UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2014August 31, 2015
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number: 1-4714
SKYLINE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana | 35-1038277 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer | |
Identification No.) |
P. O. Box 743, 2520 By-Pass Road Elkhart, Indiana | 46515 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(574) 294-6521
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xþ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xþ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes xþ No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Title of Class | Shares Outstanding October 15, 2015 | |
Common Stock, $.0277 Par Value | 8,391,244 |
INDEX
INDEXPART I— FINANCIAL INFORMATION
Page No. | ||||||||
Item 1. | ||||||||
Consolidated Balance Sheets as of | 1 | |||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II— OTHER INFORMATION | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item | ||||||||
Item 6. | 27 | |||||||
Item 1. | Financial |
Skyline Corporation and Subsidiary Companies
Consolidated Balance Sheets
(Dollars in thousands)
August 31, 2015 | May 31, 2015 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 6,672 | $ | 4,995 | ||||
Accounts receivable, less allowance for doubtful accounts of $536 | 12,064 | 15,259 | ||||||
Inventories | 10,498 | 9,008 | ||||||
Workers’ compensation security deposit | 1,015 | 1,732 | ||||||
Other current assets | 1,540 | 447 | ||||||
Assets of discontinued operations | 137 | 140 | ||||||
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Total Current Assets | 31,926 | 31,581 | ||||||
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Property, Plant and Equipment: | ||||||||
Land | 2,996 | 2,996 | ||||||
Buildings and improvements | 36,287 | 36,280 | ||||||
Machinery and equipment | 16,340 | 16,332 | ||||||
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55,623 | 55,608 | |||||||
Less accumulated depreciation | 44,232 | 44,039 | ||||||
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11,391 | 11,569 | |||||||
Other Assets | 7,299 | 7,289 | ||||||
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Total Assets | $ | 50,616 | $ | 50,439 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
Item 1. | Financial Statements —(Continued). |
Skyline Corporation and Subsidiary Companies
Consolidated Balance Sheets — (Continued)
(Dollars in thousands, except share and per share amounts)
August 31, 2015 | May 31, 2015 | |||||||
(Unaudited) | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable, trade | $ | 3,617 | $ | 3,025 | ||||
Accrued salaries and wages | 2,486 | 2,565 | ||||||
Accrued marketing programs | 3,172 | 2,319 | ||||||
Accrued warranty | 4,482 | 4,511 | ||||||
Other accrued liabilities | 2,340 | 2,593 | ||||||
Liabilities of discontinued operations | 108 | 104 | ||||||
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Total Current Liabilities | 16,205 | 15,117 | ||||||
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Long-Term Liabilities: | ||||||||
Deferred compensation expense | 5,160 | 5,237 | ||||||
Accrued warranty | 2,400 | 2,400 | ||||||
Life insurance loans | 4,312 | 4,312 | ||||||
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Total Long-Term Liabilities | 11,872 | 11,949 | ||||||
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Commitments and Contingencies – See Note 8 | ||||||||
Shareholders’ Equity: | ||||||||
Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares | 312 | 312 | ||||||
Additional paid-in capital | 4,928 | 4,928 | ||||||
Retained earnings | 83,043 | 83,877 | ||||||
Treasury stock, at cost, 2,825,900 shares | (65,744 | ) | (65,744 | ) | ||||
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Total Shareholders’ Equity | 22,539 | 23,373 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 50,616 | $ | 50,439 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
Item 1. | Financial Statements —(Continued). |
Skyline Corporation and Subsidiary Companies
Consolidated Statements of Operations and Retained Earnings
For the Three-Month Periods Ended August 31, 2015 and 2014
(Dollars in thousands, except share and per share amounts)
2015 | 2014 | |||||||
(Unaudited) | ||||||||
OPERATIONS | ||||||||
Net sales | $ | 48,742 | $ | 49,604 | ||||
Cost of sales | 44,099 | 45,563 | ||||||
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Gross profit | 4,643 | 4,041 | ||||||
Selling and administrative expenses | 5,459 | 5,180 | ||||||
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Operating loss | (816 | ) | (1,139 | ) | ||||
Interest expense | (79 | ) | (94 | ) | ||||
Interest income | — | 24 | ||||||
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Loss from continuing operations before income taxes | (895 | ) | (1,209 | ) | ||||
Benefit from income taxes | — | — | ||||||
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Loss from continuing operations | (895 | ) | (1,209 | ) | ||||
Income (loss) from discontinued operations, net of income taxes | 61 | (2,564 | ) | |||||
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Net loss | $ | (834 | ) | $ | (3,773 | ) | ||
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Basic loss per share | $ | (.10 | ) | $ | (.45 | ) | ||
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Loss per share from continuing operations | $ | (.11 | ) | $ | (.14 | ) | ||
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Income (loss) per share from discontinued operations | $ | .01 | $ | (.31 | ) | |||
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Weighted average number of common shares outstanding | 8,391,244 | 8,391,244 | ||||||
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RETAINED EARNINGS | ||||||||
Balance at beginning of period | $ | 83,877 | $ | 94,291 | ||||
Net loss | (834 | ) | (3,773 | ) | ||||
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Balance at end of period | $ | 83,043 | $ | 90,518 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
Item 1. | Financial Statements —(Continued). |
Skyline Corporation and Subsidiary Companies
Consolidated Statements of Cash Flows
For the Three-Month Periods Ended August 31, 2015 and 2014
(Dollars in thousands)
November 30, 2014 | May 31, 2014 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 4,824 | $ | 6,031 | ||||
Accounts receivable | 13,590 | 16,259 | ||||||
Note receivable, current | 51 | 50 | ||||||
Inventories | 9,155 | 8,627 | ||||||
Workers’ compensation security deposit | 2,137 | 2,688 | ||||||
Other current assets | 974 | 542 | ||||||
Assets of discontinued operations | 2,372 | 7,473 | ||||||
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Total Current Assets | 33,103 | 41,670 | ||||||
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Note Receivable, non-current | 1,555 | 1,581 | ||||||
Property, Plant and Equipment, at Cost: | ||||||||
Land | 3,586 | 3,586 | ||||||
Buildings and improvements | 39,706 | 39,254 | ||||||
Machinery and equipment | 17,001 | 17,238 | ||||||
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60,293 | 60,078 | |||||||
Less accumulated depreciation | 46,738 | 46,036 | ||||||
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13,555 | 14,042 | |||||||
Assets of discontinued operations, net of accumulated depreciation | — | 1,911 | ||||||
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13,555 | 15,953 | |||||||
Other Assets | 6,855 | 6,550 | ||||||
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Total Assets | $ | 55,068 | $ | 65,754 | ||||
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2015 | 2014 | |||||||
(Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (834 | ) | $ | (3,773 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
Depreciation | 257 | 394 | ||||||
Amortization of debt financing costs | 19 | ��� | ||||||
Change in assets and liabilities: | ||||||||
Accounts receivable | 3,137 | 3,857 | ||||||
Inventories | (1,429 | ) | (1,622 | ) | ||||
Workers’ compensation security deposit | 717 | — | ||||||
Other current assets | (1,093 | ) | (355 | ) | ||||
Accounts payable, trade | 624 | (1,283 | ) | |||||
Accrued liabilities | 464 | (171 | ) | |||||
Other, net | (107 | ) | (66 | ) | ||||
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Net cash from operating activities | 1,755 | (3,019 | ) | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from note receivable | — | 13 | ||||||
Purchase of property, plant and equipment | (70 | ) | (26 | ) | ||||
Other, net | (8 | ) | (4 | ) | ||||
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Net cash from investing activities | (78 | ) | (17 | ) | ||||
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Net increase (decrease) in cash | 1,677 | (3,036 | ) | |||||
Cash at beginning of period | 4,995 | 6,031 | ||||||
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Cash at end of period | $ | 6,672 | $ | 2,995 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Consolidated Balance Sheets—(Continued)
(Dollars in thousands, except share and per share amounts)
November 30, 2014 | May 31, 2014 | |||||||
(Unaudited) | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable, trade | $ | 2,034 | $ | 3,050 | ||||
Accrued salaries and wages | 2,171 | 2,255 | ||||||
Accrued marketing programs | 4,151 | 2,526 | ||||||
Accrued warranty and related expenses | 3,738 | 3,697 | ||||||
Other accrued liabilities | 2,482 | 3,695 | ||||||
Liabilities of discontinued operations | 339 | 3,024 | ||||||
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Total Current Liabilities | 14,915 | 18,247 | ||||||
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Long-Term Liabilities: | ||||||||
Other deferred liabilities | 7,249 | 7,386 | ||||||
Life insurance loans | 6,334 | 6,334 | ||||||
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Total Long-Term Liabilities | 13,583 | 13,720 | ||||||
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Commitments and Contingencies – See Note 9 | ||||||||
Shareholders’ Equity: | ||||||||
Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares | 312 | 312 | ||||||
Additional paid-in capital | 4,928 | 4,928 | ||||||
Retained earnings | 87,074 | 94,291 | ||||||
Treasury stock, at cost, 2,825,900 shares | (65,744 | ) | (65,744 | ) | ||||
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Total Shareholders’ Equity | 26,570 | 33,787 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 55,068 | $ | 65,754 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies
Consolidated Statements of Operations and Retained Earnings
For the Three-Month and Six-Month Periods Ended November 30, 2014 and 2013
(Dollars in thousands, except share and per share amounts)
Three-Months Ended | Six-Months Ended | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
OPERATIONS: | ||||||||||||||||
Net sales | $ | 49,667 | $ | 39,208 | $ | 99,271 | $ | 76,871 | ||||||||
Cost of sales | 44,509 | 35,401 | 90,072 | 69,461 | ||||||||||||
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Gross profit | 5,158 | 3,807 | 9,199 | 7,410 | ||||||||||||
Selling and administrative expenses | 5,008 | 4,733 | 10,188 | 9,351 | ||||||||||||
Gain on sale of idle property, plant and equipment | — | 162 | — | 162 | ||||||||||||
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Operating income (loss) | 150 | (764 | ) | (989 | ) | (1,779 | ) | |||||||||
Interest expense | (93 | ) | — | (187 | ) | — | ||||||||||
Interest income | 24 | 25 | 48 | 50 | ||||||||||||
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Income (loss) from continuing operations before income taxes | 81 | (739 | ) | (1,128 | ) | (1,729 | ) | |||||||||
Benefit from income taxes | — | — | — | — | ||||||||||||
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Income (loss) from continuing operations | 81 | (739 | ) | (1,128 | ) | (1,729 | ) | |||||||||
Loss from discontinued operations, net of income taxes | (3,525 | ) | (1,474 | ) | (6,089 | ) | (1,863 | ) | ||||||||
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Net loss | $ | (3,444 | ) | $ | (2,213 | ) | $ | (7,217 | ) | $ | (3,592 | ) | ||||
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Basic loss per share | $ | (.41 | ) | $ | (.27 | ) | $ | (.86 | ) | $ | (.43 | ) | ||||
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Basic income (loss) per share from continuing operations | $ | .01 | $ | (.09 | ) | $ | (.13 | ) | $ | (.21 | ) | |||||
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Basic income (loss) per share from discontinued operations | $ | (.42 | ) | $ | (.18 | ) | $ | (.73 | ) | $ | (.22 | ) | ||||
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Weighted average number of common shares outstanding | 8,391,244 | 8,391,244 | 8,391,244 | 8,391,244 | ||||||||||||
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RETAINED EARNINGS: | ||||||||||||||||
Balance at beginning of period | $ | 90,518 | $ | 104,776 | $ | 94,291 | $ | 106,155 | ||||||||
Net loss | (3,444 | ) | (2,213 | ) | (7,217 | ) | (3,592 | ) | ||||||||
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Balance at end of period | $ | 87,074 | $ | 102,563 | $ | 87,074 | $ | 102,563 | ||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies
Consolidated Statements of Cash Flows
For the Six-Month Periods Ended November 30, 2014 and 2013
(Dollars in thousands)
2014 | 2013 | |||||||
(Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (7,217 | ) | $ | (3,592 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
Depreciation | 726 | 887 | ||||||
Reduction in inventory value of discontinued operations | 901 | — | ||||||
Gain on sale of assets associated with discontinued operations | (670 | ) | — | |||||
Gain on sale of idle property, plant and equipment | — | (162 | ) | |||||
Change in assets and liabilities: | ||||||||
Accrued interest receivable | — | 1 | ||||||
Accounts receivable | 5,872 | 1,358 | ||||||
Inventories | 469 | (1,233 | ) | |||||
Workers’ compensation security deposit | 551 | — | ||||||
Other current assets | (432 | ) | (281 | ) | ||||
Accounts payable, trade | (3,068 | ) | (1,581 | ) | ||||
Accrued liabilities | (264 | ) | 3,556 | |||||
Other, net | (424 | ) | (434 | ) | ||||
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Net cash from operating activities | (3,556 | ) | (1,481 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from principal payments of U.S. Treasury | ||||||||
Bills | — | 16,998 | ||||||
Purchase of U.S. Treasury Bills | — | (17,999 | ) | |||||
Proceeds from note receivable | 25 | 24 | ||||||
Proceeds from sale of assets associated with discontinued operations | 2,331 | — | ||||||
Proceeds from sale of idle property, plant and equipment | — | 490 | ||||||
Purchase of property, plant and equipment | (163 | ) | (460 | ) | ||||
Other, net | 156 | 229 | ||||||
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Net cash from investing activities | 2,349 | (718 | ) | |||||
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Net decrease in cash | (1,207 | ) | (2,199 | ) | ||||
Cash at beginning of period | 6,031 | 11,838 | ||||||
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Cash at end of period | $ | 4,824 | $ | 9,639 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements
NOTE 1 | Basis of Presentation |
The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of November 30, 2014,August 31, 2015, in addition to the consolidated results of operations and the consolidated cash flows for the three-month and six-month periods ended November 30, 2014August 31, 2015 and 2013.2014. Due to the seasonal nature of the Corporation’s business, interim results are not necessarily indicative of results for the entire year.
The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The audited consolidated balance sheet as of May 31, 20142015 and the unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s latest annual report on Form 10-K.
Certain prior year amounts related to discontinued operations have been reclassified to conform to current year presentation.
The following is a summary of the accounting policies that have a significant effect on the Consolidated Financial Statements.
Accounting Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Key estimates would include accruals for warranty, workers’ compensation, marketing programs and health insurance as well as valuations for long-lived assets and deferred tax assets.
Revenue recognition — Substantially all of the Corporation’s products are made to order. Revenue is recognized upon completion of the following: an order for a unit is received from a dealer or community (customer); written or verbal approval for payment is received from a customer’s financial institution or payment is received; a common carrier signs documentation accepting responsibility for the unit as agent for the customer; and the unit is removed from the Corporation’s premises for delivery to a customer. Freight billed to customers is considered sales revenue, and the related freight costs are cost of sales. Volume based rebates paid to dealers are classified as a reduction of sales revenue. Sales of parts are classified as revenue.
Accounts Receivable — Trade receivables are based on the amounts billed to dealers and communities. The Corporation does not accrue interest on any of its trade receivables, nor does it have an allowance for credit losses due to favorable collections experience. If a loss occurs, the Corporation’s policy is to recognize it in the period when collectability cannot be reasonably assured.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements—(Continued)
Inventories— Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out method. Physical inventory counts are taken at the end of each reporting quarter.
Workers’ Compensation Security Deposit—Deferred workers’ compensation deposit represents funds placed with the Corporation’s worker’s compensation insurance carrier to offset future medical claims and benefits.
Note Receivable— The Corporation’s note receivable represents the amount owed for the sale of two idle recreational vehicle facilities in Hemet, California; less cash received on the date of closing and cash received from principal repayments through November 30, 2014. Interest is accrued on a monthly basis. No allowance for credit losses exists due to favorable collections experience. The Corporation’s management evaluates the credit quality of the note on a monthly basis. The Corporation’s policy is to recognize a loss in the period when collectability cannot be reasonably assured. Subsequent to November 30, 2014, the note was fully repaid.
Property, Plant and Equipment— Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for financial statement reporting and accelerated methods for income tax reporting purposes. Estimated useful lives for significant classes of property, plant and equipment, including idle property, are as follows: Building and improvements 10 to 30 years; machinery and equipment 5 to 8 years. At November 30, 2014, idle property consisted of an idle manufacturing facility in Ocala, Florida. At May 31, 2014, idle property consisted of the aforementioned facility, and two manufacturing facilities in Elkhart, Indiana. The Corporation has the Ocala facility, and undeveloped land in McMinnville, Oregon presently for sale.
Long-lived assets are reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable from projected future cash flows. If the carrying value of a long-lived asset is impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. The Company believes no impairment of long-lived assets exists at November 30, 2014.
Warranty —The Corporation provides the retail purchaser of its homes, park models and recreational vehicles with a full fifteen-month warranty against defects in design, materials and workmanship. The warranties are backed by service departments located at the Corporation’s manufacturing facilities and an extensive field service system.
Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. The adequacy of the recorded warranty liability is periodically assessed and the amount is adjusted as necessary.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements—(Continued)
Income Taxes —The Corporation recognizes deferred tax assets based on differences between the carrying values of assets for financial and tax reporting purposes. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income.
Generally accepted accounting principles require that an entity consider both negative and positive evidence in determining whether a valuation allowance is warranted. In comparing negative and positive evidence, continual losses in recent years is considered significant, negative, objective evidence that deferred tax assets may not be realized in the future, and generally is assigned more weight than subjective positive evidence of the realizability of deferred tax assets. As a result of its extensive evaluation of both positive and negative evidence, management maintains a full valuation allowance against its deferred tax assets. The Corporation reports a liability, if any, for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Recently issued accounting pronouncements— In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-08Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.ASU No. 2014-08 changes the requirements for reporting discontinued operations in that a discontinued operation may include a component of an entity, a group of components of an entity, or a business or non-profit activity. In addition, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results when certain conditions are met. For public business entities, ASU No. 2014-08 is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Corporation did not utilize early adoption of ASU No. 2014-08 regarding the sale of its recreational vehicle segment as referenced in Note 2. It will, however, adopt this pronouncement for any disposals (or classifications as held for sale) that may occur after May 31, 2015.
Management’s Plan—The Corporation’s consolidated financial statements were prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business. Due to recurring losses during certain periods, the Corporation has historically experienced negative cash flows from operating activities. The level of historical negative cash flows from operations and not having available funding from outside financing sources raise substantial doubt about the Corporation’s ability to continue as a going concern. To continue as a going concern, management determined that certain strategies need to be pursued to raise capital, increase sales and decrease costs. pursued.
These strategies include but are not all inclusive:
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements—(Continued)
Management’s Plan — (continued)limited to:
Progress:
In October 2014, the Corporation sold its recreational vehicle segment to focus solely on its core housing business and to raise cash. Additional information regarding the sale is in Note 2.3 of Notes to Consolidated Financial Statements.
In addition to the sale of the RV business, the Corporation sold two idle housing facilities and one undeveloped parcel of land in fiscal 2014 and is currently seeking buyers for an idle housing facility andin fiscal 2015. A buyer is also being sought for an undeveloped parcel of land the Corporation owns.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to raise cash and eliminate carrying costs.Consolidated Financial Statements (Unaudited) — (Continued)
Progress:
Eight of the Corporation’s nine housing facilities had operating profits for both the second quarter and first half of fiscal 2015. The ninth is the Mansfield, Texas plant, our newest housing facility, which recently was converted from an RV plant and has experienced temporary inefficiencies inherent in such a conversion.
The Corporation’s performance in fiscal 2015 represents significant improvement over fiscal 2014. In the first half of fiscal 2014, five of its eight housing facilities had operating profits. By comparison, in the first half of fiscal 2015 eight of nine housing facilities had operating profits.
NOTE 2 | Management’s Plan — (Continued) |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements—(Continued)
Management’s Plan — (continued)
Progress:
These efforts contributedManufactured housing net sales in the first quarter of fiscal 2016 decreased 0.9 percent compared to the first quarter of fiscal 2015. Management believes the decrease is attributable to a sales increase attemporary softness in demand among the Mansfield, Texas facility of approximately 28 percentCorporation’s manufactured housing dealers and communities.
Park model net sales in the secondfirst quarter of fiscal 2016 decreased 21.8 percent compared with the first quarter of fiscal 2015, while2015. Management also believes the operating loss decreased by approximately 39 percent overdecrease is due to a temporary softness in demand among dealers, communities and campgrounds.
Modular housing net sales for the same time period.
