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 29,November 30, 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 14, 2016 January 12, 2017

Common Stock,

$.0277 $.0277 Par Value

 8,391,244

 

 

 


FORM 10-Q

INDEX

PART I — FINANCIAL INFORMATION

 

     Page No. 
Item 1.

Financial Statements

PART I — FINANCIAL INFORMATION
  

Item 1.

Financial Statements
Consolidated Balance Sheets as of February 29,November 30, 2016 and May 31, 20152016

   1  

Consolidated Statements of Operations for the three-month and nine-monthsix-month periods ended February 29,November 30, 2016 and February 28, 2015

   3  

Consolidated Statements of Cash Flows for the nine-monthsix-month periods ended February 29,November 30, 2016 and February 28, 2015

   4  

Notes to the Consolidated Financial Statements

   5  

Item 2.

 

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

   1311  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures22
PART II — OTHER INFORMATION

Item 1.

Legal Proceedings22

Item 1A.

Risk Factors22

Item 6.

Exhibits23

Signatures

   24  
Item 4.

Controls and Procedures

25
PART II OTHER INFORMATION
Item 1.

Legal Proceedings

25
Item 1A.

Risk Factors

25
Item 6.

Exhibits

26
Signatures27


PART I FINANCIAL INFORMATION

 

Item 1.Financial StatementsStatements..

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets

(Dollars in thousands)

 

  February 29,
2016
   May 31,
2015
   November 30, 2016   May 31, 2016 
  (Unaudited)       (Unaudited)     
ASSETS            

Current Assets:

        

Cash

  $6,260    $4,995    $8,902    $7,659  

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

   12,738     15,288  

Accounts receivable

   15,823     15,153  

Inventories

   10,923     9,119     11,956     11,381  

Workers’ compensation security deposit

   1,749     1,732     690     1,294  

Other current assets

   424     447     1,048     331  
  

 

   

 

   

 

   

 

 

Total Current Assets

   32,094     31,581     38,419     35,818  
  

 

   

 

   

 

   

 

 

Property, Plant and Equipment:

    

Property, Plant and Equipment, at Cost:

    

Land

   2,996     2,996     2,996     2,996  

Buildings and improvements

   36,624     36,280     37,207     36,624  

Machinery and equipment

   16,223     16,332     17,142     16,977  
  

 

   

 

   

 

   

 

 
   55,843     55,608     57,345     56,597  

Less accumulated depreciation

   44,740     44,039     45,423     44,952  
  

 

   

 

   

 

   

 

 
   11,103     11,569     11,922     11,645  

Other Assets

   7,325     7,289     7,386     7,515  
  

 

   

 

   

 

   

 

 

Total Assets

  $50,522    $50,439    $57,727    $54,978  
  

 

   

 

   

 

   

 

 

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
   November 30, 2016 May 31, 2016 
  (Unaudited)     (Unaudited)   
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY  

Current Liabilities:

      

Accounts payable, trade

  $2,381   $3,033    $4,013   $3,921  

Accrued salaries and wages

   2,164   2,565     3,507   3,557  

Accrued marketing programs

   2,931   2,356     3,638   1,767  

Accrued warranty

   4,755   4,511     5,379   4,817  

Customer deposits

   1,332   1,521  

Other accrued liabilities

   2,725   2,652     2,756   2,448  
  

 

  

 

   

 

  

 

 

Total Current Liabilities

   14,956   15,117     20,625   18,031  
  

 

  

 

   

 

  

 

 

Long-Term Liabilities:

      

Deferred compensation expense

   5,072   5,237     4,946   5,002  

Accrued warranty

   2,400   2,400     2,500   2,500  

Life insurance loans

   4,312   4,312     4,312   4,312  
  

 

  

 

   

 

  

 

 

Total Long-Term Liabilities

   11,784   11,949     11,758   11,814  
  

 

  

 

   

 

  

 

 

Commitments and Contingencies — See Note 9

   

Commitments and Contingencies – See Note 8

   

Shareholders’ Equity:

      

Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares

   312   312     312   312  

Additional paid-in capital

   4,985   4,928     5,072   5,010  

Retained earnings

   84,229   83,877     85,704   85,555  

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

   (65,744 (65,744   (65,744 (65,744
  

 

  

 

   

 

  

 

 

Total Shareholders’ Equity

   23,782   23,373     25,344   25,133  
  

 

 ��

 

   

 

  

 

 

