UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended February 28, 201529, 2016

or

For the transition period fromto

Commission file number: 1-4714

SKYLINE CORPORATION

(Exact name of registrant as specified in its charter)

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.    x  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).    x  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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

FORM 10-Q

INDEX

PART I — FINANCIAL INFORMATION

PART I — FINANCIAL INFORMATION

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets

(Dollars in thousands)

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)

The accompanying notes are an integral part of the consolidated financial statements.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Consolidated Balance SheetsStatements of Operations —(Continued)

For the Three-Month and Nine-Month Periods Ended February 29, 2016 and February 28, 2015

(Dollars in thousands, except share and per share amounts)

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 EarningsCash Flows

For the Three-Month and Nine-Month Periods Ended February 29, 2016 and February 28, 2015 and 2014

(Dollars in thousands, except share and per share amounts)thousands)

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 Nine-Month Periods Ended February 28, 2015 and 2014

(Dollars in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

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 February 28, 2015, in addition to29, 2016, the consolidated results of operations and consolidated cash flows for the three-month and nine-month periods ended February 29, 2016 and February 28, 2015, and 2014.consolidated cash flows for the nine-month periods ended February 29, 2016 and February 28, 2015. 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 yearperiod amounts related to assets and liabilities of discontinued operations have been reclassified to conform to current yearperiod presentation.

TheNOTE 2 Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, (FASB), issued Accounting Standards Update (ASU) No. 2016-02,Leases. ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance.

Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting policiesfor leases that haveexpired before the earliest comparative period presented. Lessees may not apply a significantfull retrospective transition approach. The Corporation will examine ASU 2016-02 to determine its effect on the Consolidated Financial Statements.financial condition and results of operations.

In July 2015, FASB issued ASU No. 2015-11,Accounting Estimates —Inventory, The preparation of financial statements in conformity with generally accepted accounting principleswhich requires managementan entity to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilitiesmeasure inventory at the datelower of cost and net realizable value. Net realizable value is the financial statements, as well asestimated selling prices in the reported amountsordinary course of revenuebusiness, less reasonably predictable costs of completion, disposal 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.transportation.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

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.

InventoriesNOTE 2 Recently Issued Accounting Pronouncements — 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.(Continued)

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. The note was fully repaid in December 2014.

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 February 28, 2015, 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 February 28, 2015.

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.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

Warranty (continued)— 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.

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. 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.Public business entities should apply ASU No. 2014-08 changes the requirements2015-11 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 periodsfiscal years beginning on or after December 15, 2014, and2016, including interim periods within those fiscal 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 earlywill examine this pronouncement to determine its effect on financial condition and results of operations.

In August 2014, FASB issued ASU No. 2014-15,Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Amendments in this update are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Corporation will evaluate how the adoption of ASU 2014-15 will impact its footnote disclosures.

In May 2014, FASB issued ASU No. 2014-08 regarding2014-09,Revenue from Contracts with Customers (Topic 66). The core principal of ASU 2014-09 is that an entity should recognize revenue to depict the saletransfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, this guidance is effective for annual reporting periods after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Subsequent to the issuance of ASU No. 2014-09, FASB issued ASU No. 2015-14, which deferred the effective date of ASU 2014-09 by one year. The Corporation will evaluate how the adoption of ASU 2014-09 will impact 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.financial position and result of operations.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

NOTE 3 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 as of February 28, 2015 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. These strategies include but are not all inclusive:

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 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 and an undeveloped parcel of land to raise cash and eliminate carrying costs.

Progress:

The Corporation continues to show improvement over fiscal 2014. In the third quarter, excluding the Mansfield facility which has not yet been operating for a full year, four of the Corporation’s eight housing facilities had operating profits for the third quarter of fiscal 2015. By comparison, two of the Corporation’s eight housing facilities had operating profits for the third quarter of fiscal 2014.

Similarly, in the first nine months of fiscal 2015, excluding Mansfield, seven of the Corporation’s eight housing facilities had operating profits. By comparison, in the first nine months of fiscal 2014, four of the eight housing facilities had operating profits.pursued.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

NOTE 3 Management’s Plan — (Continued)

These strategies include but are not limited to:

Increasing Sales

Progress:

The Mansfield facility continues to build sales since commencing operations in the third quarter of fiscal 2014. In the third quarter, where sales are traditionally lowest for the year, sales decreased 7 percent from the second to third quarters as compared to an approximately 23 percent decline for all of the housing facilities.

For the first nine months of fiscal 2015, manufactured housing sales to the Corporation’s six largest communities increased approximately 40 percent compared with the first nine months of fiscal 2014. For the third quarter of fiscal 2015, sales to these communities increased approximately 41 percent compared with the third quarter of fiscal 2014.

In the third quarter of fiscal 2015, net sales for modular housing and park models increased approximately 22 percent and 45 percent, respectively, compared with the third quarter of fiscal 2014.