For the first half of fiscal 2015, manufactured housing sales to the Corporation’s six largest communities increased approximately 35 percent compared with the first half of fiscal 2014. For the second quarter of fiscal 2015, sales2016 increased 1.6 percent as compared to these communities increased approximately 2 percent compared with the secondfiscal quarter of fiscal 2014.
In the second quarter of fiscal 2015, net sales for modular housing and park models increased approximately 23 percent and 124 percent, respectively, compared with the second quarter of fiscal 2014. For the first half of fiscal 2015, net sales for modular housing and park models increased approximately 14 percent and 122 percent, respectively, compared with the first half of fiscal 2014.
During the second quarter, the Corporation established a relationship with a manufactured housing retailer that specializes in internet-based marketing and provides factory tours to potential customers. This relationship is expected to help drive additional sales by more fully exploiting this increasingly important distribution channel for the Corporation’s products. The Corporation expects five or six locations to be operating by the end of fiscal 2015.
Progress:
The Corporation’s Purchasing Department has obtained significant price concessions from certain suppliers and anticipates further savings from this initiative in the second half of the fiscal year.suppliers.
In addition, Management has continued to analyze staffing needs and make reductions when considered appropriate. In connection with the sale of the RV business,
Progress:
On March 20, 2015, the Corporation also identifiedentered into a Loan and implemented reductions in corporate personnel that should result in annualized savingsSecurity Agreement with First Business Capital Corp. providing for a renewable three-year secured revolving credit facility. Under the new credit facility, the Corporation may obtain loan advances up to a maximum of approximately $400,000.$10 million, subject to certain collateral-obligation ratios.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements—(Continued)
Management’s Plan — (continued)
NOTE 2 | Management’s Plan — (Continued) |
Progress:Progress – (Continued):
Outstanding loan advances under the facility will bear interest at 3.75% in excess ofThe Corporation has obtained a number of proposals for additionalWall Street Journal’s published one year LIBOR rate. The facility will be used to support the Company’s working capital that are being evaluatedneeds and other general corporate purposes, and is secured by the Special Committeesubstantially all of the BoardCorporation’s assets. Additional information regarding the revolving credit facility is in Note 9 of Directors.Notes to Consolidated Financial Statements.
As with any business enterprise, the Corporation’s ability to operate as a going concern is contingent upon the successful execution of its strategies. Management is prepared to modify these strategies as appropriate to meet prevailing business and market conditions.
NOTE 2 Discontinued Operations
NOTE 3 | Discontinued Operations |
During September 2014, the Corporation decidedmade a strategic decision to strategicallyexit the recreational vehicle industry in order to focus on its core housing business and exit the recreational vehicle industry.business. As a result, on October 7, 2014 (“Closing Date”), the Corporation completed the sale of certain assets associated with its recreational vehicle segment (the “Transaction”) to Evergreen Recreational Vehicles, LLC (“ERV”).
The Transaction was completed pursuant to the terms of an Asset Purchase Agreement entered into between the Corporation and ERV on the Closing Date, as well as the terms of a Real Property Purchase Agreement entered into on that same date between the Corporation and an affiliate of ERV, Skyline RE Holding LLC (which, collectively with ERV, is referred to herein as “Evergreen”). The assets of the recreational vehicle segment disposed of in the Transaction include:
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 2 Discontinued Operations — (Continued)
The amount and nature of the consideration received by the Corporation for the assets sold include:included:
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 3 | Discontinued Operations — (Continued) |
In addition, under the Asset Purchase Agreement, Evergreen willdid not assume or agree to pay, perform, or discharge any of the Corporation’s liabilities or obligations, which will remainremained the liabilities and obligations of the Corporation.
The Bristol facility, and assets other than raw material and finished goods inventories, waswere sold at approximately net book value. Evergreen has the right, but not the obligation, to purchase the raw material inventory at 50 percent of the Corporation’s cost of approximately $1,600,000. There can be no assurances as to how much of the raw material inventory Evergreen will purchase. Consequently, the Corporation incurred an approximate $901,000 charge in the second quarter reflecting the reduction in value of the raw material inventory plus raw material inventory that will not be used by Evergreen. Through November 30, 2014, Evergreen paid the Corporation approximately $69,000 for raw material inventory. In future periods, there may be additional charges that could be material related to the discontinued operations of the recreational vehicle segment disposed of in the Transaction.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 2 Discontinued Operations — (Continued)
The following table summarizes the results of discontinued operations:
Three-Months Ended November 30, | Six-Months Ended November 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Net Sales | $ | 1,890 | $ | 7,055 | $ | 9,715 | $ | 18,386 | ||||||||
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Operating loss of discontinued operations | $ | (3,294 | ) | $ | (1,474 | ) | $ | (5,858 | ) | $ | (1,863 | ) | ||||
Loss on disposal of discontinued operations | (231 | ) | — | (231 | ) | — | ||||||||||
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Loss before income taxes | (3,525 | ) | (1,474 | ) | (6,089 | ) | (1,863 | ) | ||||||||
Income tax benefit | — | — | — | — | ||||||||||||
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Loss from discontinued operations, net of taxes | $ | (3,525 | ) | $ | (1,474 | ) | $ | (6,089 | ) | $ | (1,863 | ) | ||||
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Loss on disposal of discontinued operations consisted of a $901,000 charge associated with the reduction in value of raw material inventory, less a gain of approximately $670,000 resulting from the sale of two idle recreational vehicle manufacturing facilities in Elkhart, Indiana to Forest River Manufacturing, LLC.
Three-Months Ended August 31, | ||||||||
2015 | 2014 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands) | ||||||||
Net Sales | $ | 21 | $ | 7,825 | ||||
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Operating income (loss) of discontinued operations | $ | 61 | $ | (2,564 | ) | |||
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Income (loss) before income taxes | 61 | (2,564 | ) | |||||
Income tax benefit | — | — | ||||||
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Income (loss) from discontinued operations, net of taxes | $ | 61 | $ | (2,564 | ) | |||
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The Corporation’s park model business, which was formerly reported in the recreational vehicle segment, was not disposed as part of the transaction with Evergreen and is now reported in continuing operations because the housing segment becauselevel of net sales do not warrant separate segment reporting.
The following is a summary of assets and liabilities of discontinued operations at November 30, 2014 and May 31, 2014:
November 30, 2014 | May 31, 2014 | |||||||
(Dollars in thousands) | ||||||||
Current Assets: | ||||||||
Accounts receivable | $ | 1,567 | $ | 4,770 | ||||
Inventories | 805 | 2,703 | ||||||
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$ | 2,372 | $ | 7,473 | |||||
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Property, Plant and Equipment: | ||||||||
Property, plant and equipment, at cost | $ | — | $ | 9,812 | ||||
Less accumulated depreciation | — | 7,901 | ||||||
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$ | — | $ | 1,911 | |||||
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Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 2 Discontinued Operations — (Continued)
NOTE 3 | Discontinued Operations — (Continued) |
The following is a summary of assets and liabilities of discontinued operations at the dates indicated:
November 30, 2014 | May 31, 2014 | |||||||
(Dollars in thousands) | ||||||||
Current Liabilities: | ||||||||
Accounts payable, trade | $ | 37 | $ | 2,089 | ||||
Accrued salaries and wages | — | 419 | ||||||
Accrued marketing programs | 118 | 330 | ||||||
Other accrued liabilities | 184 | 186 | ||||||
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$ | 339 | $ | 3,024 | |||||
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|
August 31, 2015 | May 31, 2015 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands) | ||||||||
Current Assets: | ||||||||
Accounts receivable | $ | 87 | $ | 30 | ||||
Inventories | 50 | 110 | ||||||
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$ | 137 | $ | 140 | |||||
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Current Liabilities: | ||||||||
Accounts payable, trade | $ | 40 | $ | 8 | ||||
Accrued marketing programs | — | 37 | ||||||
Other accrued liabilities | 68 | 59 | ||||||
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$ | 108 | $ | 104 | |||||
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In accordance with the Asset Purchase Agreement, the Corporation is responsible for the payment of product warranty claims associated with recreational vehicles sold by the Corporation. Consequently, this obligation is not included in the liabilities of discontinued operations on the Consolidated Balance Sheets at November 30August 31, 2015 and May 31, 2014.2015.
NOTE 3 Inventories
NOTE 4 | Inventories |
Total inventories from continuing operations consist of the following:
August 31, 2015 | May 31, 2015 | |||||||||||||||
(Unaudited) | ||||||||||||||||
November 30, 2014 | May 31, 2014 | (Dollars in thousands) | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Raw materials | $ | 5,180 | $ | 5,135 | $ | 6,010 | $ | 5,788 | ||||||||
Work in process | 2,915 | 3,174 | 3,041 | 3,137 | ||||||||||||
Finished goods | 1,060 | 318 | 1,447 | 83 | ||||||||||||
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$ | 9,155 | $ | 8,627 | $ | 10,498 | $ | 9,008 | |||||||||
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NOTE 4 Note Receivable
During fiscal 2013, the Corporation sold two idle recreational vehicle facilities in Hemet, California. The sale of the facilities included a promissory note of $1,700,000 to the Corporation. The note bears an interest rate of 6 percent per annum, requires monthly payments following a 20 year amortization schedule, and provides for a final payment after 6 years. In addition, the two facilities are collateral for the note. The current and non-current balance of $1,606,000 represents the original amount of the note less principal payments received through November 30, 2014. Subsequent to November 30, 2014, the note was fully repaid.
NOTE 5 Other Assets
NOTE 5 | Other Assets |
Other assets consist primarily of the cash surrender value of life insurance policies which totaled $6,485,000$6,687,000 and $6,452,000$6,677,000 at November 30August 31, 2015 and May 31, 2014,2015, respectively.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 6 Warranty
NOTE 6 | Warranty |
A reconciliation of accrued warranty and related expenses is as follows:
Three-Months Ended August 31, | ||||||||||||||||
Six-Months Ended November 30, | 2015 | 2014 | ||||||||||||||
2014 | 2013 | (Unaudited) | ||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Balance at the beginning of the period | $ | 5,697 | $ | 5,882 | $ | 6,911 | $ | 5,697 | ||||||||
Accruals for warranties | 3,543 | 2,786 | 1,545 | 1,695 | ||||||||||||
Settlements made during the period | (3,502 | ) | (2,513 | ) | (1,574 | ) | (1,731 | ) | ||||||||
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Balance at the end of the period | 5,738 | 6,155 | 6,882 | 5,661 | ||||||||||||
Non-current balance included in other deferred liabilities | 2,000 | 2,200 | 2,400 | 2,000 | ||||||||||||
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Accrued warranty and related expenses | $ | 3,738 | $ | 3,955 | ||||||||||||
Accrued warranty | $ | 4,482 | $ | 3,661 | ||||||||||||
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At November 30, 2014,August 31, 2015, the total current obligation for warranty and related expenses associated with the recreational vehicle segment that was discontinued is estimated to be $1,300,000; consisting of an estimated current obligation of $800,000 and a non-current obligation of $500,000. At November 30, 2013, the total obligation for warranty and related expenses associated with the recreational vehicle segment is estimated to be $1,900,000; consisting of an estimated current obligation of $1,200,000 and non-current obligation of $700,000.
NOTE 7 Long-Term Liabilities
Long-term liabilities, consisting of other deferred liabilities and life insurance loans include the following:approximately $409,000.
November 30, 2014 | May 31, 2014 | |||||||
(Dollars in thousands) | ||||||||
Other deferred liabilities: | ||||||||
Deferred compensation expense | $ | 5,249 | $ | 5,386 | ||||
Accrued warranty and related expenses | 2,000 | 2,000 | ||||||
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Total other deferred liabilities | 7,249 | 7,386 | ||||||
Life insurance loans | 6,334 | 6,334 | ||||||
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$ | 13,583 | $ | 13,720 | |||||
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Life insurance loans have no fixed repayment schedule, and have interest rates ranging from 4.2 percent to 7.4 percent. The weighted average interest rate is 5.9 percent. At November 30 and May 31, 2014, prepaid interest associated with the life insurance loans totaled approximately $135,000 and $165,000, respectively; which is recognized in Other current assets.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 8 Income Taxes
At November 30, 2014,August 31, 2015, the Corporation’s gross deferred tax assets of approximately $49$50 million consist of approximately $34$35 million in federal net operating loss carryforwards and tax credit carryforwards, $8 million in state net operating loss carryforwards and $7 million resulting from temporary differences between financial and tax reporting. $5 million of the $49 million of total gross deferred tax assets pertain to discontinued operations. The federal net operating loss and tax credit carryforwards have a life expectancy of between sixteenthirteen and twenty years. The state net operating loss carryforwards have a life expectancy, depending on the state where a loss was incurred, between fiveone and twenty years. The Corporation has recorded a full valuation allowance against this asset. If the Corporation, after considering future negative and positive evidence regarding the realization of deferred tax assets, determines that a lesser valuation allowance is warranted, it would record a reduction to income tax expense and the valuation allowance in the period of determination.
NOTE 9 Commitments and Contingencies
NOTE 8 | Commitments and Contingencies |
The Corporation was contingently liable at November 30August 31, 2015 and May 31, 20142015, under repurchase agreements with certain financial institutions providing inventory financing for dealers of its products. Under these arrangements, which are customary in the manufactured housing and park modelsrecreational vehicle industries, the Corporation agrees to repurchase units in the event of default by the dealer at declining prices over the term of the agreement. The period to potentially repurchase units is between 12 to 24 months.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 8 | Commitments and Contingencies — (Continued) |
The maximum repurchase liability is the total amount that would be paid upon the default of the Corporation’s independent dealers. The maximum potential repurchase liability for continuing and discontinued operations, without reduction for the resale value of the repurchased units, was approximately $65$55 million at November 30, 2014August 31, 2015 and approximately $63$60 million at May 31, 2014.2015. At November 30August 31, 2015 and May 31, 2014,2015, the maximum potential repurchase liability, without reduction for the resale value of the repurchased units, associated with discontinued operations was approximately $29$14 million and $33$19 million, respectively. As a result of favorable experience regarding repurchased units, which is largely due to the strength of dealers selling the Corporation’s products, the Corporation maintained at November 30August 31, 2015 and May 31, 2014,2015, a $100,000 loss reserve that is a component of other accrued liabilities. $9,000The amount of the $100,000this loss reserve that pertains to discontinued operations is $9,000, and Management believes that the Corporation’s exit from the recreational vehicle business will not further impact the loss reserve.
The risk of loss under these agreements is spread over many dealers and financial institutions. The loss, if any, under these agreements is the difference between the repurchase cost and the resale value of the units. The Corporation estimates the fair value of this commitment considering both the contingent losses and the value of the guarantee. This amount has historically been insignificant. The Corporation believes that any potential loss under the agreements in effect at November 30, 2014August 31, 2015 will not be material to its financial position or results of operations.
Skyline CorporationThe amounts of obligations from repurchased units, all of which were from discontinued operations, and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
NOTE 9 Commitments and Contingencies—(Continued)
In the first half of fiscal 2015, 11 recreational vehicles were repurchased for approximately $203,000; resulting in a loss of approximately $43,000. In the first half of fiscal 2014, there were no obligations or net losses from repurchased units.
Three-Months Ended August 31, | ||||||||
2015 | 2014 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands) | ||||||||
Number of units repurchased | — | 11 | ||||||
Obligations from units repurchased | $ | — | $ | 203 | ||||
Net losses on repurchased units | $ | — | $ | 43 |
The Corporation is a party to various pending legal proceedings in the normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Corporation’s results of operations or financial position.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 8 | Commitments and Contingencies — (Continued) |
The Corporation utilizes a combination of insurance coverage and self-insurance for certain items, including workers’ compensation and group health benefits. Liabilities for workers’ compensation are recognized for estimated future medical costs and indemnity costs.
Liabilities for group health benefits are recognized for claims incurred but not paid. Insurance reserves are estimated based upon a combination of historical data and actuarial information. Actual results could differ from these estimates.
NOTE 10 Gain
NOTE 9 | Secured Revolving Credit Facility |
On March 20, 2015, the Corporation entered into a Loan and Security Agreement (the “Loan Agreement”) with First Business Capital Corp. (“First Business Capital”). Under the Loan Agreement, First Business Capital will provide a secured revolving credit facility to the Corporation for a term of three years, renewable on Salean annual basis thereafter with each renewal for a successive one-year term. The Corporation may obtain loan advances up to a maximum of Idle Property, Plant$10,000,000 subject to certain collateral-obligation ratios. In addition, loan advances bear interest at 3.75% in excess ofThe Wall Street Journal’s published one year LIBOR rate, and Equipmentare secured by substantially all of the Corporation’s assets, now owned or hereafter acquired. Interest is payable monthly, in arrears, and all principal and accrued but unpaid interest is due and payable upon termination of the Loan Agreement.
InAlso under the secondLoan Agreement, First Business Capital agreed to issue, or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the Corporation. However, no advances have yet been made in connection with such letters of credit.
As part of the financing, the Company paid First Business Capital a facility fee of $150,000 at closing, and also agreed to pay the following fees to First Business Capital during the term of the facility: (i) annual facility fees of $50,000; (ii) an unused line fee payable in arrears at the rate of 0.25% per annum on the average daily unused amount of the facility during the prior calendar month; (iii) monthly bank assessment fees equal to 0.25% per annum of the maximum loan amount; (iv) certain overadvance fees (currently $1,000 per day) in the event outstanding obligations and letter of credit liabilities under the facility exceeds the amount permitted under the Loan Agreement; and (v) monthly letter of credit fees payable in arrears at the rate of 0.25% on the outstanding amount of letters of credit issued and outstanding during the prior month.
The Loan Agreement contains covenants that limit the ability of the Corporation to, among other things: (i) incur or guarantee other indebtedness; (ii) create or incur liens, mortgages, or security interests on their assets; (iii) expend more than $600,000 per year for the lease, purchase, or acquisition of any asset; (iv) consummate asset sales, acquisitions, or mergers; (v) pay dividends or repurchase stock; (vi) make certain investments; (vii) enter into certain transactions with affiliates; and (viii) amend a Corporation’s articles of incorporation or bylaws.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 9 | Secured Revolving Credit Facility — (Continued) |
The Loan Agreement also requires compliance with certain financial covenants (in each case calculated as set forth in the Loan Agreement), including: (i) minimum net worth; (ii) minimum net earnings; and (iii) maximum net loss.
If the Corporation defaults in its obligations under the Loan Agreement, then the unpaid balances under the facility will bear interest at 3.0% per annum in excess of the rate that would apply in the absence of a default. Other remedies available to First Business Capital upon an event of default include the right to accelerate the maturity of all obligations, the right to foreclose on and otherwise repossess the collateral securing the obligations, all rights of a secured creditor under applicable law, and all other rights set forth in the Loan Agreement.
The events of default under the Loan Agreement include the following: (i) certain events of bankruptcy and insolvency; (ii) failure to make required payments; (iii) misrepresentations to First Business Capital; (iv) failure to comply with certain covenants and agreements; (v) termination or default under guarantees or subordination agreements; (vi) certain cross-default events; (vii) changes in control of the Corporation; (viii) certain injunctions or attachments are issued against a Corporation’s assets or restricting its business; and (ix) a material adverse change occurs with respect to the Corporation.
During the first quarter of fiscal 2014,2016, the Corporation soldon two occasions did not meet a covenant requiring a monthly loss not exceeding $500,000. In addition, at least one monthly loss exceeding $500,000 is projected during the third quarter of fiscal 2016; a period where net sales are traditionally at its idle manufactured housing facility locatedlowest for the year. The Corporation, however, complied with a covenant specifying that the loss for the first quarter of fiscal 2016 not exceed $1,000,000, as a result of the net income the Corporation earned in Fair Haven, Vermont. the month of August. Subsequent to August 31, 2015, the Corporation received a waiver for the defaults that occurred in the first quarter. In addition, the following modifications were made to the Loan Agreement:
NOTE 10 | Stock-Based Compensation |
On June 25, 2015, the Corporation’s Board of Directors approved the 2015 Stock Incentive Plan (“Plan”), which allows the granting of stock options and other equity awards to directors, officers, employees, and eligible independent contractors of the Corporation and is intended to retain and reward key employees’ performance and efforts as they relate to the Corporation’s long-term objectives and strategic plan. The Plan was subsequently approved by shareholders at the Corporation’s annual shareholder meeting on September 21, 2015. A total of 700,000 shares of Common Stock has been reserved for issuance under the Plan. Stock option awards are granted with an exercise price equal to, or greater than, the market price of the Corporation’s stock at the date of grant and vest over a period of time as determined by the Corporation at the date of grant up to the contractual ten year life of the options, at which time the options expire.
Item 1. | Financial Statements — (Continued). |
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 10 | Stock-Based Compensation — (Continued) |
On June 25, 2015, the Corporation granted 200,000 stock options at an exercise price per share of $3.12 with a five year vesting period. Stock-based compensation expense for the fair value of the stock options vested during the three months ended August 31, 2015 was not significant.
At August 31, 2015, the intrinsic value of all options outstanding approximated $38,000 and had a weighted-average remaining contractual life of ten years. Total unrecognized compensation expense related to stock-based awards outstanding at August 31, 2015, was $421,000 and is to be recorded over a weighted-average life of five years.
The Corporation records all stock-based payments, including grants of stock options, in the consolidated statements of operations and retained earnings based on their fair values at the date of grant.
The Corporation currently uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the saledate of this facility was $162,000.grant using an option-pricing model is affected by stock price as well as assumptions that include expected stock price volatility over the term of the awards, expected life of the awards, risk-free interest rate, and expected dividends.
Stock price volatility is estimated based on historical volatility measured monthly for a time period equal to the expected life of the option ending on the date of grant. The expected life of stock options (estimated average period of time the options will be outstanding) is estimated based on the contractual life or the vesting period of the options. The risk-free interest rate is determined based on observed U.S. Treasury yields in effect at the time of grant for maturities equivalent to the expected life of the options. The expected dividend yield is estimated based on the dividend yield at the time of grant as adjusted for any expected changes during the life of the options.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
The Corporation designs, produces and markets manufactured housing, modular housing and park models to independent dealers, developers, campgrounds and manufactured housing communities located throughout the United States and Canada. To better serve the needs of its dealers, developers, campgrounds and communities, the Corporation has nine manufacturing facilities in eight states. Manufactured housing, modular housing and park models are sold to dealers and communitiescustomers either through floor plan financing with various financial institutions or on a cash basis. While the Corporation maintains production of manufactured housing, modular homes and park models throughout the year, seasonal fluctuations in sales do occur.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Manufactured Housing, Modular Housing and Park Model Industry Conditions
Sales and production of manufactured housing and modular housing are affected by winter weather conditions at the Corporation’s northern plants. Park model sales are generally higher in the spring and summer months than in the fall and winter months. Manufactured and modular housing are marketed under a number of trademarks, and are available in a variety of dimensions. Park models are marketed under the following trademarks: “Kensington”; “Shore Park”; “Stone Harbor”; and “Vacation Villa”. Manufactured housing products are built according to standards established by the U.S. Department of Housing and Urban Development. Modular homes are built according to state, provincial or local building codes. Park models are built according to specifications established by the American National Standards Institute, and are intended to provide temporary living accommodations for individuals seeking leisure travel and outdoor recreation.
Manufactured Housing, Modular Housing and Park Model Industry Conditions
Sales of manufactured housing, modular housing and park models are affected by the strength of the U.S. economy, interest rate and employment levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing industry had been affected by decliningRecent trends regarding calendar year unit shipments to historically low levels. Shipments totaled approximately 373,000 units in 1998; steadily declining to approximately 50,000 units by 2010. This decline was caused primarily by adverse economic conditions, tightening retail and wholesale credit markets and a depressed site-built housing market. Shipments, however, increased to approximately 52,000, 55,000 and 60,000 units in 2011, 2012 and 2013, respectively. From 2010 to 2013,of the Corporation’s shipments totaled approximately 1,900, 1,900, 1,800products and 2,200 units, respectively. From January 2014 to November 2014, shipments were approximately 60,000 units; an approximately 6 percent increase from the same period in 2013. During this same timeframe, the Corporation’s shipments were approximately 2,500 units; a 21 percent increase from the same period in 2013.their respective industries are as follows:
The domestic modular housing industry experienced challenges similar to the manufactured housing industry. From calendar 2006 to 2012, total industry shipments decreased from approximately 39,000 to 13,000 units, a decline of 67 percent. In 2013, industry shipments increased to approximately 14,000 units. In 2012 and 2013, the Corporation’s shipments were 301 and 263, respectively. From January 2014 to September 2014, shipments were approximately 10,000 units; an approximately 3 percent decrease from the same period a year ago. During this same timeframe, the Corporation’s shipments were 375 units; a 43 percent increase from the same period in 2013.
Manufactured Housing | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
Industry | 50,066 | 51,606 | 54,901 | 60,210 | 64,331 | |||||||||||||||
Percentage Increase (Decrease) | 3.1 | % | 6.4 | % | 9.7 | % | 6.8 | % | ||||||||||||
Corporation | 1,894 | 1,880 | 1,848 | 2,205 | 2,678 | |||||||||||||||
Percentage Increase (Decrease) | (.07 | %) | (1.7 | %) | 19.3 | % | 21.5 | % | ||||||||||||
Modular Housing | ||||||||||||||||||||
*Industry | 12,928 | 12,202 | 13,290 | 14,020 | 13,856 | |||||||||||||||
Percentage Increase (Decrease) | (5.6 | %) | 8.9 | % | 5.5 | % | (1.2 | %) | ||||||||||||
**Corporation | 250 | 347 | 382 | 350 | 477 | |||||||||||||||
Percentage Increase (Decrease) | 38.8 | % | 10.1 | % | (8.4 | %) | 36.3 | % | ||||||||||||
Park Models | ||||||||||||||||||||
Industry | 3,486 | 2,761 | 2,780 | 3,598 | 3,781 | |||||||||||||||
Percentage Increase (Decrease) | (20.8 | %) | 0.7 | % | 29.4 | % | 5.1 | % | ||||||||||||
Corporation | 129 | 170 | 138 | 171 | 307 | |||||||||||||||
Percentage Increase (Decrease) | 31.8 | % | (18.8 | %) | 23.9 | % | 79.5 | % |
* | Domestic shipment only. Canadian industry shipments not available. |
** | Includes domestic and Canadian unit shipments |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Sales of park models are influenced by changes and consumer confidence, employment levels, and the availability of retail and wholesale financing. From calendar 2006 to 2012, total industry shipments decreased from approximately 9,800 to 2,800 units, a decline of 71 percent. In 2013, industry shipments increased to approximately 3,600 units. In 2012 and 2013, the Corporation’s shipments were 138 and 171, respectively. From January 2014 to November 2014, shipments were approximately 3,500 units; an approximately 4 percent increase from the same period a year ago. During this same timeframe, the Corporation’s shipments were 296 units; a 78 percent increase from the same period in 2013.
Discontinued Operations
During September 2014, the Corporation decidedmade a strategic decision to strategicallyexit the recreational vehicle industry in order to focus on its core housing business and exit the recreational vehicle industry.business. As a result, on October 7, 2014 (“Closing Date”), the Corporation completed the sale of certain assets associated with its recreational vehicle segment (the “Transaction”) to Evergreen Recreational Vehicles, LLC (“ERV”).
Discontinued Operations — (Continued)
The Transaction was completed pursuant to the terms of an Asset Purchase Agreement entered into between the Corporation and ERV on the Closing Date, as well as the terms of a Real Property Purchase Agreement entered into on that same date between the Corporation and an affiliate of ERV, Skyline RE Holding LLC (which, collectively with ERV, is referred to herein as “Evergreen”).
The assets of the recreational vehicle segment disposed of in the Transaction include,included, but were not are limited to:
The amount and nature of the consideration received by the Corporation for the assets sold include:included:
In addition, under the Asset Purchase Agreement, Evergreen willdid not assume or agree to pay, perform, or discharge any of the Corporation’s liabilities or obligations, which will remainremained the liabilities and obligations of the Corporation.
The Bristol facility, and assets other than raw material and finished goods inventories, waswere sold at approximately net book value. Evergreen has the right, but not the obligation, to purchase the raw material inventory at 50 percent of the Corporation’s cost of approximately $1,600,000. There can be no assurances as to how much of the raw material inventory Evergreen will purchase.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Discontinued Operations — (Continued)
Consequently, the Corporation incurred an approximate $901,000 charge in the second quarter reflecting the reduction in value of the raw material inventory plus raw material inventory that will not be used by Evergreen. Through November 30, 2014, Evergreen paid the Corporation approximately $69,000 for raw material inventory. In future periods, there may be additional charges that could be material related to the discontinued operations of the recreational vehicle segment disposed of in the Transaction.
The following table summarizes the results of discontinued operations:
Three-Months Ended November 30, | Six-Months Ended November 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Net Sales | $ | 1,890 | $ | 7,055 | $ | 9,715 | $ | 18,386 | ||||||||
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Operating loss of discontinued operations | $ | (3,294 | ) | $ | (1,474 | ) | $ | (5,858 | ) | $ | (1,863 | ) | ||||
Loss on disposal of discontinued operations | (231 | ) | — | (231 | ) | — | ||||||||||
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Loss before income taxes | (3,525 | ) | (1,474 | ) | (6,089 | ) | (1,863 | ) | ||||||||
Income tax benefit | — | — | — | — | ||||||||||||
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Loss from discontinued operations, net of taxes | $ | (3,525 | ) | $ | (1,474 | ) | $ | (6,089 | ) | $ | (1,863 | ) | ||||
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Loss on disposal of discontinued operations consisted of a $901,000 charge associated with the reduction in value of raw material inventory, less a gain of approximately $670,000 resulting from the sale of two idle recreational vehicle manufacturing facilities in Elkhart, Indiana to Forest River Manufacturing, LLC.
Three-Months Ended August 31, | ||||||||
2015 | 2014 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands) | ||||||||
Net Sales | $ | 21 | $ | 7,825 | ||||
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Operating income (loss) of discontinued operations | $ | 61 | $ | (2,564 | ) | |||
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Income (loss) before income taxes | 61 | (2,564 | ) | |||||
Income tax benefit | — | — | ||||||
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Income (loss) from discontinued operations, net of taxes | $ | 61 | $ | (2,564 | ) | |||
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The Corporation’s park model business, which was formerly reported in the recreational vehicle segment, was not disposed as part of the transaction with Evergreen and is now reported in the housing segment because the level of net sales do not warrant separate segment reporting.
