of Cavco common stock. The purpose of this proposal is to enable Cavco to effect potential future stock splits and stock dividends that would make Cavco stock affordable for a broader base of stockholders, and to issue Cavco common stock for other proper corporate purposes that may be identified in the future. The proposed amendment would increase the number of authorized shares of common stock from 20,000,000 shares to 40,000,000 shares.
The board of directors adopted the proposed amendment to the restated certificate of incorporation on May 26, 2015, subject to stockholder approval, and declared the proposal to be advisable. Accordingly, stockholders are asked to vote on the following resolution:
RESOLVED, THAT THE RESTATED CERTIFICATE OF INCORPORATION OF CAVCO INDUSTRIES, INC. BE AMENDED TO INCREASE THE TOTAL NUMBER OF SHARES OF COMMON STOCK THAT THE CORPORATION IS AUTHORIZED TO ISSUE TO 40,000,000, TO BE EFFECTED BY AMENDING THE FIRST PARAGRAPH OF THE FOURTH ARTICLE OF THE CORPORATION’S RESTATED CERTIFICATE OF INCORPORATION TO READ IN ITS ENTIRETY AS FOLLOWS:
FOURTH: The aggregate number of shares of capital stock that the Corporation shall have authority to issue is 41,000,000, of which 40,000,000 shares are classified as Common Stock, par value $.01 per share (“Common Stock”), and 1,000,000 shares are classified as preferred stock, par value $.01 per share (“Preferred Stock”).
Reasons for the Amendment
Approval of the proposed amendment will allow Cavco to affect potential future stock splits and stock dividends while maintaining flexibility similar to the flexibility that currently exists for Cavco to use capital stock for future business and financial purposes. Authorized but unissued shares of Cavco common stock may be used by Cavco for any purpose permitted under Delaware law, including to raise capital; to provide equity incentives to employees, officers and directors; and to enter into strategic transactions that the board of directors believes provide the potential for growth and profit. Authorized but unissued shares of Cavco common stock may also be used to oppose a hostile takeover attempt or to delay or prevent a change in control of Cavco, although Cavco has no present intention to issue shares for such purpose. The proposed amendment arises out of business and financial considerations, and Cavco is not aware of any threat of takeover or change in control. Cavco currently has no plans or arrangements for the issuance of shares of common stock for the purpose of rendering more difficult or discouraging a change in control of Cavco.
Adoption of the proposed amendment will eliminate the delay and expense involved in calling a special meeting of stockholders to authorize the additional shares at the time such issuance by the board may become necessary or advisable. Adoption of the proposed amendment would also enable the board of directors from time to time to issue additional shares of common stock authorized by the proposed amendment for such purposes and such consideration as the board of directors may approve without further approval of Cavco’s stockholders, except as may be required by Cavco’s restated certificate of incorporation, applicable law or by the rules of any stock exchange on which the shares of common stock are then listed. As is true for shares presently authorized, common stock authorized by the proposed amendment may, when issued, have a dilutive effect on earnings per share and on the equity and voting power of existing holders of common stock.
Under the proposed amendment, each of the newly authorized shares of Cavco common stock will have the same rights and privileges as currently authorized Cavco common stock. Adoption of the proposed amendment will not affect the rights of the holders of currently outstanding Cavco common stock nor will it change the par value of the Cavco common stock.
Background Information
The number of shares of Cavco common stock issued as of the record date for the annual meeting was 8,862,062. There are also 139,921 shares subject to issuance for outstanding awards or available for future grants under Cavco’s stock incentive plans.
The authorized capital stock of Cavco currently consists of 20,000,000 shares of common stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, $0.01 par value per share. Since the proposed amendment would increase the number of authorized shares of common stock to 40,000,000, the total number of authorized shares would thereby be increased to 41,000,000. The proposed amendment to increase the authorized number of shares of common stock does not change the number of shares of preferred stock that Cavco is authorized to issue. There are no shares of preferred stock currently outstanding.
If the proposed amendment is adopted, it will become effective upon filing of a certificate of amendment to Cavco’s restated certificate of incorporation with the Secretary of State of Delaware. However, if stockholders approve the proposed amendment to Cavco’s restated certificate of incorporation, the board of directors retains the discretion under Delaware law to abandon and not implement the proposed amendment and the number of authorized shares would accordingly remain at its current level.
Recommendation of the Board
The board of directors unanimously recommends that the amendment to Cavco’s restated certificate of incorporation be approved. The amendment will be approved if the proposal receives the affirmative vote of a majority of the outstanding shares entitled to vote on the proposal. Abstentions and broker non-votes will have the same effect as votes against the proposal. The proxies will be voted for or against the proposal or as an abstention, in accordance with the instructions specified on the proxy form. If no instructions are given, proxies will be voted for approval of the amendment.
PROPOSAL NO. 5: APPROVAL OF AN AMENDMENT TO THE CAVCO INDUSTRIES, INC. 2005 STOCK INCENTIVE PLAN, TO INCREASE THE NUMBER OF SHARES AVAILABLE FOR ISSUANCE UNDER THE PLAN, TO MAEK CERTAIN OTHER CHANGES TO THE PLAN, AND TO RE-APPROVE THE MATERIAL TERMS OF THE PERFORMANCE GOALS UNDER THE PLAN
Our board of directors believes that the availability of stock options is important to Cavco’s ability to attract and retain experienced employees and to provide an incentive for them to exert their best efforts on behalf of Cavco. As of May 26, 2015, out of a total of 450,000 shares of Cavco common stock authorized for issuance under the Cavco Industries, Inc. 2005 Stock Incentive Plan (the “2005 Stock Plan”), only 139,921 shares remained available for grant.
Our board believes additional shares will be needed to provide appropriate incentives to key employees. Accordingly, on May 26, 2015, our board approved, subject to stockholder approval, an increase in the number of shares available under the 2005 Stock Incentive Plan to provide an additional 300,000 shares of Cavco common stock for issuance pursuant to stock-based awards that may be granted to officers, directors and key employees. The board approved, subject to stockholder approval, amendments to the 2005 Stock Plan establishing a double trigger for Change in Control vesting and removing the requirement for administrative approval necessary for share settlement of Options. These amendments to the 2005 Stock Plan are described in more detail below. The board is also seeking shareholder re-approval of the terms and goals underlying performance-based awards for qualification purposes under Section 162(m) of the Internal Revenue Code (the “Tax Code”). In developing our share request for the 2005 Stock Plan and analyzing the impact of utilizing equity on our shareholders, the board considered our equity usage (also known as burn rate) and “overhang.” Equity usage provides a measure of the potential dilutive impact of our annual equity award program. Set forth below is a table that reflects our burn rates for 2015, 2014 and 2013, as well as the average over those years.
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Fiscal Year | Options Granted | Basic Weighted Average Number of Common Shares Outstanding | Burn Rate (1) |
2015 | 84,730 |
| 8,854,359 |
| 0.96 | % |
2014 | 64,450 |
| 8,262,688 |
| 0.78 | % |
2013 | 72,200 |
| 6,956,706 |
| 1.04 | % |
Three Year Average | 73,793 |
| 8,024,584 |
| 0.92 | % |
(1) "Burn Rate" is defined as the number of equity awards granted in the year divided by the basic weighted average number of common shares outstanding.
Overhang is a measure of potential dilution and is defined as the sum of (i) the total number of shares underlying all equity awards outstanding and (ii) the total number of shares available for future award grants, divided by: the sum of (a) the total number of shares underlying all equity awards outstanding, (b) the total number of shares available for future award grants and (c) the basic weighted average common shares outstanding for the most recently completed fiscal year. Our overhang at March 28, 2015 was 6.8%. If the 300,000 shares proposed to be authorized for grant under the 2005 Stock Plan are included in the calculation, our overhang would have been 9.66% at March 28, 2015, which assumes no repurchases intended to offset dilution under our stock repurchase program.
Our Burn Rate, current dilution, and total overhang for the 2005 Stock Plan in the fiscal year ended March 28, 2015 are all within the ranges of our peer group of companies over a comparable period of time (based upon our review of publicly available information). Burn Rates for members of our peer group that issued options ranges from 0.14% to 4.28%; ours was .96%. Current dilution for our peer group ranges from 0.46% to 17.14%; ours was 5.72%. Overhang for our peer group ranged from 3.61% to 18.49%; with the increase in share ours would be 9.66%. For a complete list of our peer group of companies, please see the subsection titled Benchmarking within our Compensation Discussion and Analysis on page 16.
In addition, the 2005 Stock Plan is intended to comply with Section 162(m) of the Tax Code. Section 162(m) places a limit of $1 million on the amount that Cavco may deduct in any one taxable year for compensation paid to each of its “covered employees.” Cavco’s covered employees include its Chief Executive Officer and each of its other three most highly-paid executive officers, other than the Chief Financial Officer. There is, however, an exception to this limit for compensation earned pursuant to certain performance-based awards. A performance-based award made under the 2005 Stock Plan is eligible for this exception provided certain Section 162(m) requirements are met. One of these requirements relates to shareholder approval (and, in certain cases, re-approval) of the material terms of the performance goals underlying the performance-based award. The performance goals in the 2005 Stock Plan were approved by shareholders in 2005 and reapproved in 2010. Section 162(m) requires re-approval of those performance goals after five years if the compensation committee has retained discretion to vary the targets under the performance goals from year to year. The Compensation Committee has retained discretion to vary the targets under the performance goals from year to year. Accordingly, Cavco is seeking re-approval of the performance goals included in the 2005 Stock Plan in order to preserve Cavco’s ability to deduct compensation earned by certain executives pursuant to any performance-based award that may be made in the future under the plan.
The following discussion summarizes the material terms of the performance goals under the 2005 Stock Incentive Plan, including a description of (i) the individuals eligible for performance awards under the 2005 Stock Incentive Plan, (ii) the business criteria on which the underlying performance goals are based, and (iii) the applicable award limits.
The complete text of the amendment to the 2005 Stock Plan is attached to this proxy statement as Appendix A. The complete text of the original 2005 Stock Plan is attached as Appendix A to the proxy statement filed with the SEC on May 23, 2005. The following description of the 2005 Stock Plan is a summary of certain provisions of the 2005 Stock Plan and is qualified in its entirety by reference to Appendix A to this proxy statement and to Appendix A to the proxy statementfiled with the SEC on May 23, 2005.
Increase in Shares
The 2005 Stock Plan is limited in the number of shares available to Participants. Once the 2005 Stock Plan has exceeded its authorized share limit, the Company is less able to use the 2005 Stock Plan as a tool to reward and incentivize employees. Equity compensation links the incentives of employees to the Company, rewarding efforts that increase share value. If the share limit of the 2005 Stock Plan is increased, then the Company can continue to remunerate employees and to align employee interests with shareholder interests.
The proposed amendment will increase the number of authorized shares in the 2005 Stock Plan to 750,000. The level of increase was selected based upon previous experience of the 2005 Stock Plan including the rate at which shares are used and projections for future share usage of the 2005 Stock Plan.
Other Amendments
The 2005 Stock Plan without the proposed amendment vests Participant awards upon the occurrence of a Change in Control. The proposed amendment to the 2005 Stock Plan further dictates that a Change in Control does not cause awards to vest except where the Participant is also involuntarily terminated in connection with the Change in Control. These two arrangements are sometimes called “single-trigger” and “double-trigger,” respectively. The inclusion of an additional requirement or trigger means that, following a hypothetical acquisition, merger or reorganization, retained employees would not receive accelerated vesting of their 2005 Stock Plan awards. Since acquirers and investors typically expect the target company in a transaction to bear the costs of employee compensation related to the Change in Control, this proposed amendment reduces the cost of an acquisition, merger or reorganization to the Company and its shareholders. Additionally, since a single-trigger award tends to encourage employees to leave after a transaction, the second trigger provides more flexibility to an acquirer in selecting the employees to be retained by the Company following the transaction. More flexibility over employee retention may increase the value of the Company to an acquirer. The proposed amendment to Change in Control vesting will therefore tend to increase the value of consideration available to shareholders from such a transaction.
The 2005 Stock Plan without the proposed amendment allows the settlement of awards on a net share basis only with administrative approval. The proposed amendment to the 2005 Stock Plan removes the need for administrative approval. Settlement in shares means that, upon exercise, the Participant in the 2005 Stock Plan receives their net gain in Company shares of stock rather than cash. The 2005 Stock Plan approval provision was carried over from the Company’s 2003 Stock Plan which predated the initial public offering of the Company and was tailored to the needs of a then-private company. Private companies will often regulate the shareholders of the company where there is no readily available public market to trade shares. As a public company, the Company does not need to regulate the market for alienation of Participant shares, so there is no further need for administrative approval to settle awards on a net share basis.
Re-Approval of Performance Goals
Section 162(m) of the Tax Code (“Section 162(m)”) limits the tax deductibility of annual compensation paid to certain executive officers in excess of $1 million. Section 162(m) and the applicable regulations provide exemptions to the limitation on the deductibility of compensation, one of which is the “performance-based compensation” exception. The 2005 Stock Plan permits Cavco to grant Performance Awards (which are Cash Awards, Restricted Stock Awards or Stock Unit Awards) that are intended to satisfy the “performance-based compensation” exception to Section 162(m). Performance Awards must be granted by the Compensation Committee and are payable only upon achieving one or more “Performance Goals” which must be based on one or more business criteria set forth in the 2005 Stock Plan. The Section 162(m) regulations require that Cavco obtain shareholder approval of the specific business criteria upon which the Performance Goals are based every five years to rely on the “performance-based compensation” exception to Section 162(m) for the Performance Awards. To comply with the Section 162(m) regulations, the Board asks that the shareholders re-approve the specific business criteria upon which the Performance Goals are based as set forth in the 2005 Stock Plan.
Material Terms of the Performance Goals. The 2005 Stock Plan permits the grant of the following Awards as Performance Awards that are intended to qualify as “performance-based compensation” under Section 162(m): Cash Awards, Restricted Stock Awards and Stock Unit Awards. See Section 7 of the 2005 Stock Plan for additional information on each of these Awards. The 2005 Stock Plan is administered by the Compensation Committee of the Board of Directors of Cavco (the “Administrator”).
The material terms of the performance goals for Performance Awards consist of (i) the employees eligible to receive Performance Awards; (ii) the performance criteria on which the performance goals for the Performance Awards are based; and (iii) the maximum payout of a Performance Award that can be paid to a participant pursuant to the 2005 Stock Plan.
Eligibility. Awards may be granted under the 2005 Stock Plan to certain officers, Directors, and key employees of Cavco and its Affiliates (as defined in the 2005 Stock Plan) and individuals who have agreed to become employees of Cavco and its Affiliates and are expected to become such employees within the following six months.
Performance Goals. The Administrator, in its discretion, may designate any Award as a Performance Award that is intended to qualify for the “performance-based compensation” exception to Section 162(m). If the Administrator designates an Award as a Performance Award, the Administrator must establish the Performance Goal(s) for the Performance Award prior to the earlier to occur of ninety (90) days after the commencement of the period of service to which the Performance Goals relate and the lapse of twenty-five (25) percent of the period of service. The Performance Goal(s) may be based on one or more of the following business criteria:
operating income;
operating margin;
earnings before interest, taxes, depreciation and amortization (EBITDA);
pre-tax income;
net income;
net earnings per share;
net earnings per share growth;
return on beginning stockholders’ equity;
return on average net assets;
total stockholder return relative to other companies in a relevant industry group;
debt/capitalization ratio; and
customer satisfaction.
The business criteria on which the Performance Goal(s) is based may apply to the individual receiving the Performance Award, to one or more business units of Cavco or to Cavco and its Affiliates as a whole. A Performance Goal that is based on the above-listed business criteria need not be based upon an increase or positive result under a particular business criterion but may include, for example, maintaining the status quo or limiting economic losses, as measured by reference to such criterion. The Administrator must certify that the Performance Goal(s) applicable to any Performance Award have been satisfied prior to the lapse of restrictions, vesting, or payment of the Performance Award.
Maximum Payout of Performance Awards. The following limitations shall apply to any Performance Awards made under the 2005 Stock Plan:
(a) No individual may be awarded a Restricted Stock Award or Stock Unit Award on shares having a having a Fair Market Value on the Grant Date of the Award of more than $1 million in any one-year period; and
(b) No individual may be awarded a Cash Award having a value of more than $1 million in any one-year period.
Options. Options granted pursuant to the 2005 Stock Plan are deemed to qualify for the “performance-based compensation” exception to Section 162(m) provided that the Options are granted by the Administrator at Fair Market Value and the number of shares does not exceed the limit set forth in the 2005 Stock Plan.
The foregoing summary of the material terms of the performance goals is qualified in its entirety by reference to the 2005 Stock Plan, a copy of which is attached as an annex to the electronic copy of the proxy statement filed with the SEC and may be accessed from the SEC’s website at www.sec.gov.
Description of the 2005 Stock Plan
General. Under the amendment to the 2005 Stock Plan, a maximum of 450,000 shares of Cavco common stock may be subject to grants of options. No person may be granted options under the 2005 Stock Plan for more than 250,000 shares of common stock in any one-year period. Shares of common stock covered by options that terminate or are canceled prior to exercise and shares of restricted stock or shares covered by stock units that are returned to us will again be available for grants of options and awards of restricted stock or stock units. Also, if the option price or any applicable tax withholding obligation payable upon exercise of an option is satisfied by the tender or withholding of shares of common stock, the number of shares so tendered or withheld will be eligible for grants of options and awards of restricted stock or stock units under the plan. We may satisfy our tax withholding obligations by retaining shares of common stock that would otherwise be issuable on exercise by an optionee or deliverable upon vesting of an award of restricted stock or stock unit.
Administration. The compensation committee of our board of directors, which is comprised solely of three “non-employee directors” as defined by Rule 16b-3(b)(3) under the Exchange Act, will have full and exclusive authority to administer the 2005 Stock Plan and to take all actions specifically contemplated by the plan or necessary or appropriate in connection with its administration. The compensation committee will select the individuals who will receive options and awards of restricted stock, stock units or cash under the plan. Options and restricted stock, stock units and cash awards are sometimes referred to collectively as “awards”. The compensation committee will determine the terms of the awards (to the extent not in the plan) and interpret the awards. The committee may:
provide for the extension of the exercisability of an option;
accelerate the vesting or exercisability of an option, restricted stock, stock unit or cash award
eliminate or make less restrictive any restrictions applicable to an option, restricted stock, stock unit or cash award;
waive any restriction or other provision of the plan or any option, restricted stock, stock unit or cash award; or otherwise amend or modify an option, restricted stock, stock unit or cash award in any manner that is either
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◦ | not adverse to the holder of the award; or |
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◦ | consented to by the holder of the award. |
However, except to the extent resulting from application of the anti-dilution provisions of the 2005 Stock Plan described below, after an option has been awarded, the price at which shares of common stock may be purchased upon exercise of such option may not be amended, so as to reduce the exercise price, and no option may be granted in exchange for a previously granted option if the exercise price of the previously granted option is greater than the exercise price of the replacement option. The committee may correct any defect, supply any omission or reconcile any inconsistency in the plan or in any award in the manner and to the extent it deems necessary or desirable to further the purposes of the plan. The plan provides that any decision of the committee in the interpretation and administration of the plan is final, conclusive and binding on all parties concerned.
Cash Awards. Awards of cash can be made to our officers and key employees under the 2005 Stock Plan. Such awards may be conditioned upon the achievement of performance goals designed to comply with Section 162(m) of the Tax Code.
Options. An award under the 2005 Stock Plan may be in the form of an option to purchase Cavco common stock. Options granted under the plan will be non-qualified options, which will not satisfy the incentive stock option requirements of Section 422 of the Tax Code. The exercise price of an option may not be less than 100% of the fair market value of Cavco common stock at the time of grant.
Options will become exercisable at such time or times not more than seven years from the date of grant as may be provided by their terms. The committee may, however, accelerate the time at which an option is exercisable without regard to its terms. Generally, all rights to exercise an option terminate within four months after the date the optionee ceases to be our employee or an employee of any of our affiliates, or ceases to be a director, for any reason other than death or disability. In the event of an optionee’s death, an option will terminate fifteen months thereafter. In the event of an optionee’s disability and resulting termination of employment, an option will terminate six months after such optionee’s employment termination date. However, if an option is held by a director who, on the date he or she ceases to be our director (and, if also an employee, ceases to be our employee), has at least ten years of service as our director, then all shares subject to such option will vest on the date the director ceases to be our director, and all rights to exercise such option will terminate three years thereafter.
The compensation committee may, in its discretion, grant a new option or amend an outstanding option to provide an extended period of time during which an optionee can exercise the option. However, no option may be exercised later than seven years from the date of grant. If the employment of the optionee or the optionee’s service as a director is terminated for cause, the option shall thereafter be null and void for all purposes.
Unless otherwise determined by the compensation committee and provided in the agreement evidencing an option, no option will be transferable except by will or the laws of descent and distribution, and during the lifetime of the optionee the option may be exercised only by the optionee or the optionee’s guardian or legal representative. The exercise price of options may be paid in cash, by check or wire transfer or, with the consent of the committee, by delivery or withholding of shares of our common stock, including actual or deemed multiple exchanges of shares.
Restricted Stock and Stock Units. The 2005 Stock Plan also provides that shares of restricted stock and stock units may be awarded by the compensation committee to such eligible recipients as it may determine from time to time. As used in the plan, “restricted stock” means common stock that does not irrevocably vest in the holder or may not be sold, exchanged, pledged, transferred, assigned or otherwise encumbered or disposed of until the terms and conditions set by the committee (which terms and conditions may include, among other things, the achievement of specific goals) have been satisfied. During the restricted period, unless specifically provided otherwise in accordance with the terms of the plan, the recipient of restricted stock will be the record owner of such shares and have all the rights of a stockholder with respect to such shares, including the right to vote and the right to receive dividends or other distributions made or paid with respect to such shares. As used in the plan, a “stock unit” means a unit equal to, and which is paid out in the form of, one share of common stock, subject to the terms and conditions of the award set by the committee (which terms and conditions may include, among other things, the achievement of
specific goals). A stock unit award will not represent any actual legal or beneficial interest in Cavco, and will not be entitled to any credit for cash dividends on common stock.
The 2005 Stock Plan provides that the committee has the authority to cancel all or any portion of any outstanding restrictions prior to the expiration of the restricted period with respect to all or any of the shares of restricted stock or stock units awarded to an individual on such terms and conditions as the committee may deem appropriate. Except as otherwise provided in the plan and the applicable award agreement, if during the restricted period an individual to whom restricted stock or stock units have been awarded ceases to be our employee or an employee of one of our affiliates, or ceases to be one of our directors for any reason, any restricted stock or stock units remaining subject to restrictions will be forfeited by the individual and transferred at no cost to us unless otherwise determined by the committee.
Anti-dilution Provisions. The plan contains anti-dilution provisions applicable in the event of a change in the number of outstanding shares of Cavco common stock as a result of a subdivision or consolidation of outstanding shares, declaration of a dividend payable in shares or other stock split, in which event appropriate adjustments shall be made in:
the maximum number of shares subject to the plan;
the number of shares and option prices under then outstanding options
the number of shares of restricted stock or stock units previously awarded under the plan; and
the number of shares that may be granted to any person in any one-year period under the plan
Similar adjustments will also be made in the event of any other recapitalization or capital reorganization of Cavco, any consolidation or merger of Cavco with another corporation or entity, the adoption by Cavco of any plan of exchange affecting the shares of Cavco common stock or any distribution to Cavco stockholders of securities or property (other than normal cash dividends or dividends payable in shares of Cavco common stock), to the extent necessary to preserve, without exceeding, the value of then outstanding options and shares of restricted stock and stock units. In the event of a merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the compensation committee is authorized to issue new awards as it determines is appropriate in substitution for, or to reflect the assumption of, any other compensatory awards, whether or not awarded under the plan.
In addition, in the case of a change in control of Cavco (as defined in the 2005 Stock Plan):
every option then outstanding will vest and become exercisable in full; and
every restriction with respect to outstanding shares of restricted stock, stock units and performance-based cash awards will terminate immediately prior to such change in control, to the extent not theretofore exercisable or free of restrictions, without regard to any limits on exercisabiltiy or any restrictions contained in the agreements evidencing such options, restricted stock, stock units or cash awards, but only if such options have not yet expired or been terminated or such awards have not yet been canceled or forfeited.
The accelerated vesting and exercisability upon a change in control could be considered as having an anti-takeover effect. However, because the 2005 Stock Plan was approved by our board for the purposes and reasons discussed above and not for any perceived anti-takeover benefit, and because the maximum number of shares available under the plan would be insignificant compared to the total number of our authorized shares, our board of directors believes that this provision should not be considered as having any significant anti-takeover effect.
Amendment of Plan. Our board of directors may, at any time, amend, suspend or terminate the 2005 Stock Plan for any purpose permitted by law. However, no amendment or alteration that would adversely affect the rights of any holder under any award previously granted to such person may be made without the consent of such person, and no amendment shall be effective prior to its approval by our stockholders to the extent such approval is required by law or any stock exchange or automated quotation system on which our common stock is listed or admitted to trading.
Performance Awards. The compensation committee may determine that an option or an award of restricted stock, stock units or cash will be subject to restriction until one or more pre-established, objective performance goals established by the committee have been achieved. With respect to any such award, the restrictions will lapse and the award will vest only upon achievement of the goals. A performance goal may be based on one or more business criteria that apply to the recipient, one or more of our business units or us as a whole, and may include one or more of the following criteria: operating income, operating margin, earnings before interest, taxes, depreciation and amortization (EBITDA), pre-tax income, net income, net earnings per share, net earnings per share growth, return on beginning stockholders’ equity, return on average net assets, total stockholder return relative to other companies in a relevant industry group, debt/capitalization ratio and customer satisfaction. A performance goal need not be based upon an increase or positive result under a particular business criterion but may include, for example, maintaining the status quo or limiting economic losses, as measured by reference to such criterion. Performance goals must be established prior to the earlier to occur of 90 days after the commencement of the period of service to which the goals relate and the lapse of 25% of the period of service. Prior to the lapse of any applicable restrictions and the vesting of any award based on the achievement of performance goals, the committee must determine that the applicable performance goals were satisfied.
No individual may be awarded restricted stock or stock units subject to performance goals designed to comply with Section 162(m) of the Tax Code having a value of more than $1.0 million in any given one-year period. Cash based performance awards designed to comply with Section 162(m) of the Tax Code are subject to a separate limit of no more than $1.0 million in any given one-year period for any individual.
New Plan Benefits
Mr. Stegmayer receives an annual grant of stock options equal to his base salary pursuant to his employment agreement and non-executive directors receive a grant of 4,000 stock options annual on the anniversary of the (as set forth in the table below). Equity-based or cash compensation awards to be granted in the future to other non-executive employees, including current and future employees under the 2005 Stock Plan cannot be determined at this time, as actual awards will be made at the discretion of the Compensation Committee. For an understanding of the equity-based compensation awards made in the past to our executives under the 2005 Plan and 2003 Plan, see the Grants of Plan-Based Awards in Fiscal Year 2015 table and the Outstanding Equity Awards at 2015 Fiscal Year-End table.