For the first nine months of fiscal 2015, net sales for modular housing and park models increased approximately 16 percent and 82 percent, respectively, compared with the first nine months 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 retailer operates retail sales centers located at the Corporation’s housing facilities. This relationship is expected to help drive additional sales by more fully exploiting this increasingly important distribution channel for the Corporation’s products. This initiative began generating sales to four locations in the third quarter. The Corporation expects one or two additional locations to be operating by the end of fiscal 2015.growth.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

Management’s Plan — (continued)(Continued)

Progress:

The Corporation’s Purchasing Department has obtained significant price concessions from certain suppliers and anticipates further savings from this initiative in the fourth quarter of the fiscal year.

In addition, Management has continued to analyze staffing needs 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.

Progress:

On March 20, 2015, the Corporation entered into a Loan and Security Agreement with First Business Capital Corp. providing for a renewable three-year secured revolving credit facility. Under the new credit facility, the Company 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 Company’s working capital needs and other general corporate purposes, and is secured by substantially all of the Company’s and its subsidiaries’ assets. Additional information regarding the revolving credit facility is in Note 11 of Notes to Consolidated Financial Statements.

Management believes that it will be able to execute their strategies as noted above. Management is prepared to modify these strategies as appropriate to meet prevailing business and market conditions.

NOTE 4 Discontinued Operations

During September 2014, the Corporation made a strategic decision to exit the recreational vehicle industry in order to focus on its core housing business.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

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: A recreational vehicle manufacturing facility consisting of approximately 135,000 square feet situated on 18.2 acres located in Bristol, Indiana;

The amount and nature of the consideration received by the Corporation for the assets sold include:

In addition, under the Asset Purchase Agreement Evergreen will not assume or agree to pay, perform, or discharge any of the Corporation’s liabilities or obligations, which will remain the liabilities and obligations of the Corporation.

The Bristol facility, and assets other than raw material and finished goods inventories, was 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 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(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 February 28, 2015, Evergreen has paid the Corporation approximately $596,000 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.LLC.

The following table summarizes the results of discontinued operations:

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.NOTE 5 Inventories

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 net sales do not warrant separate segment reporting.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

The following is a summary of assets and liabilities of discontinued operations at February 28, 2015 and May 31, 2014:

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 February 28, 2015 and May 31, 2014.

Total inventories from continuing operations consist of the following:

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

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 carried an interest rate of 6 percent per annum, required monthly payments following a 20 year amortization schedule, and provided for a final payment after 6 years. The two facilities were collateral for the note. The note was fully repaid in December 2014.Other Assets

Other assets consist primarily of the cash surrender value of life insurance policies which totaled $6,511,000$6,736,000 and $6,452,000$6,677,000 at February 28, 201529, 2016 and May 31, 2014,2015, respectively.

A reconciliation of accrued warranty and related expenses is as follows:

At February 28, 2015, the total current obligation for warranty and related expenses associated with the recreational vehicle segment is estimated to be $965,000. At February 28, 2014, the total obligation for warranty and related expenses associated with the recreational vehicle segment was estimated to be $1,900,000; consisting of an estimated current obligation of $1,200,000 and non-current obligation of $700,000.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

Long-term liabilities, consistingNOTE 7 Warranty

A reconciliation of other deferred liabilities and life insurance loans include the following:accrued warranty is as follows:

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 February 28, 2015 and May 31, 2014, prepaid interest29, 2016, the total current warranty obligation associated with the life insurance loans totaleddiscontinued recreational vehicle segment is approximately $217,000 and $165,000, respectively; which is recognized in Other current assets.$62,000.

NOTE 8 Income Taxes

At February 28, 2015,29, 2016, the Corporation’s gross deferred tax assets of approximately $50$49.8 million consist of approximately $35$34.5 million in federal net operating loss carryforwards and tax credit carryforwards, $8$8.0 million in state net operating loss carryforwards $7and $7.3 million resulting from temporary differences between financial and tax reporting and $5 million in gross deferred tax assets pertaining to discontinued operations.reporting. The federal net operating loss and tax credit carryforwards have a life expectancy of between sixteentwelve 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. For the nine months ended February 29, 2016, the Corporation reported the utilization of previously fully-reserved federal net operating loss carryforwards of $17,000 and state operating loss carryforwards of $97,000 and released corresponding amounts of the valuation allowance to offset federal and state income tax expense.

NOTE 9 Commitments and Contingencies

The Corporation was contingently liable at February 28, 201529, 2016 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 9 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 $62$48 million at February 28, 201529, 2016 and approximately $63$60 million at May 31, 2014.2015. At February 28, 201529, 2016 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 $24$8 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 February 28, 201529, 2016 and May 31, 2014,2015, a $100,000 loss reserve that is a component of other accrued liabilities. $9,000 of the $100,000 loss reserve pertains to discontinued operations, and Management believes that the Corporation’s exit from the recreational vehicle business will not furthermaterially 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 February 28, 201529, 2016 will not be material to its financial position or results of operations.

In the first nine monthsThe amounts of fiscal 2015, 11 recreational vehiclesobligations from repurchased units, all of which were repurchased for approximately $203,000; resulting in a loss of approximately $43,000. In the first nine months of fiscal 2014, there were no obligations orfrom discontinued operations, and incurred net losses from repurchased units.for the periods reported are as follows:

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.