Total Liabilities and Shareholders’ Equity

  $50,522   $50,439    $57,727   $54,978  
  

 

  

 

   

 

  

 

 

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

For the Three-MonthThree-Months and Nine-Month PeriodsSix-Months Ended February 29,November 30, 2016 and February 28, 2015

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

 

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

OPERATIONS

        

Net sales

  $47,697   $38,109   $155,123   $137,380    $64,226   $58,684   $125,402   $107,426  

Cost of sales

   42,887   35,771   138,443   125,843     58,996   51,457   113,592   95,556  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Gross profit

   4,810   2,338   16,680   11,537     5,230   7,227   11,810   11,870  

Selling and administrative expenses

   5,246   5,159   16,105   15,347     5,739   5,400   11,489   10,859  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Operating (loss) income

   (436 (2,821 575   (3,810   (509 1,827   321   1,011  

Interest expense

   (78 (92 (236 (279   (86 (79 (172 (158

Interest income

   —     2    —     50  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

(Loss) income from continuing operations before income taxes

   (514 (2,911 339   (4,039   (595 1,748   149   853  

Income tax expense

   —      —      —      —       —      —      —      —    
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

(Loss) income from continuing operations

   (514 (2,911 339   (4,039   (595 1,748   149   853  

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

   (6 (86 13   (6,175

(Loss) income from discontinued operations, net of taxes

   —     (42  —     19  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net (loss) income

  $(520 $(2,997 $352   $(10,214  $(595 $1,706   $149   $872  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Basic (loss) income per share

  $(.06 $(.36 $.04   $(1.22

Basic and diluted (loss) income per share

  $(.07 $.20   $.02   $.10  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Basic (loss) income per share from continuing operations

  $(.06 $(.35 $.04   $(.48

Basic and diluted (loss) income per share from continuing operations

  $(.07 $.21   $.02   $.10  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Basic loss per share from discontinued operations

  $—     $(.01 $—     $(.74

Basic and diluted income (loss) per share from discontinued operations

  $—     $(.01 $—     $—    
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Weighted average number of common shares outstanding

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

Weighted average number of common shares outstanding:

     

Basic

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

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

   8,391,244   8,391,244   8,512,903   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 Cash Flows

For the Nine-Month PeriodsSix-Months Ended February 29,November 30, 2016 and February 28, 2015

(Dollars in thousands)

 

   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  
  

 

 

  

 

 

 

   2016  2015 
   (Unaudited) 

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income

  $149   $872  

Adjustments to reconcile net income to net cash from operating activities:

   

Depreciation

   511    520  

Amortization of debt financing costs

   51    39  

Share-based compensation

   62    35  

Change in assets and liabilities:

   

Accounts receivable

   (670  979  

Inventories

   (575  (1,640

Workers’ compensation security deposit

   604    940  

Other current assets

   (717  (923

Accounts payable, trade

   92    111  

Accrued liabilities

   2,502    1,329  

Other, net

   46    (183
  

 

 

  

 

 

 

Net cash from operating activities

   2,055    2,079  
  

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Purchase of property, plant and equipment

   (787  (245

Other, net

   (25  (25
  

 

 

  

 

 

 

Net cash from investing activities

   (812  (270
  

 

 

  

 

 

 

Net increase in cash

   1,243    1,809  

Cash at beginning of period

   7,659    4,995  
  

 

 

  

 

 

 

Cash at end of period

  $8,902   $6,804  
  

 

 

  

 

 

 

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

Item 1.Financial Statements — (Continued).

 

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 Basis of Presentation

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of February 29,November 30, 2016, in addition to the consolidated results of operations and cash flows for the three-month and nine-monthsix-month periods ended February 29,November 30, 2016 and February 28, 2015, and 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, 20152016 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 period amounts related to assets and liabilities of discontinued operations have been reclassified to conform to current period presentation.

NOTE 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 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 financial 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 operations.

In July 2015, FASB issued ASU No. 2015-11,Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 2 Recently Issued Accounting Pronouncements — (Continued)

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 Corporation will evaluate how the adoption of ASU 2014-15 will impact its footnote disclosures.

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 transfer 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 financial position and result of operations.

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 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.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 3 Management’s Plan — (Continued)

These strategies include but are not limited to:

Increasing Sales

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 growth.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 42 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, the Corporation completed the sale of certain assets associated with its recreational vehicle segment to Evergreen Recreational Vehicles, LLC.

The following table summarizes the results of discontinued operations:

 

  Three-Months Ended   Six-Months Ended 
  Three-Months Ended   Nine-Months Ended   November 30,   November 30, 
  February 29,
2016
   February 28,
2015
   February 29,
2016
   February 28,
2015
   2016   2015   2016   2015 
  (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
  (Dollars in thousands)   (Dollars in thousands)   (Dollars in thousands)   (Dollars in thousands) 

Net Sales

  $5    $52    $71    $9,767    $—      $45    $—      $66  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Operating (loss) income of discontinued operations

  $(6  $(86  $13    $(5,944  $—      $(42  $—      $19  

Loss on disposal of discontinued operations

   —       —       —       (231
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

(Loss) income before income taxes

   (6   (86   13     (6,175   —       (42   —       19  

Income tax expense

   —       —       —       —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

(Loss) income from discontinued operations, net of taxes

  $(6  $(86  $13    $(6,175  $—      $(42  $—      $19  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 53 Inventories

Total inventories consist of the following:

 

  February 29,
2016
   May 31,
2015
   November 30, 2016   May 31, 2016 
  (Unaudited)       (Unaudited)     
  (Dollars in thousands)   (Dollars in thousands) 

Raw materials

  $6,906    $5,828    $8,302    $7,198  

Work in process

   3,073     3,137     3,364     3,447  

Finished goods

   944     154     290     736  
  

 

   

 

   

 

   

 

 
  $10,923    $9,119    $11,956    $11,381  
  

 

   

 

   

 

   

 

 

NOTE 64 Other Assets

Other assets consist primarily of the cash surrender value of life insurance policies which totaled $6,736,000$6,914,000 and $6,677,000$6,885,000 at February 29,November 30, 2016 and May 31, 2015,2016, respectively.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 75 Warranty

A reconciliation of accrued warranty is as follows:

 

  Six-Months Ended 
  Nine-Months Ended   November 30, 
  February 29,
2016
   February 28,
2015
   2016   2015 
  (Unaudited)   (Unaudited) 
  (Dollars in thousands)   (Dollars in thousands) 

Balance at the beginning of the period

  $6,911    $5,697    $7,317    $6,911  

Accruals for warranties

   5,087     4,932     3,842     3,439  

Settlements made during the period

   (4,843   (4,907   (3,280   (3,332
  

 

   

 

   

 

   

 

 

Balance at the end of the period

   7,155     5,722     7,879     7,018  

Non-current balance

   2,400     2,000     2,500     2,400  
  

 

   

 

   

 

   

 

 

Accrued warranty

  $4,755    $3,722    $5,379    $4,618  
  

 

   

 

   

 

   

 

 

At February 29,November 30, 2016, the total current obligation for warranty obligationand related expenses associated with the discontinued recreational vehicle segmentoperations is approximately $62,000.estimated to be $117,000 as compared to $150,000 at May 31, 2016.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited) (Continued)

NOTE 6 Life Insurance Loans

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 5.2 percent.

NOTE 87 Income Taxes

At February 29,November 30, 2016, the Corporation’s gross deferred tax assets of approximately $49.8$48.8 million consist of approximately $34.5$33.8 million in federal net operating loss and tax credit carryforwards, $8.0$7.6 million in state net operating loss carryforwards and $7.3$7.4 million resulting from temporary differences between financial and tax reporting. The federal net operating loss and tax credit carryforwards have a life expectancy of between twelveeleven and twenty years. The state net operating loss carryforwards have a life expectancy, depending on the state where a loss was incurred, between one 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 ninesix months ended February 29,November 30, 2016, the Corporation reported the utilization ofutilized previously fully-reserved federal net operating loss carryforwards of $17,000 and state operating loss carryforwardsnet deferred tax assets of $97,000$127,000 and $86,000, respectively, and released corresponding amounts of the valuation allowance to offset federal and state income tax expense.

NOTE 98 Commitments and Contingencies

The Corporation was contingently liable at February 29,November 30, 2016 and May 31, 2015,2016, 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 recreational vehiclepark model industries, the Corporation agrees to repurchase units in the event of default by the dealer at declining prices over the term of the agreement. The period to potentially repurchase units is between 12 to 24 months.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 9 Commitments and Contingencies — (Continued)

The maximum repurchase liability is the total amount that would be paid upon the default of the Corporation’s independent dealers.