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Name and Position | Dollar Value of Options | | Number of Options | |
Joseph H. Stegmayer Chairman, President and Chief Executive Officer | $520,000 | (1) | [ ] | (1) |
Daniel L. Urness Executive Vice President and Chief Financial Officer | [ ] | (2) | [ ] | (2) |
Charles E. Lott President, Fleetwood Homes, Inc. | [ ] | (2) | [ ] | (2) |
Total Executive Group | $520,000 | (1) (2) (3) | [ ] | (1) (2) (3) |
Non-employee Director Group | [ ] | (4) | 16,000 | (4) |
Non-Executive Officer Employee Group (5) | [ ] | | [ ] | |
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(1) | Pursuant to his employment agreement, Mr. Stegmayer receives an annual grant of stock options equal to his then current base salary based on a Black-Scholes calculation. The number of shares of our common stock granted to Mr. Stegmayer could go up or down depending on the value of our common stock at the date of grant so long as the value of those shares equals Mr. Stegmayer’s then current base salary (subject to minor rounding). As of March 29, 2015, Mr. Stegmayer's base salary is $520,000. The date of grant is at the discretion of our Compensation Committee. See Compensation Discussion and Analysis on page 22. |
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(2) | Future awards under the 2005 Plan are indeterminable and at the discretion of the Compensation Committee. |
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(3) | We currently have three executive officers (Messrs. Stegmayer, Urness and Lott) who would be eligible to receive awards under our 2005 Stock Plan (see footnotes 1 and 2 to this table for information). |
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(4) | The dollar value of future awards under the 2005 Stock Plan are indeterminable. Each non-executive director will receive 4,000 options to purchase shares of our common stock on the anniversary of such non-executive director’s election to the Board. We currently have 4 non-executive directors who are eligible to receive this benefit under the 2005 Stock Plan. All of these directors are expected to continue to serve as directors and earn this award. |
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(5) | Future awards under the 2005 Stock Plan are indeterminable. No arrangements have been made at this time with respect to the shares reserved for issuance under the 2005 Stock Plan except as set forth in (1) above. |
Federal Income Tax Consequences
The following is a brief summary of the federal income tax aspects of awards that may be made under the 2005 Stock Plan based on existing U.S. federal income tax laws. This summary is general in nature and does not address issues related to the tax circumstances of any particular participant. This discussion is not to be construed as tax advice.
Stock Awards. Federal income tax consequences with respect to options, restricted stock and stock units depend on the facts and circumstances of each award, and, in particular, the nature of any restrictions imposed with respect to the award. In general, if the stock which is the subject of an award is actually issued to a participant but is subject to a “substantial risk of forfeiture” (e.g., if rights to ownership of the stock are conditioned upon the future performance of substantial services by the participant), a taxable event occurs only when the risk of forfeiture ceases. When the substantial risk of forfeiture ceases, the participant will realize ordinary income to the extent of the excess of the fair market value of the stock on the date the risk of forfeiture terminates over the participant’s cost for such stock (if any), and the same amount is then deductible by Cavco as compensation. If the restrictions with respect to the award, by their nature, do not subject the participant to a “substantial risk of forfeiture” of the stock, then the participant will realize ordinary income at the time of grant to the extent of the excess of the fair market value of the stock over the participant’s cost (if any). The same amount is then deductible by Cavco. If no stock is actually issued to the participant at the time the award is granted, the participant will realize ordinary income at the time the participant receives stock free of any substantial risk of forfeiture, and the amount of such income will be equal to the fair market value of the stock at such time over the participant’s cost (if any). The same amount is then deductible by Cavco.
Stock Options. The stock options granted under the 2005 Stock Plan will be non-qualified stock options. Upon the exercise of a non-qualified stock option, the optionee recognizes ordinary taxable income (subject to withholding) in an amount equal to the difference between the fair market value of the shares on the date of exercise and the exercise price. Cavco is entitled to a deduction in an amount equal to the income recognized by the optionee. Upon any sale of such shares by the optionee, any difference between the sale price and the fair market value of the shares on the date of exercise of the non-qualified stock option will be treated generally as capital gain or loss, but only taxed at the more favorable capital gains tax rate if held for the requisite holding period, which, ordinarily, is a period of more than 12 months.
General. A participant’s tax basis in shares purchased or awarded under the 2005 Stock Plan is equal to the sum of the price paid for the shares, if any, and the amount of ordinary income recognized by the participant in connection with the transfer of the shares. The participant’s holding period for the shares begins immediately after ordinary income is recognized with respect to the transfer of the shares If a participant sells shares, any difference between the amount realized in the sale and the participant’s tax basis in the shares is taxed as long-term or short-term capital gain or loss (provided the shares are held as a capital asset on the date of sale), depending on the participant’s holding period for the shares.
Tax Deductibility Cap. Section 162(m) of the Tax Code provides that certain compensation received in any year by a “covered employee” in excess of $1 million is non-deductible by Cavco for federal income tax purposes. Section 162(m) provides an exception, however, for “performance-based compensation.” As described in “Report of Compensation Committee on Executive Compensation,” the compensation committee believes that compensation to its executives should involve a direct and substantial link with financial measures that affect shareholder values. This generally permits the compensation committee to structure grants and awards under the 2005 Stock Plan to “covered employees” as performance-based compensation that is exempt from Section 162(m). However, the compensation committee may award compensation that is or may become non-deductible when such grants are in the best interest of Cavco, balancing tax efficiency with long-term strategic objectives.
Recommendation of the Board
The Board of Directors unanimously recommends a vote “FOR” Proposal 5.
GENERAL
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Cavco directors and executive officers, and persons who beneficially own more than 10% of a registered class of Cavco’s equity securities, to file initial reports of ownership, reports of changes in ownership and annual reports of ownership with the SEC and Nasdaq.NASDAQ. Such persons are required by SEC regulations to furnish Cavco with copies of all Section 16(a) reports that they file with the SEC.
Based solely on its review of the copies of such reports received by it with respect to fiscal year 20152016 or written representations from certain reporting persons, Cavco believes that its directors, executive officers and persons who beneficially own more than 10% of a registered class of Cavco’s equity securities have complied with the filing requirements of Section 16(a) for fiscal year 20152016 applicable to such persons.
Certain Relationships and Related Transactions
Transactions with Related Persons
We have entered into Change of Control Agreements with certain of our executive officers. See above under “Compensation Discussion and Analysis – Employment, Severance and Change of Control Arrangements.”
Review, Approval or Ratification of Transactions with Related Persons
Cavco has established policies and other procedures regarding approval of transactions between Cavco and any employee, officer, director, and certain of their family members and other related persons, including those required to be reported under Item 404 of Regulation S-K. These policies and procedures are generally not in writing, but are evidenced by long standing principles set forth in our code of conduct or adhered to by our Board. As set forth in the Audit Committee Charter, as and to the extent required under applicable federal securities laws and related rules and regulations, and/or the NasdaqNASDAQ Rules, related party transactions are to be reviewed and approved, if appropriate, by the Audit Committee. Generally speaking, we enter into such transactions only on terms that we believe are at least as favorable to Cavco as those that we could obtain from an unrelated third party.
Code of Conduct
Cavco has adopted a code of conduct that applies to Cavco directors and all employees, including Cavco’s Chief Executive Officer, Chief Financial Officer and Controller. Cavco’s code of conduct is designed to deter wrongdoing and to promote:
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
full, fair, accurate, timely and understandable disclosure in reports and documents that Cavco files with, or submits to, the SEC and in other public communications made by Cavco;
compliance with applicable governmental laws, rules and regulations;
the prompt internal reporting of violations of the code of conduct to an appropriate person or persons identified in the code of conduct; and
accountability for adherence to the code of conduct.
Cavco has posted the text of its code of conduct on its Internet website at www.cavco.comhttp://investor.cavco.com/general-documents. Cavco’s code of conduct will remain accessible on its Internet website. However, if Cavco ever desires to remove its code of conduct from its Internet website, then, prior to such removal, Cavco will either file its code of conduct as an exhibit to its Annual Report on Form 10-K filed with the SEC or will undertake to provide a copy of the code of conduct to any person without charge.
Form 10-K
Stockholders entitled to vote at the annual meeting may obtain a copy of Cavco’s Annual Report on Form 10-K for the fiscal year ended March 28, 2015,April 2, 2016, including the Consolidated Financial Statements, required to be filed with the SEC, without charge, upon written or oral request to Cavco Industries, Inc., Attention: James P. Glew, Secretary, 1001 North Central Avenue, Suite 800, Phoenix, Arizona, 85004, (800) 790-9111.
Stockholder Proposals
To be considered for inclusion in next year’s proxy statement, stockholder proposals, submitted in accordance with the SEC’s Rule 14a-8, must be received at Cavco’s principal executive offices, addressed to the attention of the Secretary, no later than the close of business on February 10, 2016.16, 2017.
For any proposal that is not submitted for inclusion in Cavco’s proxy material for the 20162017 Annual Meeting of Stockholders but is instead sought to be presented directly at that meeting, Rule 14a-4(c) under the Exchange Act permits Cavco’s management to exercise discretionary voting authority under proxies it solicits unless Cavco is notified about the proposal no earlier than January 11, 201614, 2017 and no later than April 11, 2016,14, 2017, and the stockholder submitting the proposal satisfies the other requirements of Rule 14a-4(c). Cavco’s bylaws further provide that, to be considered at the 20162017 Annual Meeting, a stockholder proposal relating to the nomination of a person for election as a director must be submitted in writing and received by the Secretary at the principal executive offices of Cavco no earlier than January 11, 201614, 2017 and no later than April 11, 2016,14, 2017, and must contain the information required by Cavco’s bylaws. Any stockholder wishing to receive a copy of Cavco’s bylaws should direct a written request to the Secretary at Cavco’s principal executive offices.
Cavco Website
In this proxy statement, we state that certain information and documents are available on the Cavco website. These references are merely intended to suggest where additional information may be obtained by our stockholders, and the materials and other information presented on our website are not incorporated in and should not otherwise be considered part of this proxy statement.
Incorporation of Certain Documents By Reference
The SEC allows us to “incorporate by reference” the information in certain documents that we file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this proxy statement, and information that we subsequently file with the SEC prior to the Annual Meeting will automatically update and supersede this information. This proxy statement incorporates by reference the Annual Report of Cavco on Form 10-K for the fiscal year ended March 28, 2015,April 2, 2016, filed with the SEC on [ ], 2015June 21, 2016 pursuant to the Exchange Act, which contains audited financial statements of Cavco for the fiscal year ended March 28, 2015,April 2, 2016, and which is being distributed to stockholders with this proxy statement and any future filings we make with the SEC prior to the Annual Meeting under Sections13(a), 13(c), 14 or 15(d) of the Exchange Act:
You may obtain a copy of these documents (other than exhibits to such documents), at no cost, upon written or oral request to Cavco Industries, Inc., Attention: James P. Glew, Secretary, 1001 North Central Avenue, Suite 800, Phoenix, Arizona 85004, (800) 790-9111.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, proxy statements or other information filed by us at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. You may also obtain copies of these reports, proxy statements and other documents at the SEC’s website, the address of which is http://www.sec.gov.
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| By Order of the Board of Directors |
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| JAMES P. GLEW |
| Secretary |
35
APPENDIX A
AMENDMENT NO. 1
TO THE
CAVCO INDUSTRIES, INC.
2005 STOCK INCENTIVE PLAN
WHEREAS, Cavco Industries, Inc. (the “Company”) has adopted and currently maintains the Cavco Industries, Inc. 2005 Stock Incentive Plan, effective June 21, 2005 (the “Plan”); and
WHEREAS, Section 13 of the Plan gives the Board of Directors of the Company (the “Board”) the authority to amend the Plan at any time, subject to certain conditions; and
WHEREAS, the Plan is a central tool to reward the employees of the Company; and
WHEREAS, the Board intends to increase the number of shares available to the Plan; and
WHEREAS, the Board has decided to limit the acceleration of vesting due to Change in Control (as defined in the Plan) only to those employees who are involuntarily terminated in connection with the Change in Control; and
WHEREAS, the Board intends to dispense with administrative approval requirements for share settlement of awards.
NOW, THEREFORE, the Plan is hereby amended as set forth below:
1.Section 2 of the Plan is hereby amended to include the following new definition:
“Cause” means, except as otherwise defined in a Participant’s Award Agreement or in a Participant’s written employment arrangements with the Company or any of its Subsidiaries in effect on the date of grant (as amended from time to time thereafter), the occurrence of one or more of the following events:
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(i) | Conviction of, or agreement to a plea of nolo contendere to, a felony, or any crime or offense lesser than a felony involving the property of the Company or a Subsidiary; or |
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(ii) | Conduct that has caused demonstrable and serious injury to the Company or a Subsidiary, monetary or otherwise; or |
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(iii) | Willful refusal to perform or substantial disregard of duties properly assigned, as determined by the Company; or |
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(iv) | Breach of duty of loyalty to the Company of a Subsidiary or other act of fraud or dishonesty with respect to the Company or a Subsidiary; or |
(v) Violation of the Company's code of conduct
2.Section 6 of the Plan is hereby restated to read as set forth below:
Shares Available for Awards. Subject to Section 11 below, the maximum number of Shares that may be awarded under this Plan is 750,000, provided that no more than 200,000 of such Shares will be subject to awards of Restricted Stock or Stock Units. Shares covered by Options that terminate or are canceled prior to exercise and Shares of Restricted Stock or Shares covered by Stock Units returned to Cavco Industries will again be available for grants of Options, Restricted Stock Awards, and Stock Unit Awards. Also, if the Option price or any applicable tax withholding obligation payable upon exercise of an Option is satisfied by the tender or withholding of Shares, the number of Shares so tendered or withheld will be eligible for grants of Options, Restricted Stock Awards, and Stock Unit Awards under this Plan. The Administrator may from time to time adopt and observe such procedures concerning the counting of Shares against the Plan maximum as it may deem appropriate. The Board and the appropriate officers of Cavco Industries shall from time to time take whatever actions are necessary to file any required documents with governmental authorities, stock exchanges and transaction reporting systems to ensure that Shares are available for issuance pursuant to Awards.
3.Section 7(b)(ii) of the Plan is hereby restated to read as set forth below:
Payment of Option/Exercise Price. The exercise price of an Option may be paid in cash, by check or wire transfer or by delivery or withholding of Shares, including actual or deemed multiple exchanges of Shares. The exercise price shall be paid at the time of delivery of Shares.
4.Section 7(c)(i)(B) of the Plan is hereby restated to read as set forth below:
A Participant’s Restricted Stock Award shall be fully vested, irrespective of the limitations set forth in subparagraph (A) above, in the event of (i) a Change in Control, as provided for in Section 8 below, provided that the Participant was terminated without Cause in connection with a Change in Control or (ii) Retirement of the Participant.
5.Section 8 of the Plan is hereby restated to read as set forth below:
Change in Control. Notwithstanding the provisions of Section 7 hereof, unless otherwise expressly provided in the applicable Award Agreement, or as otherwise specified in the terms of an Award, if the Participant’s employment with the Company or one of its Affiliates is involuntarily terminated without Cause in connection with a Change in Control, each Award granted under this Plan to the Participant shall become immediately vested and fully exercisable, with performance-based awards vested at target level (regardless of the otherwise applicable vesting or exercise schedules or performance goals provided for under the Award Agreement or the terms of the Award); provided however, that this Section 8 shall not apply with respect to Awards that have expired or been terminated, canceled or forfeited. An involuntary termination of the Participant’s employment may be treated as being in connection with a Change in Control only if such termination occurs during the period beginning six months prior to the Change in Control and ending twelve months following the Change in Control.
6.This Amendment shall amend only the provisions of the Plan as set forth herein, and
those provisions not expressly amended hereby shall be considered in full force and effect.
7.The Board originally intended that awards of Options pursuant to the Plan would qualify for the “performance-based compensation” exception to Section 162(m) of the Internal Revenue Code and the Company has operated the Plan consistent with that intent from the Plan’s effective date. Accordingly, this clarifying Amendment is effective as of the effective date set forth in the Plan.