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.

In the second quarter of fiscal 2014, the Corporation sold its idle manufactured housing facility located in Fair Haven, Vermont. The gain on the sale of this facility was $162,000. Likewise, in the third quarter of fiscal 2014 an idle manufactured housing facility located in Halstead, Kansas was sold for a gain of $300,000.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

NOTE 10 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 BorrowersCorporation for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term. The BorrowersCorporation 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 Borrowers’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 underDuring the first quarter of fiscal 2016, the Corporation on two occasions did not meet a covenant requiring a monthly loss not exceeding $500,000. Consequently, the Corporation received in the second quarter a waiver of the defaults that occurred. In addition, the following modifications were made to the Loan Agreement, First Business Capital agreedAgreement:

The Corporation was in compliance with affiliates; and (viii) amend a Borrower’s articles of incorporation or bylaws.

The Loan Agreement also requires compliance with certain financial covenants (in each case calculated as set forth inof February 29, 2016.

NOTE 11 Stock-Based Compensation

On June 25, 2015, the Loan Agreement)Corporation’s Board of Directors approved the 2015 Stock Incentive Plan (“Plan”), including: (i) minimum net worth; (ii) minimum net earnings;which allows the granting of stock options and (iii) maximum net loss.

Ifother equity awards to directors, officers, employees, and eligible independent contractors of the Borrowers default in their obligationsCorporation 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 have been reserved for issuance under the Loan Agreement, thenPlan. Stock option awards are granted with an exercise price equal to, or greater than, the unpaid balances under the facility will bear interest at 3.0% per annum in excessmarket price of the rate that would apply inCorporation’s stock at the absencedate of grant and vest over a default. Other remedies availableperiod of time as determined by the Corporation at the date of grant up to First Business Capital upon an eventthe contractual ten year life of default include the right to accelerateoptions, at which time the maturityoptions expire.

During the nine months ended February 29, 2016, the Corporation granted 200,000 and 25,000 stock options at a weighted average exercise price per share of all obligations,$3.28 with a five year vesting period. Stock-based compensation expense for the right to foreclose onfair value of the stock options vested during the three and otherwise repossess the collateral securing the obligations, all rights of a secured creditor under applicable law,nine months ended February 29, 2016 was approximately $22,000 and all other rights set forth in the Loan Agreement.$57,000, respectively.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

NOTE 11 Stock-Based Compensation — (Continued)

At February 29, 2016, the intrinsic value of all options outstanding approximated $169,000 and had a weighted-average remaining contractual life of approximately nine years. Total unrecognized compensation expense related to stock-based awards outstanding at February 29, 2016 was $434,000 and is to be recorded over a weighted-average life of approximately four years.

The Corporation records all stock-based payments, including grants of stock options, in the consolidated statements of operations 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 date of 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.

The fair value of the options granted during the nine months ended February 29, 2016 were estimated at the date of grant using the following weighted average assumptions:

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 involving the Borrowers; (viii) certain injunctions or attachments are issued againstVolatility is estimated based on historical volatility measured monthly for a Borrower’s assets or restricting its business; and (ix) a material adverse change occurs with respecttime period equal to the Borrowers.

The foregoing descriptionexpected life of the Loan Agreementoption ending on the date of grant. The risk-free interest rate is a summary, does not purport to be complete, and is qualifieddetermined based on observed U.S. Treasury yields in its entirety by referenceeffect at the time of the grant for maturities equivalent to the full textexpected life of the Loan Agreement and various other loan documents, copiesoptions. The expected option life (estimated average period of which are attachedtime the options will be outstanding) is estimated based on the expected exercise date of the options. The expected dividend yield of zero is estimated based on the dividend yield at the time of grant as exhibits toadjusted for any expected changes during the Current Report on Form 8-K filed withlife of the Securities and Exchange Commission on March 26, 2015.options.

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, credit terms, 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.

Manufactured Housing, Modular Housing and Park Model Industry Conditions

Sales and production of manufactured housing, and modular housing and park models 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”. trademark. 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.

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 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. Recent trends regarding calendar year unit shipments of the Corporation’s products and their respective industries are as follows:

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Manufactured Housing, Modular Housing and Park Model Industry Conditions — (Continued)

Discontinued Operations

During September 2014, the Corporation made a strategic decision to exit the recreational vehicle industry in order to focus on its core housing 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”). LLC.

The Transaction was completed pursuant tofollowing table summarizes the termsresults 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”).discontinued operations:

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Discontinued Operations — (Continued)

The assets of the recreational vehicle segment disposed of in the Transaction include, but not are limited to:

The amount and nature of the consideration received by the Corporation for the assets sold include:

In addition, under the Asset Purchase Agreement Evergreen will not assume or agree to pay, perform, or discharge any of the Corporation’s liabilities or obligations, which will remain the liabilities and obligations of the Corporation.

The Bristol facility, and assets other than raw material and finished goods inventories, was 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 February 28, 2015, Evergreen has paid the Corporation approximately $596,000 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.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Discontinued Operations — (Continued)

The following table summarizes the results of discontinued operations: