UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 201529, 2016

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.    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):

 

Large accelerated filer ¨  Accelerated filer ¨
Non-accelerated filer ¨  Smaller reporting company x

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.

 

Title of Class

 

Shares Outstanding

April 3, 201514, 2016

Common Stock,

$.0277 Par Value

 8,391,244

 

 

 


FORM 10-Q

INDEX

PART I — FINANCIAL INFORMATION

 

      Page No. 
PART I — FINANCIAL INFORMATION

Item 1.

  

Financial Statements

  
  

Consolidated Balance Sheets as of February 28, 201529, 2016 and May  31, 20142015

   1  
  

Consolidated Statements of Operations and Retained Earnings for the three-month and nine-month periods ended February 29, 2016 and February 28, 2015 and 2014

   3  
  

Consolidated Statements of Cash Flows for the nine-month periods ended February 29, 2016 and February 28, 2015 and 2014

   4  
  

Notes to the Consolidated Financial Statements

   5  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   1813  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   3324  

Item 4.

  

Controls and Procedures

   3325  
PART II OTHER INFORMATION  

Item 1.

  

Legal Proceedings

   3425  

Item 1A.

  

Risk Factors

   3425  

Item 6.

  

Exhibits

   3426  

Signatures

   3527  


PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements.Statements.

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets

(Dollars in thousands)

 

  February 28, 2015   May 31, 2014 
  (Unaudited)       February 29,
2016
   May 31,
2015
 
  (Unaudited)     
ASSETS            

Current Assets:

        

Cash

  $4,933    $6,031    $6,260    $4,995  

Accounts receivable

   13,089     16,259  

Note receivable, current

   —       50  

Accounts receivable, less allowance for doubtful accounts of $0 at February 29, 2016 and $536 at May 31, 2015

   12,738     15,288  

Inventories

   9,307     8,627     10,923     9,119  

Workers’ compensation security deposit

   2,137     2,688     1,749     1,732  

Other current assets

   753     542     424     447  

Assets of discontinued operations

   492     7,473  
  

 

   

 

 
  

 

   

 

 

Total Current Assets

 30,711   41,670     32,094     31,581  
  

 

   

 

   

 

   

 

 

Note Receivable, non-current

 —     1,581  

Property, Plant and Equipment, at Cost:

Property, Plant and Equipment:

    

Land

 3,586   3,586     2,996     2,996  

Buildings and improvements

 39,720   39,254     36,624     36,280  

Machinery and equipment

 16,976   17,238     16,223     16,332  
  

 

   

 

   

 

   

 

 
 60,282   60,078     55,843     55,608  

Less accumulated depreciation

 47,019   46,036     44,740     44,039  
  

 

   

 

   

 

   

 

 
 13,263   14,042     11,103     11,569  

Assets of discontinued operations, net of accumulated depreciation

 —     1,911  
  

 

   

 

 
 13,263   15,953  

Other Assets

 6,892   6,550     7,325     7,289  
  

 

   

 

 
  

 

   

 

 

Total Assets

$50,866  $65,754    $50,522    $50,439  
  

 

   

 

   

 

   

 

 

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)

   February 29,
2016
  May 31,
2015
 
   (Unaudited)    
LIABILITIES AND SHAREHOLDERS’ EQUITY 

Current Liabilities:

   

Accounts payable, trade

  $2,381   $3,033  

Accrued salaries and wages

   2,164    2,565  

Accrued marketing programs

   2,931    2,356  

Accrued warranty

   4,755    4,511  

Other accrued liabilities

   2,725    2,652  
  

 

 

  

 

 

 

Total Current Liabilities

   14,956    15,117  
  

 

 

  

 

 

 

Long-Term Liabilities:

   

Deferred compensation expense

   5,072    5,237  

Accrued warranty

   2,400    2,400  

Life insurance loans

   4,312    4,312  
  

 

 

  

 

 

 

Total Long-Term Liabilities

   11,784    11,949  
  

 

 

  

 

 

 

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

   4,985    4,928  

Retained earnings

   84,229    83,877  

Treasury stock, at cost, 2,825,900 shares

   (65,744  (65,744
  

 

 

  

 

 

 

Total Shareholders’ Equity

   23,782    23,373  
  

 

 

 ��

 

 

 

Total Liabilities and Shareholders’ Equity

  $50,522   $50,439  
  

 

 

  

 

 

 

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)

 

   February 28, 2015  May 31, 2014 
   (Unaudited)    
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current Liabilities:

   

Accounts payable, trade

  $1,640   $3,050  

Accrued salaries and wages

   1,594    2,255  

Accrued marketing programs

   3,606    2,526  

Accrued warranty and related expenses

   3,722    3,697  

Other accrued liabilities

   2,888    3,695  

Liabilities of discontinued operations

   338    3,024  
  

 

 

  

 

 

 

Total Current Liabilities

 13,788   18,247  
  

 

 

  

 

 

 

Long-Term Liabilities:

Other deferred liabilities

 7,171   7,386  

Life insurance loans

 6,334   6,334  
  

 

 

  

 

 

 

Total Long-Term Liabilities

 13,505   13,720  
  

 

 

  

 

 

 

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

 84,077   94,291  

Treasury stock, at cost, 2,825,900 shares

 (65,744 (65,744
  

 

 

  

 

 

 

Total Shareholders’ Equity

 23,573   33,787  
  

 

 

  

 

 

 

Total Liabilities and Shareholders’ Equity

$50,866  $65,754  
  

 

 

  

 

 

 
   Three-Months Ended  Nine-Months Ended 
   February 29,
2016
  February 28,
2015
  February 29,
2016
  February 28,
2015
 
   (Unaudited)  (Unaudited) 

OPERATIONS

   

Net sales

  $47,697   $38,109   $155,123   $137,380  

Cost of sales

   42,887    35,771    138,443    125,843  
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   4,810    2,338    16,680    11,537  

Selling and administrative expenses

   5,246    5,159    16,105    15,347  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating (loss) income

   (436  (2,821  575    (3,810

Interest expense

   (78  (92  (236  (279

Interest income

   —      2    —      50  
  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income from continuing operations before income taxes

   (514  (2,911  339    (4,039

Income tax expense

   —      —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income from continuing operations

   (514  (2,911  339    (4,039

(Loss) income from discontinued operations, net of income taxes

   (6  (86  13    (6,175
  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income

  $(520 $(2,997 $352   $(10,214
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic (loss) income per share

  $(.06 $(.36 $.04   $(1.22
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic (loss) income per share from continuing operations