The following is a summary of assets and liabilities of discontinued operations at November 30, 2014 and May 31, 2014:the dates indicated:
November 30, 2014 | May 31, 2014 | |||||||
(Dollars in thousands) | ||||||||
Current Assets: | ||||||||
Accounts receivable | $ | 1,567 | $ | 4,770 | ||||
Inventories | 805 | 2,703 | ||||||
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$ | 2,372 | $ | 7,473 | |||||
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Discontinued Operations — (Continued)
November 30, 2014 | May 31, 2014 | August 31, 2015 | May 31, 2015 | |||||||||||||
(Dollars in thousands) | (Unaudited) | |||||||||||||||
Property, Plant and Equipment: | ||||||||||||||||
Property, plant and equipment, at cost | $ | — | $ | 9,812 | ||||||||||||
Less accumulated depreciation | — | 7,901 | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Current Assets: | ||||||||||||||||
Accounts receivable | $ | 87 | $ | 30 | ||||||||||||
Inventories | 50 | 110 | ||||||||||||||
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| $ | 137 | $ | 140 | |||||||||||
$ | — | $ | 1,911 |
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Current Liabilities: | ||||||||||||||||
Accounts payable, trade | $ | 37 | $ | 2,089 | $ | 40 | $ | 8 | ||||||||
Accrued salaries and wages | — | 419 | ||||||||||||||
Accrued marketing programs | 118 | 330 | — | 37 | ||||||||||||
Other accrued liabilities | 184 | 186 | 68 | 59 | ||||||||||||
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$ | 339 | $ | 3,024 | $ | 108 | $ | 104 | |||||||||
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In accordance with the Asset Purchase Agreement the Corporation is responsible for the payment of product warranty claims associated with recreational vehicles sold by the Corporation. Consequently, this obligation is not included in the liabilities of discontinued operations on the Consolidated Balance Sheets at November 30August 31, 2015 and May 31, 2014.2015.
Second
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
First Quarter Fiscal 20152016 Results
The Corporation experienced the following results during the secondfirst quarter of fiscal 2015:2016:
The Corporation experienced increaseddecreased net sales from continuing operations in fiscal 2016 as compared to fiscal 2015, which management believes is the result of a temporary softness in demand from its customers.
Secured Revolving Credit Facility
On March 20, 2015, the Corporation entered into a Loan and Security Agreement (the “Loan Agreement”) with First Business Capital Corp. (“First Business Capital”). Under the Loan Agreement, First Business Capital will provide a secured revolving credit facility to the Corporation for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term. The Corporation may obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. In addition, loan advances bear interest at 3.75% in excess ofThe Wall Street Journal’s published one year LIBOR rate, and are secured by substantially all of the Corporation’s assets, now owned or hereafter acquired. Interest is payable monthly, in arrears, and all principal and accrued but unpaid interest is due and payable upon termination of the Loan Agreement.
Also under the Loan Agreement, First Business Capital agreed to issue, or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the Corporation. However, no advances have yet been made in connection with such letters of credit.
As part of the financing, the Corporation paid First Business Capital a facility fee of $150,000 at closing, and also agreed to pay the following fees to First Business Capital during the term of the facility: (i) annual facility fees of $50,000; (ii) an unused line fee payable in arrears at the rate of 0.25% per annum on the average daily unused amount of the facility during the prior calendar month; (iii) monthly bank assessment fees equal to 0.25% per annum of the maximum loan amount; (iv) certain overadvance fees (currently $1,000 per day) in the secondevent outstanding obligations and letter of credit liabilities under the facility exceeds the amount permitted under the Loan Agreement; and (v) monthly letter of credit fees payable in arrears at the rate of 0.25% on the outstanding amount of letters of credit issued and outstanding during the prior month.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Secured Revolving Credit Facility — (Continued)
The Loan Agreement contains covenants that limit the ability of the Corporation to, among other things: (i) incur or guarantee other indebtedness; (ii) create or incur liens, mortgages, or security interests on their assets; (iii) expend more than $600,000 per year for the lease, purchase, or acquisition of any asset; (iv) consummate asset sales, acquisitions, or mergers; (v) pay dividends or repurchase stock; (vi) make certain investments; (vii) enter into certain transactions with affiliates; and (viii) amend a Corporation’s articles of incorporation or bylaws.
The Loan Agreement also requires compliance with certain financial covenants (in each case calculated as set forth in the Loan Agreement), including: (i) minimum net worth; (ii) minimum net earnings; and (iii) maximum net loss.
If the Corporation defaults in its obligations under the Loan Agreement, then the unpaid balances under the facility will bear interest at 3.0% per annum in excess of the rate that would apply in the absence of a default. Other remedies available to First Business Capital upon an event of default include the right to accelerate the maturity of all obligations, the right to foreclose on and otherwise repossess the collateral securing the obligations, all rights of a secured creditor under applicable law, and all other rights set forth in the Loan Agreement.
The events of default under the Loan Agreement include the following: (i) certain events of bankruptcy and insolvency; (ii) failure to make required payments; (iii) misrepresentations to First Business Capital; (iv) failure to comply with certain covenants and agreements; (v) termination or default under guarantees or subordination agreements; (vi) certain cross-default events; (vii) changes in control of the Corporation; (viii) certain injunctions or attachments are issued against a Corporation’s assets or restricting its business; and (ix) a material adverse change occurs with respect to the Corporation.
During the first quarter of fiscal 2015 as compared to2016, the secondCorporation on two occasions did not meet a covenant requiring a monthly loss not exceeding $500,000. In addition, at least one monthly loss exceeding $500,000 is projected during the third quarter of fiscal 2014,2016; a period where net sales are traditionally at its lowest for the year. The Corporation, however, complied with a covenant specifying that the loss for the first quarter of fiscal 2016 not exceed $1,000,000, as a result of the net income the Corporation earned in the month of August. Subsequent to August 31, 2015, the Corporation received a waiver for the defaults that occurred in the first quarter. In addition, the following modifications were made to the Loan Agreement:
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Management’s Plan
The Corporation’s consolidated financial statements were prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business. Due to recurring losses during certain periods, the Corporation has historically experienced negative cash flows from operating activities. The level of historical negative cash flows from operations and not having available funding from outside financing sources raise substantial doubt about the Corporation’s ability to continue as a going concern. To continue as a going concern, management determined that certain strategies need to be pursued to raise capital, increase sales and decrease costs.pursued. These strategies include but are not all inclusive:limited to:
Progress:
In October 2014, the Corporation sold its recreational vehicle segment to focus solely on its core housing business and to raise cash. Additional information regarding the sale is in Note 2.“Discontinued Operations.”
In addition to the sale of the RV business, the Corporation sold two idle housing facilities and one undeveloped parcel of land in fiscal 2014 and is currently seeking buyers for an idle housing facility andin fiscal 2015. A buyer is also being sought for an undeveloped parcel of land to raise cash and eliminate carrying costs.
Progress:
Eight of the Corporation’s nine housing facilities had operating profits for both the second quarter and first half of fiscal 2015. The ninth is the Mansfield, Texas plant, our newest housing facility, which recently was converted from an RV plant and has experienced temporary inefficiencies inherent in such a conversion.
The Corporation’s performance in fiscal 2015 represents significant improvement over fiscal 2014. In the first half of fiscal 2014, five of its eight housing facilities had operating profits. By comparison, in the first half of fiscal 2015 eight of nine housing facilities had operating profits.Corporation owns.
Management’s Plan — (Continued)
Progress:
These efforts contributed to aManufactured housing net sales increase at the Mansfield, Texas facility of approximately 28 percent in the second quarter compared with the first quarter of fiscal 2015, while the operating loss2016 decreased by approximately 390.9 percent over the same time period.
For the first half of fiscal 2015, manufactured housing salescompared to the Corporation’s six largest communities increased approximately 35 percent compared with the first half of fiscal 2014. For the second quarter of fiscal 2015,2015. Management believes the decrease is attributable of a temporary softness in demand among the Corporation’s manufactured housing dealers and communities.
Park model net sales to these communities increased approximately 2 percent compared within the secondfirst quarter of fiscal 2014.
In2016 decreased 21.8 percent compared to the secondfirst quarter of fiscal 2015,2015. Management also believes the decrease is due to a temporary softness in demand among dealers, communities and campgrounds.
Modular housing net sales for modular housing and park models increased approximately 23 percent and 124 percent, respectively, compared with the secondfirst quarter of fiscal 2014. For2016 increased 1.6 percent as compared to the first halfquarter of fiscal 2015, net sales for modular housing and park models increased approximately 14 percent and 122 percent, respectively, compared with the first half of fiscal 2014.2015.
During the second quarter, the Corporation established a relationship with a manufactured housing retailer that specializes in internet-based marketing and provides factory tours to potential customers. This relationship is expected to help drive additional sales by more fully exploiting this increasingly important distribution channel for the Corporation’s products. The Corporation expects five or six locations to be operating by the end of fiscal 2015.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Management’s Plan — (Continued)
Progress:
The Corporation’s Purchasing Department has obtained significant price concessions from certain supplierssuppliers.
Progress:
On March 20, 2015, the Corporation entered into a Loan and anticipates further savings from this initiativeSecurity Agreement with First Business Capital Corp. providing for a renewable three-year secured revolving credit facility. Under the new credit facility, the Corporation may obtain loan advances up to a maximum of $10 million, subject to certain collateral-obligation ratios.
Outstanding loan advances under the facility will bear interest at 3.75% in excess ofThe Wall Street Journal’s published one year LIBOR rate. The facility will be used to support the second halfCompany’s working capital needs and other general corporate purposes, and is secured by substantially all of the fiscal year.Corporation’s assets. Additional information regarding the revolving credit facility is described in “Secured Revolving Credit Facility.”
In addition, Management has continuedbelieves that it will be able to analyze staffing needsexecute their strategies as noted above. Management is prepared to modify these strategies as appropriate to meet prevailing business and make reductions when considered appropriate. In connection with the sale of the RV business, the Corporation also identified and implemented reductions in corporate personnel that should result in annualized savings of approximately $400,000.market conditions.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Management’s Plan — (Continued)
Progress:
The Corporation has obtained a number of proposals for additional capital that are being evaluated by the Special Committee of the Board of Directors.
As with any business enterprise, the Corporation’s ability to operate as a going concern is contingent upon the successful execution of its strategies. Management is prepared to modify these strategies as appropriate to meet prevailing business and market conditions.
Results of Operations – Three-Month Period Ended November 30, 2014August 31, 2015 Compared to Three-Month Period Ended November 30, 2013 (Unaudited)August 31, 2014
Net Sales and Unit Shipments
November 30, | November 30, | August 31, 2015 | Percent | August 31, 2014 | Percent | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
2014 | Percent | 2013 | Percent | Increase | (Unaudited) | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Net Sales | ||||||||||||||||||||||||||||||||||||||||
Manufactured Housing | $ | 38,997 | 79 | % | $ | 31,388 | 80 | % | $ | 7,609 | $ | 39,931 | 81.9 | $ | 40,305 | 81.2 | $ | (374 | ) | |||||||||||||||||||||
Modular Housing | 8,327 | 17 | 6,772 | 17 | 1,555 | 6,683 | 13.7 | 6,579 | 13.3 | 104 | ||||||||||||||||||||||||||||||
Park Models | 2,343 | 4 | 1,048 | 3 | 1,295 | 2,128 | 4.4 | 2,720 | 5.5 | (592 | ) | |||||||||||||||||||||||||||||
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Total Net Sales | $ | 49,667 | 100 | % | $ | 39,208 | 100 | % | $ | 10,459 | $ | 48,742 | 100.0 | $ | 49,604 | 100.0 | $ | (862 | ) | |||||||||||||||||||||
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Unit Shipments | ||||||||||||||||||||||||||||||||||||||||
Manufactured Housing | 726 | 80 | % | 663 | 83 | % | 63 | 730 | 82.1 | 776 | 81.8 | (46 | ) | |||||||||||||||||||||||||||
Modular Housing | 122 | 13 | 105 | 13 | 17 | 104 | 11.7 | 102 | 10.7 | 2 | ||||||||||||||||||||||||||||||
Park Models | 63 | 7 | 29 | 4 | 34 | 55 | 6.2 | 71 | 7.5 | (16 | ) | |||||||||||||||||||||||||||||
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Total Unit Shipments | 911 | 100 | % | 797 | 100 | % | 114 | 889 | 100.0 | 949 | 100.0 | (60 | ) | |||||||||||||||||||||||||||
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Net sales increased approximately 27decreased 1.7 percent. The increasedecrease was comprised of a 240.9 percent increasedecrease in manufactured housing net sales, a 231.6 percent increase in modular housing net sales, and a 12421.8 percent increasedecrease in park model net sales. Current year manufactured housing net sales includes approximately $2,706,000 attributable to the facility located in Mansfield, Texas. This facility commenced housing operations in the third quarter of fiscal 2014.
Unit shipments increased approximately 14 percent. The increase was the outcome of manufactured housing shipments increasing approximately 10 percent, modular shipments increasing approximately 16 percent, and park model shipments increasing approximately 117 percent.
Results of Operations – Three-Month Period Ended November 30, 2014 Compared to Three-Month Period Ended November 30, 2013 (Unaudited) — (Continued)
Net Sales and Unit Shipments — (Continued)
For the three month period ended November 30, 2014,following three-month periods, the percentage increase or decrease in unit shipments from the comparable period last year are as follows:
August 31, 2015 | July 31, 2015 | |||||||||||||||
Skyline | Industry | Skyline | Industry | |||||||||||||
Manufactured Housing | 10 | % | 5 | % | (5.9 | %) | 5.4% | |||||||||
Modular Housing | 16 | % | Not available | 2.0 | % | Not available | ||||||||||
Park Models | 117 | % | 1 | % | (22.5 | %) | (6.8%) | |||||||||
Total | (6.3 | %) | Not applicable |
Management believes the lag in manufactured housing and park model unit shipments relative to respective industries is attributable to temporary softness in demand among the Corporation’s dealers, communities and campgrounds.
Compared to the prior year, the average net sales price for manufactured housing and modular housing increased approximately 13 percent and 6 percent, respectively. The increase is the result of homes sold with larger square footage and greater amenities. The average net sales prices for park models increased approximately 3 percent as an adjustment to higher material costs.
Cost of Sales
November 30, 2014 | Percent of Net Sales | November 30, 2013 | Percent of Net Sales | Increase | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Cost of sales | $ | 44,509 | 90 | $ | 35,401 | 90 | $ | 9,108 |
Cost of sales, in dollars, increased as a result of increased net sales. Included in current year cost of sales is approximately $2,728,000 attributable to the Mansfield, Texas facility, which was not fully operational as a housing facility a year ago. As previously referenced, housing operations commenced in the third quarter of fiscal 2014.
Selling and Administrative Expenses
November 30, 2014 | Percent of Net Sales | November 30, 2013 | Percent of Net Sales | Increase | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Selling and administrative expenses | $ | 5,008 | 10 | $ | 4,733 | 12 | $ | 275 |
Results of Operations – Three-Month Period Ended November 30, 2014 Compared to Three-Month Period Ended November 30, 2013 (Unaudited) — (Continued)
Selling and Administrative Expenses — (Continued)
Selling and administrative expenses, increased primarily as a result of the Mansfield, Texas facility incurring approximately $246,000 in expenses in the second quarter of fiscal 2015 as compared to $143,000 for the same period a year ago. In addition, in prior year there was a $100,000 decrease that occurred in the expense related to the Corporation’s liability for retirement and death benefits offered to certain current and former employees. The decrease occurred as a result of a change in the interest rate used in valuing the liability. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining fixed amid rising sales.
Gain on Sale of Idle Property and Equipment
In the second quarter of fiscal 2014, the Corporation sold an idle housing facility located in Fair Haven, Vermont. The gain on the sale of this facility was $162,000.
Interest Expense
Interest expense of $93,000 for the second quarter of fiscal 2015 is related to interest paid on life insurance policy loans.
Interest Income
Interest income of $24,000 and $25,000 for the second quarters of fiscal 2015 and 2014, respectively, consisted of interest received from the Corporation’s Note receivable.
Results of Operations – Six-Month Period Ended November 30, 2014 Compared to Six-Month Period Ended November 30, 2013 (Unaudited)
Net Sales and Unit Shipments
November 30, | November 30, | |||||||||||||||||||
2014 | Percent | 2013 | Percent | Increase | ||||||||||||||||
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Net Sales | ||||||||||||||||||||
Manufactured Housing | $ | 79,303 | 80 | % | $ | 61,499 | 80 | % | $ | 17,804 | ||||||||||
Modular Housing | 14,906 | 15 | 13,095 | 17 | 1,811 | |||||||||||||||
Park Models | 5,062 | 5 | 2,277 | 3 | 2,785 | |||||||||||||||
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Total Net Sales | $ | 99,271 | 100 | % | $ | 76,871 | 100 | % | $ | 22,400 | ||||||||||
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Results of Operations – Six-Month Period Ended November 30, 2014 Compared to Six-Month Period Ended November 30, 2013 (Unaudited) — (Continued)
Net Sales and Unit Shipments — (Continued)
November 30, | November 30, | |||||||||||||||||||
2014 | Percent | 2013 | Percent | Increase | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Unit Shipments | ||||||||||||||||||||
Manufactured Housing | 1,502 | 81 | % | 1,293 | 83 | % | 209 | |||||||||||||
Modular Housing | 224 | 12 | 209 | 13 | 15 | |||||||||||||||
Park Models | 134 | 7 | 64 | 4 | 70 | |||||||||||||||
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Total Unit Shipments | 1,860 | 100 | % | 1,566 | 100 | % | 294 | |||||||||||||
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Net sales increased approximately 29 percent. The increase was comprised of a 29 percent increase in manufactured housing net sales, a 14 percent increase in modular housing net sales, and a 122 percent increase in park model net sales. Current year manufactured housing net sales includes approximately $4,817,000 attributable to the facility located in Mansfield, Texas. This facility commenced housing operations in the third quarter of fiscal 2014.
Unit shipments increased approximately 19 percent. The increase was the outcome of manufactured housing shipments increasing 16 percent, modular shipments increasing approximately 75.3 percent and park model shipments increasing approximately 109 percent.
For the six month period ended November 30, 2014, the percentage increase in unit shipments from the comparable period last year are as follows:
Skyline | Industry | |||||||
Manufactured Housing | 16 | % | 7 | % | ||||
Modular Housing | 7 | % | Not available | |||||
Park Models | 10 | % | 2 | % |
Compared to prior year, the average net sales price for manufactured housing and modular housing increased approximately 111.0 percent, and 6 percent, respectively. The increase is the result of homes sold with larger square footage and greater amenities. The average net sales price for park models increased approximately 6 percent as an adjustment of higher material costs, and units sold with greater amenities.
Results of Operations – Six-Month Period Ended November 30, 2014 Compared to Six-Month Period Ended November 30, 2013 (Unaudited) — (Continued)
Cost of Sales
November 30, 2014 | Percent of Net Sales | November 30, 2013 | Percent of Net Sales | Increase | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Cost of Sales | $ | 90,072 | 91 | $ | 69,461 | 90 | $ | 20,611 |
Cost of sales, in dollars, increased as a result of increased net sales. Included in current year cost of sales is approximately $5,047,000 attributable to the Mansfield, Texas facility, which was not fully operational as a housing facility a year ago. As previously referenced, housing operations commenced in the third quarter of fiscal 2014. As a percentage of net sales, cost of sales was adversely impacted by an approximately $672,000 increase in workers’ compensation costs compared to prior year; from approximately $430,000 to approximately $1,102,000,000.
Selling and Administrative Expenses
November 30, | Percent of | November 30, | Percent of | |||||||||||||||||
2014 | Net Sales | 2013 | Net Sales | Increase | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Selling and administrative expenses | $ | 10,188 | 10 | $ | 9,351 | 12 | $ | 837 |
Selling and administrative expenses, increased primarily as a result of the Mansfield, Texas facility incurring approximately $472,000 in expenses in the first half of fiscal 2015 as compared to $143,000 for the same period a year ago. In addition, in prior year there was a $250,000 decrease that occurred in the expense related to the Corporation’s liability for retirement and death benefits offered to certain current and former employees. The decrease occurred as a result of a change in the interest rate used in valuing the liability. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining fixed amid rising sales.
Gain on Sale of Idle Property, Plant and Equipment
In the second quarter of fiscal 2014, the Corporation sold an idle housing facility located in Fair Haven, Vermont. The gain on the sale of this facility was $162,000.
Interest Expense
Interest expense of $187,000 for the second quarter of fiscal 2015 is related to interest paid on life insurance policy loans.
Interest Income
Interest income of $48,000 and $50,000 for the second quarters of fiscal 2015 and 2014, respectively, consisted of interest received from the Corporation’s Note receivable.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Results of Operations – Three-Month Period Ended August 31, 2015 Compared to Three-Month Period Ended August 31, 2014 — (Continued)
LiquidityNet Sales and Capital ResourcesUnit Shipments — (Continued)
November 30, 2014 | May 31, 2014 | Decrease | ||||||||||
(Dollars in thousands) | ||||||||||||
Cash | $ | 4,824 | $ | 6,031 | $ | 1,207 | ||||||
Current assets, exclusive of cash | $ | 28,279 | $ | 35,639 | $ | 7,360 | ||||||
Current liabilities | $ | 14,915 | $ | 18,247 | $ | 3,332 | ||||||
Working capital | $ | 18,188 | $ | 23,423 | $ | 5,235 |
As notedThe increase primarily results from the sale of homes and park models with larger square footage and greater amenities. The average net sales price for modular housing is relatively unchanged.
Cost of Sales
August 31, 2015 | Percent of Net Sales | August 31, 2014 | Percent of Net Sales | Decrease | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Cost of Sales | $ | 44,099 | 90.5 | $ | 45,563 | 91.9 | $ | 1,464 |
Cost of sales, in the Consolidated Statements of Cash Flows, cashdollars, decreased primarily due to net cash usage of $3,556,000 from operating activities offset by net cash provided by financing activities of $2,349,000. Current assets, exclusive of cash, decreased mainly due to a $5,101,000 decrease in assets of discontinued operations and a $2,669,000 decrease in accounts receivable. Assets of discontinued operations declined as a result of the Corporation’s saledecreased net sales. As a percentage of its recreational vehicle segment. Accounts receivablenet sales, cost of sales decreased due to the timing of payments from dealersimprovements in material cost.
Selling and communities at November 30, 2014 as compared to May 31, 2014.
Current liabilities decreased due to the following factors:Administrative Expenses
August 31, 2015 | Percent of Net Sales | August 31, 2014 | Percent of Net Sales | Increase | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Selling and administrative expenses | $ | 5,459 | 11.2 | $ | 5,180 | 10.4 | $ | 279 |
Interest Expense
Interest expense of $56,000 and communities. Accruals are made monthly, and the majority of the payments occur during the Corporation’s fourth quarter.
Capital expenditures totaled $163,000$94,000 for the first halfquarter of fiscal 2016 and 2015, as comparedrespectively, related to $460,000 forinterest on life insurance policy loans. In the first halfquarter of fiscal 2014. Approximately $391,0002016, the Corporation incurred $19,000 of prior year expenditures was attributable toamortization of debt financing costs, and $4,000 of interest expense associated with the renovation of the Mansfield, Texas facility to accommodate housing production.secured revolving credit facility.
Certain key cash flow metrics related to discontinued operations for the first half of fiscal 2015 are set forth below (in thousands):
Loss from discontinued operations, net of income taxes | $ | (6,089 | ) | |
Depreciation | $ | 85 | ||
Reduction in value of raw material inventory | $ | 901 | ||
Gain on sale of property, plant and equipment | $ | (670 | ) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Liquidity and Capital Resources — (Continued)
August 31, 2015 | May 31, 2015 | Increase (Decrease) | ||||||||||
(Unaudited) | ||||||||||||
(Dollars in thousands) | ||||||||||||
Cash | $ | 6,672 | $ | 4,995 | $ | 1,677 | ||||||
Current assets, exclusive of cash | $ | 25,254 | $ | 26,586 | $ | (1,332 | ) | |||||
Current liabilities | $ | 16,205 | $ | 15,117 | $ | 1,088 | ||||||
Working capital | $ | 15,721 | $ | 16,464 | $ | (743 | ) |
WithAs noted in the saleConsolidated Statements of Cash Flows, cash increased due to cash flow from operating activities increasing $1,755,000 and cash flow from investing activities decreasing $78,000. Current assets, exclusive of cash, decreased mainly due to a $3,137,000 decrease in accounts receivable partially offset by a $1,429,000 increase in inventories. Accounts receivable declined as a result of the recreational vehicle segment,timing of payments from dealers and communities at August 31, 2015 as compared to May 31, 2015. Inventories increased due to a greater number of display homes and homes awaiting shipment to dealers and communities at August 31, 2015 as compared to May 31, 2015. Current liabilities increased primarily as a result of accruals for an ongoing marketing program for manufactured housing dealers. Accruals are made monthly, and the majority of payments are made during the Corporation’s fourth fiscal quarter.
Capital expenditures totaled $70,000 for the first quarter of fiscal 2016 as compared to $26,000 for the first quarter of fiscal 2015.
The Corporation anticipates that cash needs associated with this discontinued operationoperations will significantly decreasebe insignificant in future periods since it will not be funding significant operating losses. As previously referenced, the Corporation has current assets of discontinued operations of $2,372,000,$137,000, current liabilities of discontinued operations of $339,000,$108,000, and an estimated $1,300,000$409,000 of current and non-current warranty obligations associated with the recreational vehicle segment that is reported in continuing obligations.
As noted in the “Management’s Plan” section,, the Corporation is aggressively pursuing strategies in order to raise capital, increase sales and decrease costs. As with any business enterprise, the Corporation’s abilityManagement believes that it will be able to operateexecute their strategies as a going concern is contingent upon the successful execution of its strategies.noted above. Management however, is prepared to modify these strategies as appropriate to meet prevailing business and market conditions. The Management Plan also references a secured revolving credit facility that the Corporation entered during fiscal 2015.
Impact of Inflation
The consolidated financial statements included in this report reflect transactions in the dollar values in which they were incurred and, therefore, do not attempt to measure the impact of inflation. On a long-term basis, the Corporation has demonstrated an ability to adjustadjusted selling prices in reaction to changing costs due to inflation.
Forward Looking Information
Certain statements in this report are considered forward looking as indicated by the Private Securities Litigation Reform Act of 1995. These statements involve uncertainties that may cause actual results to materially differ from expectations as of the report date. These uncertainties include but are not limited to:
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued). |
Forward Looking Information — (Continued)
The preceding Management’s Discussion and Analysis contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements are also made elsewhere in this report. The Corporation publishes other forward-looking statements from time to time. Statements that are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions, are intended to identify forward-looking statements. We caution you to be aware of the speculative nature of “forward-looking statements.” Although these statements reflect the Corporation’s good faith belief based on current expectations, estimates, and projections about (among other things) the industry and the markets in which the Corporation operates, they are not guarantees of future performance. Whether actual results will conform to management’s expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the following:
Consequently, all of the Corporation’s forward-looking statements are qualified by these cautionary statements.
The Corporation may not realize the results anticipated by management or, even if the Corporation substantially realizes the results management anticipates, the results may not have the consequences to, or effects on, the Corporation or its business or operations that management expects. Such differences may be material. Except as required by applicable laws, the Corporation does not intend to publish updates or revisions of any forward-looking statements management makes to reflect new information, future events or otherwise.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not applicable.
Item 4. | Controls and Procedures. |
Management’s Conclusionsconclusions Regarding Effectiveness of Disclosure Controls and Procedures
As of November 30, 2014,August 31, 2015 the Corporation conducted an evaluation, under the supervision and participation of management including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934)1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective for the period ended November 30, 2014.August 31, 2015 to ensure that material information required to be disclosed by the Corporation in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported as and when required.
Changes in Internal Control over Financial Reporting
No change in the Corporation’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the secondfirst quarter ended November 30, 2013August 31, 2015 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 1. | Legal Proceedings. |
Information with respectThe Corporation is a party to this Item forvarious pending legal proceedings in the period covered by this Form 10-Q has been reported in Item 3, entitled “Legal Proceedings”normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Form 10-K for the fiscal year ended May 31, 2014 filed by the registrant with the Commission.Corporation’s results of operations or financial position.
Item 1A. | Risk Factors. |
There were no material changes in the risk factors disclosed in Item 1A of the Corporation’s Form 10-K for the year ended May 31, 2014.2015.
Item 5. | Other Information. |
On October 14, 2015, the Corporation and its wholly-owned subsidiaries Homette Corporation (“Homette”), Layton Homes Corp. (“Layton”), and Skyline Homes, Inc. (“Homes,” and together with the Corporation, Homette, and Layton, the “Borrowers” and each a “Borrower”) entered into a First Amendment to Loan and Security Agreement and Waiver of Defaults (the “Amendment”) with First Business Capital Corp. (“First Business Capital”) which modifies the Loan and Security Agreement executed between the Borrowers and First Business Capital on March 20, 2015. The material amendments to the Loan Agreement included in the Amendment are as follows:
The Amendment amends certain other provisions of the Loan Agreement as set forth therein.
The foregoing description of the Amendment is a summary and is qualified in its entirety by reference to the full text of the Amendment, a copy of which is attached as Exhibit 10.3 to this Quarterly Report on Form 10-Q and incorporated by reference herein, as well as the full text of the Loan Agreement, a copy of which is attached as Exhibit 10.1 to the Current Report on Form 8-K filed by the Corporation with the SEC on March 26, 2015 and incorporated by reference herein.
PART II— OTHER INFORMATION (CONTINUED)
Item 6. | Exhibits. |
Exhibits (Numbered according to Item 601 of Regulation S-K, Exhibit Table)
3.1 | Amended and Restated By-Laws of Skyline Corporation (Amended and Restated as of June 25, 2015) (incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K filed on June 30, 2015). | |||
10.1 | Executive Employment Agreement dated June 25, 2015 between Richard Florea and Skyline Corporation (incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K filed on June 30, 2015). | |||
10.2 | Skyline Corporation 2015 Stock Incentive Plan. | |||
10.3 | First Amendment to Loan and Security Agreement and Waiver of Defaults dated October 14, 2015 by and among Skyline Corporation, Homette Corporation, Layton Homes Corp., Skyline Homes, Inc., and First Business Capital Corp. | |||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of | |||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of | |||
32 | Certification of | |||
101 | The following materials from the Corporation’s Form 10-Q for the fiscal quarter ended August 31, 2015 formatted in an XBRL | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SKYLINE CORPORATION | ||||||
DATE: | /s/ Jon S. Pilarski | |||||
Jon S. Pilarski | ||||||
Chief Financial Officer |
DATE: | /s/ Martin R. Fransted | |||||
Martin R. Fransted | ||||||
INDEX TO EXHIBITS
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3328