  $(.06 $(.35 $.04   $(.48
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic loss per share from discontinued operations

  $—     $(.01 $—     $(.74
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average number of common shares outstanding

   8,391,244    8,391,244    8,391,244    8,391,244  
  

 

 

  

 

 

  

 

 

  

 

 

 

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)

 

   Three-Months Ended  Nine-Months Ended 
   2015  2014  2015  2014 
   (Unaudited)  (Unaudited) 

OPERATIONS:

     

Net sales

  $38,109   $30,169   $137,380   $107,040  

Cost of sales

   35,771    29,390    125,843    98,851  
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

 2,338   779   11,537   8,189  

Selling and administrative expenses

 5,159   5,010   15,347   14,361  

Gain on sale of idle property, plant and equipment

 —     300   —     462  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating loss

 (2,821 (3,931 (3,810 (5,710

Interest expense

 (92 —     (279 —    

Interest income

 2   25   50   75  
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before income taxes

 (2,911 (3,906 (4,039 (5,635

Benefit from income taxes

 —     —     —     —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations

 (2,911 (3,906 (4,039 (5,635

Loss from discontinued operations, net of income taxes

 (86 (1,806 (6,175 (3,669
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

$(2,997$(5,712$(10,214$(9,304
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic loss per share

$(.36$(.68$(1.22$(1.11
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss per share from continuing operations

$(.35$(.47$(.48$(.67
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss per share from discontinued operations

$(.01$(.21$(.74$(.44
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average number of common shares outstanding

 8,391,244   8,391,244   8,391,244   8,391,244  
  

 

 

  

 

 

  

 

 

  

 

 

 

RETAINED EARNINGS:

Balance at beginning of period

$87,074  $102,563  $94,291  $106,155  

Net loss

 (2,997 (5,712 (10,214 (9,304
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of period

$84,077  $96,851  $84,077  $96,851  
  

 

 

  

 

 

  

 

 

  

 

 

 
   February 29,
2016
  February 28,
2015
 
   (Unaudited) 

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income (loss)

  $352   $(10,214

Adjustments to reconcile net income (loss) to net cash from operating activities:

   

Depreciation

   780    1,034  

Reduction in inventory value of discontinued operations

   —      901  

Gain on sale of assets associated with discontinued operations

   —      (670

Share-based compensation

   57    —    

Amortization of debt financing costs

   58    —    

Change in assets and liabilities:

   

Accounts receivable

   2,550    7,642  

Inventories

   (1,804  928  

Workers’ compensation security deposit

   (17  551  

Other current assets

   23    (211

Accounts payable, trade

   (652  (3,382

Accrued liabilities

   491    (1,077

Other, net

   (212  (516
  

 

 

  

 

 

 

Net cash from operating activities

   1,626    (5,014
  

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Proceeds from note receivable

   —      1,631  

Proceeds from sale of assets associated with discontinued operations

   —      2,331  

Purchase of property, plant and equipment

   (312  (178

Other, net

   (49  132  
  

 

 

  

 

 

 

Net cash from investing activities

   (361  3,916  
  

 

 

  

 

 

 

Net increase (decrease) in cash

   1,265    (1,098

Cash at beginning of period

   4,995    6,031  
  

 

 

  

 

 

 

Cash at end of period

  $6,260   $4,933  
  

 

 

  

 

 

 

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)

   2015  2014 
   (Unaudited) 

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net loss

  $(10,214 $(9,304

Adjustments to reconcile net loss to net cash used for operating activities:

   

Depreciation

   1,034    1,304  

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

   —      (462

Change in assets and liabilities:

   

Restricted cash

   —      600  

Accrued interest receivable

   —      1  

Accounts receivable

   7,642    (1,723

Inventories

   928    (2,502

Workers’ compensation security deposit

   551    —    

Other current assets

   (211  (32

Accounts payable, trade

   (3,382  118  

Accrued liabilities

   (1,077  3,400  

Other, net

   (516  (527
  

 

 

  

 

 

 

Net cash used for operating activities

 (5,014 (9,127
  

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from principal payments of U.S. Treasury Bills

 —     30,998  

Purchase of U.S. Treasury Bills

 —     (28,999

Proceeds from note receivable

 1,631   35  

Proceeds from sale of assets associated with discontinued operations

 2,331   —    

Proceeds from sale of idle property, plant and equipment

 —     958  

Purchase of property, plant and equipment

 (178 (649

Other, net

 132   221  
  

 

 

  

 

 

 

Net cash from investing activities

 3,916   2,564  
  

 

 

  

 

 

 

Net decrease in cash

 (1,098 (6,563

Cash at beginning of period

 6,031   11,838  
  

 

 

  

 

 

 

Cash at end of period

$4,933  $5,275  
  

 

 

  

 

 

 

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

NOTE 1Nature of Operations, Accounting Policies of Consolidated Financial Statements

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:

A lease liability, which is a summarylessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

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)

NOTE 1Nature of Operations, Accounting Policies of Consolidated Financial Statements(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 DepositDeferred 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)

NOTE 1Nature of Operations, Accounting Policies of Consolidated Financial Statements(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 1Nature of Operations, Accounting Policies of Consolidated Financial Statements(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:

Divest Non-Core Assets:Management is focused on driving profitable growth in the Corporation’s core housing business.

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.

Optimize Manufacturing Footprint: Through an ongoing assessment of the strategic positioning of Skyline’s manufacturing facilities, Management has successfully executed initiatives to optimize financial performance by reducing costs and gaining efficiencies at each facility.

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)

 

NOTE 1Nature of Operations, Accounting Policies of Consolidated Financial Statements(Continued)

These strategies include but are not limited to:

Increase Sales:

Increasing Sales

Working

Management is investigating strategies to expand our current market position relative to Real Estate Investment Trusts and other customers who are in the Manufactured Housing Community and Recreational Resort business. We continue to explore other market niches where we believe our products provide a valuable housing alternative to apartments or conventional site built homes.

Management is engaged in reviewing our current Marketing Strategies used to reach the end consumer of our products. We expect to launch an improved Web site and social media portfolio designed to reach more consumers and highlight the value of Skyline products and service. In addition, our internet marketing strategy has been calibrated to benefit retail customers who are currently underrepresented by our traditional distribution channels with no downside to our existing dealers and communities.

Management has empowered each of the company’s Operating Divisions to develop products which meet consumer expectations for design and features within their respective market regions. We believe that this new approach to product development will further enhance our ability to reach more consumers and capture additional market share.

Management has expanded the number of Operating Divisions which produce our popular Shore Park brand of recreational park models from three to eight. Management believes that we can improve top line revenue appreciably for each of our divisions with the addition of these popular products.

Decreasing Costs

Management has been, and continues to be, actively engaged in driving material costs lower by more effectively controlling material costs during the procurement and manufacturing process.

Management is undergoing a detailed review of all current pricing strategies and market programs and plans to introduce new initiatives designed to increase, recognize, and reward Dealer commitment and sales at the Mansfield, Texas housing facility by gaining a greater presence on the properties of manufactured housing dealers and manufactured housing communities.

Continuing to work with manufactured housing communities to identify opportunities for increasing sales.

Increasing sales of modular homes and park models by cultivating relationships with modular housing developers and campground owners that are outside the Corporation’s historical distribution channels.

Establishing additional distribution channels and forging new strategic relationships.

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)

NOTE 1Nature of Operations, Accounting Policies of Consolidated Financial Statements(Continued)

Management’s Plan(continued)(Continued)

Decrease Costs:Skyline continues to streamline costs with a focus on maximizing efficiencies and resources.

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.

Raise Additional Capital:

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 2Discontinued Operations

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)

NOTE 2Discontinued Operations — (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;

Intellectual properties such as trademarks, licenses, and product designs associated with the recreational vehicle segment;

Furniture, machinery, software, and equipment;

Raw material and work-in-process inventories;

Product designs, plans, and specifications; and

Customer purchase orders and contracts, customer lists, and supplier lists.

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

A cash payment of $175,000;

A separate cash payment of approximately $806,000, less prorated property taxes of approximately $73,000 and selling expenses of approximately $2,000, for the Bristol, Indiana manufacturing facility; and

For six months following the Closing Date, Evergreen will pay the Corporation 50 percent of the Corporation’s cost for raw materials inventory purchased by the Corporation prior to the Closing Date within 10 days of Evergreen’s use of the raw material. After six months following the Closing Date, the Corporation will have the right to remove any remaining materials inventory from Evergreen’s possession.

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)

NOTE 2Discontinued 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 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:

 

   Three-Months Ended
February 28,
   Nine-Months Ended
February 28,
 
   2015   2014   2015   2014 
   (Dollars in thousands)   (Dollars in thousands) 

Net Sales

  $52    $8,603    $9,767    $26,989  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss of discontinued operations

$(86$(1,806$(5,944$(3,669

Loss on disposal of discontinued operations

 —     —     (231 —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

 (86 (1,806 (6,175 (3,669

Income tax benefit

 —     —     —     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

$(86$(1,806$(6,175$(3,669
  

 

 

   

 

 

   

 

 

   

 

 

 
   Three-Months Ended   Nine-Months Ended 
   February 29,
2016
   February 28,
2015
   February 29,
2016
   February 28,
2015
 
   (Unaudited)   (Unaudited) 
   (Dollars in thousands)   (Dollars in thousands) 

Net Sales

  $5    $52    $71    $9,767  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income of discontinued operations

  $(6  $(86  $13    $(5,944

Loss on disposal of discontinued operations

   —       —       —       (231
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

   (6   (86   13     (6,175

Income tax expense

   —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from discontinued operations, net of taxes

  $(6  $(86  $13    $(6,175
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

NOTE 2Discontinued Operations — (Continued)

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

   February 28, 2015   May 31, 2014 
   (Dollars in thousands) 

Current Assets:

    

Accounts receivable

  $298    $4,770  

Inventories

   194     2,703  
  

 

 

   

 

 

 
$492  $7,473  
  

 

 

   

 

 

 

Property, Plant and Equipment:

Property, plant and equipment, at cost

$—    $9,812  

Less accumulated depreciation

 —     7,901  
  

 

 

   

 

 

 
$—    $1,911  
  

 

 

   

 

 

 

Current Liabilities:

Accounts payable, trade

$117  $2,089  

Accrued salaries and wages

 —     419  

Accrued marketing programs

 64   330  

Other accrued liabilities

 157   186  
  

 

 

   

 

 

 
$338  $3,024  
  

 

 

   

 

 

 

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.

NOTE 3Inventories

Total inventories from continuing operations consist of the following:

 

  February 28, 2015   May 31, 2014   February 29,
2016
   May 31,
2015
 
  (Dollars in thousands)   (Unaudited)     
  (Dollars in thousands) 

Raw materials

  $5,751    $5,135    $6,906    $5,828  

Work in process

   2,848     3,174     3,073     3,137  

Finished goods

   708     318     944     154  
  

 

   

 

   

 

   

 

 
$9,307  $8,627    $10,923    $9,119  
  

 

   

 

   

 

   

 

 

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)(Continued)

NOTE 4Note 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 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

NOTE 5Other 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.

NOTE 6Warranty

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

   

Nine-Months Ended

February 28,

 
   2015   2014 
   (Dollars in thousands) 

Balance at the beginning of the period

  $5,697    $5,882  

Accruals for warranties

   4,932     4,106  

Settlements made during the period

   (4,907   (3,867
  

 

 

   

 

 

 

Balance at the end of the period

 5,722   6,121  

Non-current balance included in other deferred liabilities

 2,000   2,200  
  

 

 

   

 

 

 

Accrued warranty and related expenses

$3,722  $3,921  
  

 

 

   

 

 

 

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)

 

NOTE 7Long-Term Liabilities

Long-term liabilities, consistingNOTE 7 Warranty

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

 

   February 28, 2015   May 31, 2014 
   (Dollars in thousands) 

Other deferred liabilities:

    

Deferred compensation expense

  $5,171    $5,386  

Accrued warranty and related expenses

   2,000     2,000  
  

 

 

   

 

 

 

Total other deferred liabilities

 7,171   7,386  

Life insurance loans

 6,334   6,334  
  

 

 

   

 

 

 
$13,505  $13,720  
  

 

 

   

 

 

 
   Nine-Months Ended 
   February 29,
2016
   February 28,
2015
 
   (Unaudited) 
   (Dollars in thousands) 

Balance at the beginning of the period

  $6,911    $5,697  

Accruals for warranties

   5,087     4,932  

Settlements made during the period

   (4,843   (4,907
  

 

 

   

 

 

 

Balance at the end of the period

   7,155     5,722  

Non-current balance

   2,400     2,000  
  

 

 

   

 

 

 

Accrued warranty

  $4,755    $3,722  
  

 

 

   

 

 

 

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

NOTE 8Income 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 9Commitments and Contingencies

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)

NOTE 9Commitments 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:

   Nine-Months Ended 
   February 29,
2016
   February 28,
2015
 
   (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.

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 10Gain on Sale of Idle Property, Plant and Equipment

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 11Subsequent Events

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:

A covenant specifying that a monthly loss not exceed $500,000 was modified to issue, or cause to be issued by a bank affiliate or other bank, letters of credit$1,500,000 for the account of the Borrowers. 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,December 2015, $1,000,000 for January 2016, 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$1,000,000 for February, 2016. Following February 2016, the maximum loan amount; (iv) certain overadvance fees (currently $1,000 per day)monthly net loss as noted 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.

Theoriginal Loan Agreement contains covenants thatreturns to $500,000 for March to May 2016, and $250,000 thereafter;

The limit the ability of the Borrowers 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 transactionsincreased from $600,000 per year to $800,000 per year; and

The monthly bank assessment fee increased from .25% per annum to .35% per annum.

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:

 

NOTE 11Subsequent Events(Continued)

Volatility

55.8

Risk-free interest rate

2.22

Expected option life in years

9.72

Dividend yield

0

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.

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, 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:

 

Manufactured Housing

  2010   2011 2012 2013 2014   2011   2012 2013 2014 2015 

Industry

   50,066     51,606   54,901   60,210   64,331     51,606     54,901   60,210   64,331   70,544  

Percentage Increase (Decrease)

     3 6 10 7     6.4 9.7 6.8 9.7

Skyline

   1,894     1,880   1,848   2,205   2,678  

Corporation

   1,880     1,848   2,205   2,678   2,872  

Percentage Increase (Decrease)

     (1%)  (2%)  19 21     (1.7%)  19.3 21.5 7.2

Modular Housing

              

*Industry

   13,616     12,202   13,290   14,020   13,856  

Percentage Increase (Decrease)

     (10%)  9 5 (1%) 

**Skyline

   250     347   382   350   477  

Percentage Increase (Decrease)

     39 10 (8%)  36

* Domestic shipment only. Canadian industry shipments not available.

** Includes domestic and Canadian unit shipments

          

        

Park Models

  2010   2011 2012 2013 2014 

Industry

   3,486     2,761   2,780   3,598   3,781  

Percentage Increase (Decrease)

     (21%)  1 29 5

Skyline

   129     170   138   171   307  

Percentage Increase (Decrease)

     32 (19%)  24 80

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)

Modular Housing

  2011   2012  2013  2014  2015 

*Industry

   12,202     13,290    14,020    13,844    13,974  

Percentage Increase (Decrease)

     8.9  5.5  (1.3%)   .9

**Corporation

   347     382    350    477    341  

Percentage Increase (Decrease)

     10.1  (8.4%)   36.3  (28.5%) 

Park Models

       

Industry

   2,761     2,780    3,598    3,781    3,649  

Percentage Increase (Decrease)

     0.7  29.4  5.1  (3.5%) 

Corporation

   170     138    171    307    380  

Percentage Increase (Decrease)

     (18.8%)   23.9  79.5  23.8

*Domestic shipments only. Canadian industry shipments not available.
**Includes domestic and Canadian unit shipments

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:

   Three-Months Ended   Nine-Months Ended 
   February 29,
2016
   February 28,
2015
   February 29,
2016
   February 28,
2015
 
   (Unaudited)   (Unaudited) 
   (Dollars in thousands)   (Dollars in thousands) 

Net Sales

  $5    $52    $71    $9,767  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income of discontinued operations

  $(6  $(86  $13    $(5,944

Loss on disposal of discontinued operations

   —       —       —       (231
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

   (6  $(86   13     (6,175

Income tax expense

   —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from discontinued operations, net of taxes

  $(6  $(86  $13    $(6,175
  

 

 

   

 

 

   

 

 

   

 

 

 

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:

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

Intellectual properties such as trademarks, licenses, and product designs associated with the recreational vehicle segment;

Furniture, machinery, software, and equipment;

Raw material and work-in-process inventories;

Product designs, plans, and specifications; and

Customer purchase orders and contracts, customer lists, and supplier lists.

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

A cash payment of $175,000;

A separate cash payment of approximately $806,000, less prorated property taxes of approximately $73,000 and selling expenses of approximately $2,000, for the Bristol, Indiana manufacturing facility; and

For six months following the Closing Date, Evergreen will pay the Corporation 50 percent of the Corporation’s cost for raw materials inventory purchased by the Corporation prior to the Closing Date within 10 days of Evergreen’s use of the raw material. After six months following the Closing Date, the Corporation will have the right to remove any remaining materials inventory from Evergreen’s possession.

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:

   Three-Months Ended
February 28,
   Nine-Months Ended
February 28,
 
   2015   2014   2015   2014 
   (Dollars in thousands)   (Dollars in thousands) 

Net Sales

  $52    $8,603    $9,767    $26,989  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss of discontinued operations

$(86$(1,806$(5,944$(3,669

Loss on disposal of discontinued operations

 —     —     (231 —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

 (86 (1,806 (6,175 (3,669

Income tax benefit

 —     —     —     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

$(86$(1,806$(6,175$(3,669
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

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.

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

   February 28, 2015   May 31, 2014 
   (Dollars in thousands) 

Current Assets:

    

Accounts receivable

  $298    $4,770  

Inventories

   194     2,703  
  

 

 

   

 

 

 
$492  $7,473  
  

 

 

   

 

 

 

Property, Plant and Equipment:

Property, plant and equipment, at cost

$—    $9,812  

Less accumulated depreciation

 —     7,901  
  

 

 

   

 

 

 
$—    $1,911  
  

 

 

   

 

 

 

Current Liabilities:

Accounts payable, trade

$117  $2,089  

Accrued salaries and wages

 —     419  

Accrued marketing programs

 64   330  

Other accrued liabilities

 157   186  
  

 

 

   

 

 

 
$338  $3,024  
  

 

 

   

 

 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Discontinued Operations — (Continued)

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.

Third Quarter Fiscal 20152016 Results

The Corporation experienced the following results during the third quarter of fiscal 2015:2016:

 

Net sales related tofrom continuing operations were $38,109,000, an approximate 26$47,697,000, a 25.2 percent increase from the $30,169,000$38,109,000 reported in the same period a year agoago.

 

Loss from continuing operations for the third quarter of fiscal 20152016 was $2,911,000$514,000 as compared to a net loss of $3,906,000$2,911,000 for the same period a year agoago.

 

Loss from discontinued operations, net of incomes taxes, was $6,000 for fiscal 2016 as compared to a loss of $86,000 for the same period a year ago.

Net loss for fiscal 2016 was $520,000 as compared to a net loss of $2,997,000 for the third quarter of fiscal 2015 as compared to $1,806,000 for the same period a year ago

Net loss for the third quarter of fiscal 2015 was $2,997,000 as compared to $5,712,000 for the third quarter of fiscal 2014.2015. On a per share basis, net loss was $.36$.06 as compared to $.68a net loss of $.36 for the comparable period a year ago.

The Corporation experienced the following results during the first nine months of fiscal 2016:

Net sales from continuing operations were $155,123,000, a 12.9 percent increase from the $137,380,000 reported in the same period a year ago.

Income from continuing operations for fiscal 2016 was $339,000 as compared to a loss of $4,039,000 for the same period a year agoago.

The Corporation experienced increased

Income from discontinued operations, net sales in the third quarter of incomes taxes, was $13,000 for fiscal 20152016 as compared to a loss of $6,175,000 for the third quarter of fiscal 2014, and management cannot determine with certainty if this trend will continue. This uncertainty is based on potential adverse changes in economic growth, interest rate and employment levels, and consumer confidence.

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 onsame period 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, the Corporation 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, certain strategies need to be pursued to raise capital, increase sales and decrease costs. These strategies include but are not all inclusive:

year ago.

 

Divest Non-Core Assets:Management is focused on driving profitable growth in the Corporation’s core housing business.

Progress:

In October 2014, the Corporation sold its recreational vehicle segmentNet income for fiscal 2016 was $352,000 as compared to focus solely on its core housing business and to raise cash. Additional information regarding the sale is in Note 2a net loss 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$10,214,000 for an idle housing facility and an undeveloped parcel of land to raise cash and eliminate carrying costs.

Optimize Manufacturing Footprint: Through an ongoing assessment of the strategic positioning of Skyline’s manufacturing facilities, Management has successfully executed initiatives to optimize financial performance by reducing costs and gaining efficiencies at each facility.

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.

Increase Sales:

Working to increase sales at the Mansfield, Texas housing facility by gaining2015. On a greater presence on the properties of manufactured housing dealers and manufactured housing communities.

Continuing to work with manufactured housing communities to identify opportunities for increasing sales.

Increasing sales of modular homes and park models by cultivating relationships with modular housing developers and campground owners that are outside the Corporation’s historical distribution channels.

Establishing additional distribution channels and forging new strategic relationships.

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 quartersper share basis, net income was $.04 as compared to an approximately 23 percent decline for alla net loss of the housing facilities.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Management’s Plan — (Continued)

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$1.22 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.

Decrease Costs:Skyline continues to streamline costs withcomparable period a focus on maximizing efficiencies and resources.year ago.

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.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Management’s Plan — (Continued)

Raise Additional Capital:

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 Subsequent Events.

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.

Subsequent EventsSecured 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.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.

A covenant specifying that a monthly loss not exceed $500,000 was modified to issue, or cause to be issued by a bank affiliate or other bank, letters of credit$1,500,000 for the account of the Borrowers. 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,December 2015, $1,000,000 for January 2016, 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$1,000,000 for February, 2016. Following February 2016, the maximum loan amount; (iv) certain overadvance fees (currently $1,000 per day)monthly net loss as noted in the event outstanding obligationsoriginal Loan Agreement returns to $500,000 for March to May 2016, 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.

$250,000 thereafter;

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Secured Revolving Credit Facility — (Continued)

 

Subsequent Events — (Continued)

The Loan Agreement contains covenants that limit the ability of the Borrowers 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 transactionsincreased from $600,000 per year to $800,000 per year; and

The monthly bank assessment fee increased from .25% per annum to .35% per annum.

The Corporation was in compliance with affiliates; and (viii) amend a Borrower’s articlesLoan Agreement covenants as of incorporation or bylaws.February 29, 2016.

Management’s Plan

The Loan Agreement also requires compliance with certainCorporation’s consolidated financial covenants (in each case calculated as set forthstatements were prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the Loan Agreement), including: (i) minimum net worth; (ii) minimum net earnings;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 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. These strategies include but are not limited to:

Increasing Sales

Management is investigating strategies to expand our current market position relative to Real Estate Investment Trusts and (iii) maximum net loss.other customers who are in the Manufactured Housing Community and Recreational Resort business. We continue to explore other market niches where we believe our products provide a valuable housing alternative to apartments or conventional site built homes.

IfManagement is engaged in reviewing our current Marketing Strategies used to reach the Borrowers default in their obligations underend consumer of our products. We expect to launch an improved Web site and social media portfolio designed to reach more consumers and highlight the Loan Agreement, then the unpaid balances under the facility will bear interest at 3.0% per annum in excessvalue of Skyline products and service. In addition, our internet marketing strategy has been calibrated to benefit retail customers who are currently underrepresented by our traditional distribution channels with no downside to our existing dealers and communities.

Management has empowered each of the ratecompany’s Operating Divisions to develop products which meet consumer expectations for design and features within their respective market regions. We believe that wouldthis new approach to product development will further enhance our ability to reach more consumers and capture additional market share.

Management has expanded the number of Operating Divisions which produce our popular Shore Park brand of recreational park models from three to eight. Management believes that we can improve top line revenue appreciably for each of our divisions with the addition of these popular products.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Management’s Plan — (Continued)

Decreasing Costs

Management has been, and continues to be, actively engaged in driving material costs lower by more effectively controlling material costs during the procurement process.

Management is undergoing a detailed review of all current pricing strategies and market programs and plans to introduce new initiatives designed to increase, recognize, and reward Dealer commitment and sales growth.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board 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:

A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

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 absencefinancial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Corporation will examine ASU 2016-02 to determine its effect on financial condition and results of a default. Other remedies availableoperations.

In July 2015, FASB issued ASU No. 2015-11,Inventory, which requires an entity to First Business Capital upon an eventmeasure inventory at the lower of default includecost and net realizable value. Net realizable value is 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 forthestimated selling prices in the Loan Agreement.ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Public business entities should apply ASU No. 2015-11 for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Corporation will 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 eventsCorporation will evaluate how the adoption of default underASU 2014-15 will impact its footnote disclosures.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Recently Issued Accounting Pronouncements — (Continued)

In May 2014, FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 66). The core principal of ASU 2014-09 is that an entity should recognize revenue to depict the Loan Agreement includetransfer of promised goods or services to customers in an amount that reflects the following: (i) certain events of bankruptcy and insolvency; (ii) failureconsideration to make required payments; (iii) misrepresentationswhich the entity expects to First Business Capital; (iv) failure to comply with certain covenants and agreements; (v) terminationbe entitled in exchange for those goods 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 againstservices. For a Borrower’s assets or restricting its business; and (ix) a material adverse change occurs with respectpublic 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 Borrowers.

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 foregoing descriptionCorporation will evaluate how the adoption of the Loan Agreement is a summary, does not purport to be complete,ASU 2014-09 will impact its financial position and is qualified in its entirety by reference to the full textresult of the Loan Agreement and various other loan documents, copies of which are attached as exhibits to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 26, 2015.operations.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

 

Results of Operations Three-Month Period Ended February 28, 201529, 2016 Compared to Three-Month Period Ended February 28, 2014 (Unaudited) — (Continued)

2015

Net Sales and Unit Shipments

 

  February 28,
2015
   Percent February 28,
2014
   Percent Increase   February 29,
2016
   Percent   February 28,
2015
   Percent   Increase
(Decrease)
 
  (Dollars in thousands)   (Unaudited) 
  (Dollars in thousands) 

Net Sales

                  

Manufactured Housing

  $30,067     79 $24,038     80 $6,029    $38,709     81.2    $30,067     78.9    $8,642  

Modular Housing

   4,382     11   3,603     12   779     5,084     10.6     4,382     11.5     702  

Park Models

   3,660     10   2,528     8   1,132     3,904     8.2     3,660     9.6     244  
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total Net Sales

$38,109   100$30,169   100$7,940    $47,697     100.0    $38,109     100.0    $9,588  
  

 

   

 

  

 

   

 

  

 

 
  

 

   

 

   

 

   

 

   

 

 

Unit Shipments

          

Manufactured Housing

 507   76 454   79 53     695     79.7     507     76.5     188  

Modular Housing

 58   9   52   9   6     73     8.4     58     8.7     15  

Park Models

 98   15   71   12   27     104     11.9     98     14.8     6  
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total Unit Shipments

 663   100 577   100 86     872     100.0     663     100.0     209  
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Net sales increased approximately 2625.2 percent. The increase was comprised of a 2528.7 percent increase in manufactured housing net sales, a 2216.0 percent increase in modular housing net sales, and a 456.7 percent increase in park model net sales.

For the three-month periods ending on the following three month periods,dates, the percentage increase or decrease in unit shipments from the comparable period last year are as follows:

 

  February 29, 2016 January 31, 2016 
  February 28,
2015

Skyline
 January 31,
2015
Industry
   Skyline Industry 

Manufactured Housing

   12 10   37.1 19.6

Modular Housing

   12 Not available     25.9 Not available  

Park Models

   38 7   6.1 (7.7%) 

Total

   15 Not applicable     31.5 Not applicable  

Compared to the prior year, the average net sales price for manufactured housing,and modular housing and park models increased approximately 12 percent, 9decreased 6.1 percent and 57.8 percent, respectively. The increasedecrease primarily results from the sale of homes and park models with largersmaller square footage and greaterfewer amenities. The average net sales price for park models is relatively unchanged.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Results of Operations — Three-Month Period Ended February 29, 2016 Compared to Three-Month Period Ended February 28, 2015 — (Continued)

Cost of Sales

   February 29,
2016
   Percent
of Net
Sales
   February 28,
2015
   Percent
of Net
Sales
   Increase 
   (Unaudited) 
   (Dollars in Thousands) 

Cost of Sales

  $42,887     89.9    $35,771     93.9    $7,116  

Cost of sales, in dollars, increased as a result of increased net sales. As a percentage of net sales, cost of sales decreased in part due to more effectively controlling material costs during the procurement and manufacturing process, and certain manufacturing costs remaining fixed amid rising sales.

Selling and Administrative Expenses

   February 29,
2016
   Percent
of Net
Sales
   February 28,
2015
   Percent
of Net
Sales
   Increase 
   (Unaudited) 
   (Dollars in thousands) 

Selling and administrative expenses

  $5,246     11.0    $5,159     13.5    $87  

Selling and administrative expenses increased primarily as a result of an increase in sales-based compensation and performance-based compensation; which was partially offset by the absence of any expenses associated with the Special Committee of the Board of Directors in the current year as compared to approximately $176,000 in the same period last year. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining fixed amid rising sales.

Interest Expense

Interest expense of $55,000 and $92,000 for the third quarter of fiscal 2016 and 2015, respectively, related to interest on life insurance policy loans. Interest expense in the third quarter of fiscal 2016 included $19,000 of amortization of debt financing costs and $4,000 of interest expense associated with the secured revolving credit facility.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

 

Results of Operations – Three-Month— Nine-Month Period Ended February 29, 2016 Compared to Nine-Month Period Ended February 28, 2015

Net Sales and Unit Shipments

   February 29,
2016
   Percent   February 28,
2015
   Percent   Increase
(Decrease)
 
   (Unaudited) 
   (Dollars in thousands) 

Net Sales

          

Manufactured Housing

  $127,300     82.1    $109,370     79.6    $17,930  

Modular Housing

   19,671     12.7     19,288     14.0     383  

Park Models

   8,152     5.2     8,722     6.4     (570
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Sales

  $155,123     100.0    $137,380     100.0    $17,743  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unit Shipments

          

Manufactured Housing

   2,325     82.1     2,009     79.6     316  

Modular Housing

   291     10.3     282     11.2     9  

Park Models

   216     7.6     232     9.2     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Unit Shipments

   2,832     100.0     2,523     100.0     309  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales increased 12.9 percent. The increase was comprised of a 16.4 percent increase in manufactured housing net sales, a 2.0 percent increase in modular housing net sales, and a 6.5 percent decrease in park model net sales.

For the nine-month periods ending on the following dates, the percentage increase or decrease in unit shipments from the comparable period last year are as follows:

   February 29, 2016  January 31, 2016 
   Skyline  Industry 

Manufactured Housing

   15.7  9.9

Modular Housing

   3.2  Not available  

Park Models

   (6.9%)   (6.4%) 

Total

   12.2  Not applicable  

Management believes the lag in park model unit shipments relative to the park model industry is attributable to temporary softness in demand among the Corporation’s dealers, communities and campgrounds in the first half of the current year.

Compared to Three-Monththe prior year, the average net sales price for manufactured housing and park models is relatively unchanged. The average net sales price for modular housing decreased 1.2 percent as a result of homes sold with small square footage and fewer amenities.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Results of Operations — Nine-Month Period Ended February 29, 2016 Compared to Nine-Month Period Ended February 28, 2014 (Unaudited)2015 — (Continued)

 

Cost of Sales

 

   February 28,
2015
   Percent of
Net Sales
   February 28,
2014
   Percent of
Net Sales
   Increase 
   (Dollars in Thousands) 

Cost of sales

  $35,771     94    $29,390     97    $6,381  
   February 29,
2016
   Percent
of Net
Sales
   February 28,
2015
   Percent
of Net
Sales
   Increase 
   (Unaudited) 
   (Dollars in Thousands) 

Cost of Sales

  $138,443     89.2    $125,843     91.6    $12,600  

Cost of sales, in dollars, increased as a result of increased net sales. As a percentage of net sales, cost of sales decreased in part due to models sold with improved margins,more effectively controlling material costs during the procurement and efforts by the Corporation’s Purchasing Department to improve material costs.manufacturing process.

Selling and Administrative Expenses

 

   February 28,
2015
   Percent of
Net Sales
   February 28,
2014
   Percent of
Net Sales
   Increase 
   (Dollars in thousands) 

Selling and administrative expenses

  $5,159     14    $5,010     17    $149  
   February 29,
2016
   Percent
of Net
Sales
   February 28,
2015
   Percent
of Net
Sales
   Increase 
   (Unaudited) 
   (Dollars in thousands) 

Selling and administrative expenses

  $16,105     10.4    $15,347     11.2    $758  

Selling and administrative expenses increased primarily as a result of approximately $176,000 in costsincreased salaries, wages, sales-based compensation, performance-based compensation and increased marketing costs; which was partially offset by the absence of any expenses associated with the Special Committee of the Board of Directors taskedin the current year as compared to evaluate strategic initiatives.approximately $237,000 in the same period last year. In addition, the Corporation benefited from a $250,000 final payment received in the second quarter on an account that had previously been fully reserved. 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 third quarter of fiscal 2014, the Corporation sold an idle housing facility located in Halstead, Kansas. The gain on the sale of this facility was $300,000.

Interest Expense

Interest expense of $92,000$167,000 and $279,000 for the third quarter of fiscal 2015 is related to interest paid on life insurance policy loans.

Interest Income

Interest income of $2,000 and $25,000 for the third 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 –Nine-Month Period Ended February 28, 2015 Compared to Nine-Month Period Ended February 28, 2015 (Unaudited) — (Continued)

Net Sales and Unit Shipments

   February 28,
2015
   Percent  February 28,
2014
   Percent  Increase 
   (Dollars in thousands) 

Net Sales

        

Manufactured Housing

  $109,370     80 $85,537     80 $23,833  

Modular Housing

   19,288     14    16,698     16    2,590  

Park Models

   8,722     6    4,805     4    3,917  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total Net Sales

$137,380   100$107,040   100$30,340  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Unit Shipments

Manufactured Housing

 2,009   80 1,747   82 262  

Modular Housing

 282   11   261   12   21  

Park Models

 232   9   135   6   97  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total Unit Shipments

 2,523   100 2,143   100 380  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Net sales increased approximately 28 percent. The increase was comprised of a 28 percent increase in manufactured housing net sales, a 16 percent increase in modular housing net sales, and a 82 percent increase in park model net sales. Current year manufactured housing net sales includes approximately $4,817,000 of first and second quarters net sales attributable to the facility located in Mansfield, Texas. This facility commenced housing operations in the third quarter of fiscal 2014.

For the following nine month periods, the percentage increase in unit shipments from the comparable period last year are as follows:

   February 28,
2015

Skyline
  January 31,
2015
Industry
 

Manufactured Housing

   15  8

Modular Housing

   8  Not available  

Park Models

   72  5

Total

   18  Not applicable  

Compared to prior year, the average net sales price for manufactured housing, modular housing and park models increased approximately 11 percent, 7 percent and 6 percent, respectively. The increase primarily results from the sale of homes and park models with larger square footage and greater amenities.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Results of Operations –Nine-Month Period Ended February 28, 2015 Compared to Nine-Month Period Ended February 28, 2014 (Unaudited) — (Continued)

Cost of Sales

   February 28,
2015
   Percent of
Net Sales
   February 28,
2014
   Percent of
Net Sales
   Increase 
   (Dollars in Thousands) 

Cost of Sales

  $125,843     92    $98,851     92    $26,992  

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 of first and second quarter costs 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

   February 28,
2015
   Percent of
Net Sales
   February 28,
2014
   Percent of
Net Sales
   Increase 
   (Dollars in thousands) 

Selling and administrative expenses

  $15,347     11    $14,361     13    $986  

Selling and administrative expenses, increased primarily as a result of the Mansfield, Texas facility incurring approximately $702,000 in expenses in the first nine months of fiscal 2016 and 2015, as comparedrespectively, related to $325,000interest on life insurance policy loans. Interest expense in the for the same period a year ago. In addition, approximately $237,000 infirst nine months of fiscal 2016 included $58,000 of amortization of debt financing costs were incurredand $11,000 of interest expense associated with the Special Committee of the Board of Directors tasked to evaluate strategic initiatives. Finally, the prior year included a $250,000 decrease in the expense related to the Corporation’s liability for retirement and death benefits offered to certain current and former employees 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 for a gain of $162,000. Likewise, in the third quarter of fiscal 2014 an idle facility in Halstead, Kansas was sold for a gain of $300,000.secured revolving credit facility.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

 

Results of Operations – Nine-Month Period Ended February 28, 2015 Compared to Nine-Month Period Ended February 28, 2014 (Unaudited) — (Continued)

Interest Expense

Interest expense of $279,000 for the third quarter of fiscal 2015 is related to interest paid on life insurance policy loans.

Interest Income

Interest income of $50,000 and $75,000 for the third quarters of fiscal 2015 and 2014, respectively, consisted of interest received from the Corporation’s Note receivable.

Liquidity and Capital Resources

 

  February 28,
2015
   May 31,
2014
   Decrease   February 29,
2016
   May 31,
2015
   Increase 
  (Dollars in thousands)   (Unaudited)     
  (Dollars in thousands) 

Cash

  $4,933    $6,031    $1,098    $6,260    $4,995    $1,265  

Current assets, exclusive of cash

  $25,778    $35,639    $9,861    $25,834    $26,586    $(752

Current liabilities

  $13,788    $18,247    $4,459    $14,956    $15,117    $(161

Working capital

  $16,923    $23,423    $6,500    $17,138    $16,464    $674  

As noted in the Consolidated Statements of Cash Flows, cash decreased primarilyincreased due to net cash usage of $5,014,000 forflow from operating activities offset by netincreasing $1,626,000 and cash provided byflow from investing activities of $3,916,000.decreasing $361,000. Current assets, exclusive of cash, decreased mainly due to a $6,981,000 decrease in assets of discontinued operations and a $3,170,000$2,550,000 decrease in accounts receivable. Assets of discontinued operationsreceivable partially offset by a $1,804,000 increase in inventories. Accounts receivable declined as a result of the Corporation’s sale of its recreational vehicle segment. Accounts receivable decreased due to the timing of payments from dealers and communities at February 28, 201529, 2016 as compared to May 31, 2014.2015. Inventories increased as a result of increased production and homes awaiting shipment to dealers and communities at February 29, 2016 as compared to May 31, 2015.

Current liabilities decreased due to the following factors:

Liabilities of discontinued operations decreased $2,686,000 resulting from the Corporation’s sale of its recreational vehicle segment

Other accrued liabilities decreased primarily as a result of fulfilling $718,000 of certain obligations under the Corporation’s contract with National Community Renaissance of California.

a $652,000 decrease in accounts payable, a $401,000 decrease in accrued salaries and wages, a $575,000 increase in accrued marketing programs, and a $244,000 increase in accrued warranty. Accounts payable and accrued salaries and wages decreased $1,410,000 due to less production occurringthe timing of payments to vendors and employees at February 28, 201529, 2016 as compared to May 31, 2014

2015. Accrued marketing programs increased $1,080,000 due toas a result of accruals for an ongoing marketing program for manufactured housing dealers and communities.dealers. Accruals are made monthly, and the majority of the payments occurare made during the Corporation’s fourth fiscal quarter.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Liquidity and Capital Resources — (Continued)

Accrued warranty increased primarily due to increased unit sales in fiscal 2016.

Capital expenditures totaled $312,000 for the first nine months of fiscal 2016 as compared to $178,000 for the first nine months of fiscal 2015 as compared2015.

If necessary, the Corporation has the ability to $649,000 forborrow money under the first nine monthsSecured Revolving Credit Facility, and against the cash surrender value of fiscal 2014. Approximately $556,000 of prior year expenditures was attributable to the renovation of the Mansfield, Texas facility to accommodate housing production.

Certain key cash flow metrics related to discontinued operations for the first nine months of fiscal 2015 are set forth below (in thousands):

Loss from discontinued operations, net of income taxes

$(6,175

Depreciation

$67  

Reduction in value of raw material inventory

$901  

Gain on sale of property, plant and equipment

$(670

With the sale of the recreational vehicle segment,certain life insurance policies. In addition, 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 $492,000, current liabilities of discontinued operations of $338,000, and an estimated $965,000 of 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 increase sales and decrease costs, and subsequent to February 28, 2015 obtained a revolving credit facility.costs. Management believes that it will be able to execute theirits strategies as noted above. Management is prepared to modify these strategies as appropriate to meet prevailing business and market conditions.

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.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

 

Forward Looking Information

CertainThe preceding Management’s Discussion and Analysis contains forward-looking statements in this report are considered forward looking as indicated bywithin the meaning of The Private Securities Litigation Reform Act of 1995. TheseForward-looking statements involve uncertaintiesare also made elsewhere in this report. The Corporation publishes other forward-looking statements from time to time.

Statements that may causeare 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 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 materially differ frommanagement’s expectations asand predictions is subject to a number of known and unknown risks and uncertainties, including the report date. These uncertainties include but are not limited to:following:

 

Consumer confidence and economic uncertaintyuncertainty;

 

Availability of wholesale and retail financingfinancing;

 

The health of the U.S. housing market as a wholewhole;

 

Federal, state and local regulationsRegulations pertaining to the manufactured housing industry

Cyclical nature of the housing and park model industriesindustries;

The cyclical nature of the manufactured housing and park model industries;

 

General or seasonal weather conditions affecting salessales;

 

Potential impact of natural disasters on sales and raw material costscosts;

 

Potential periodic inventory adjustments by independent retailersretailers;

 

Interest rate levelslevels;

 

Impact of inflationinflation;

 

Impact of rising fuel costs

Cost ofand labor and raw materialscosts;

 

Competitive pressures on pricing and promotional costscosts;

 

Catastrophic events impacting insurance costscosts;

 

The availability of insurance coverage for various risks to the CorporationCorporation;

 

Market demographicsdemographics; and

 

Management’s ability to attract and retain executive officers and key personnelpersonnel.

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 Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

As of February 28, 2015,29, 2016, 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) or Rule 15d-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 February 28, 2015.

Item 4.Controls and Procedures — (Continued).

29, 2016 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) or Rule 15d-15(f)) occurred during the third quarter ended February 28, 201529, 2016 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART IIOTHER INFORMATION

 

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.

PART II OTHER INFORMATION (CONTINUED)

 

Item 6.Exhibits.

Exhibits (Numbered according to Item 601 of Regulation S-K, Exhibit Table)

 

(10)
Material Contracts10.1Skyline Corporation 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 10-Q filed on October 15, 2015).
(31.1)10.2First 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 Plan (incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 10-Q filed on October 15, 2015).
31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule2002 – Rule 13a-14(a)/15d-14(a).
(31.2)31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule2002 – Rule 13a-14(a)/15d-14(a).
(32)32Certification of Chief Executive Officer and ChiefPeriodic Financial OfficerReports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002.
(101.INS)101The following materials from the Corporation’s Form 10-Q for the fiscal quarter ended February 29, 2016 formatted in an XBRL Instance Document.
(101.SCH)XBRL Taxonomy Extension Schema Document.
(101.CAL)XBRL Taxonomy Extension Calculation Linkbase Document.
(101.DEF)XBRL Taxonomy Definition Linkbase Document.
(101.LAB)XBRL Taxonomy Extension Label Linkbase Document.
(101.PRE)XBRL Taxonomy Extension Presentation Linkbase Document.Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Retained Earnings; (iii) Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.

Signatures

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:April 14, 2016

April 3, 2015

/s/ Jon S. Pilarski

Jon S. Pilarski
Chief Financial Officer
DATE:April 14, 2016

April 3, 2015

/s/ Martin R. Fransted

Martin R. Fransted
Corporate Controller

INDEX TO EXHIBITS

Exhibit
Number

 

Descriptions

  10 Material Contracts
  31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)
  31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)
  32Certification of Chief Executive Officer and Chief Financial Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL Instance Document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.Controller

 

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