The maximum potential repurchase liability for continuing and discontinued operations, without reduction for the resale value of the repurchased units, was approximately $48 million at February 29, 2016 and approximately $60 million at May 31, 2015. At February 29, 2016 and May 31, 2015, the maximum potential repurchase liability, without reduction for the resale value of the repurchased units, associated with discontinued operations was approximately $8$25 million at November 30, 2016 and $19 million, respectively.May 31, 2016. As a result of the Corporation’s favorable experience regarding repurchased units, which is largely due to the strength of dealers selling the Corporation’s products, the Corporation maintained at February 29,November 30, 2016 and May 31, 2015,2016, a $100,000 loss reserve that is a component of other accrued liabilities. Management believes that the Corporation’s exit from the recreational vehicle business will not materially 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.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Continued)

NOTE 8 Commitments and Contingencies (Continued)

This amount has historically been insignificant. The Corporation believes that any potential loss under the agreements in effect at February 29,November 30, 2016 will not be material to its financial position or results of operations.

The amounts of There were no obligations or incurred net losses from repurchased units all of which were from discontinued operations, and incurred net losses for the three and six month periods reported are as follows:ended November 30, 2016 and 2015.

   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.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 109 Secured Revolving Credit Facility

On March 20, 2015, the Corporation (“Borrower(s)”) 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 CorporationBorrowers for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term. The Corporation may obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. In addition, loan advances bear interest at 3.75% in excess ofThe Wall Street Journal’s published one year LIBOR rate, and are secured by substantially all of the Corporation’sBorrowers’ 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. First Business Capital also agreed under the Loan Agreement to issue, or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the Corporation. However, no advances have yet been made in connection with such letters of credit.

During the first quarter of fiscalIn November 2016 the Corporation on two occasions did not meet a covenant requiring a monthly loss not exceeding $500,000. Consequently,to exceed $250,000. The inability to meet this covenant represents an event of default, which if not cured and waived could negatively affect the Corporation’s ability to obtain financing under the facility and thereby have an adverse effect on liquidity. Subsequent to November 30, 2016, the Corporation received a waiver for the default that occurred in the second quarter a waiver of the defaults that occurred.quarter. In addition, the following modifications were made to the Loan Agreement:

A covenant specifying that a monthly loss not exceed $500,000Agreement was modified to $1,500,000 foreliminate the monthly maximum Net Loss covenant effective with the fiscal month ended December 2015, $1,000,000 for January 2016, and $1,000,000 for February,31, 2016. Following February 2016,Except as provided herein, the maximum monthly net loss as noted in the original Loan Agreement returnsand all other loan documentation related thereto shall remain in full force and effect in accordance with their terms.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to $500,000 for March to May 2016, and $250,000 thereafter;

Consolidated Financial Statements (Continued)

 

The limit for the lease, purchase or acquisition of any asset increased 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 Loan Agreement covenants as of February 29, 2016.

NOTE 1110 Stock-Based Compensation

On June 25, 2015, the Corporation’s Board of Directors approved the 2015 Stock Incentive Plan (“Plan”), which allows the granting of stock options and other equity awards to directors, officers, employees, and eligible independent contractors of the Corporation and is intended to retain and reward key employees’ performance and efforts as they relate to the Corporation’s long-term objectives and strategic plan. The Plan was subsequently approved by shareholders at the Corporation’s annual shareholder meeting on September 21, 2015. A total of 700,000 shares of Common Stock have been reserved for issuance under the Plan. Stock option awards are granted with an exercise price equal to, or greater than, the market price of the Corporation’s stock at the date of grant and vest over a period of time as determined by the Corporation at the date of grant up to the contractual ten year life of the options, at which time the options expire.expires.

DuringThe following table summarizes option activity for the ninesix months ended February 29, 2016, the Corporation granted 200,000 and 25,000 stock options at a weighted average exercise price per share of $3.28 with a five year vesting period. November 30, 2016:

   Number of
Shares
 

Outstanding at May 31, 2016

   225,000  

Granted

   25,000  
  

 

 

 

Outstanding at November 30, 2016

   250,000  
  

 

 

 

Vested and exercisable options at November 30, 2016

   40,000  
  

 

 

 

Weighted average exercise price per share of vested and exercisable options

  $3.12  
  

 

 

 

Non-vested options at November 30, 2016

   210,000  
  

 

 

 

Weighted average grant-date fair value per share of non-vested options

  $2.67  
  

 

 

 

Stock-based compensation expense for the fair value of the stock options vested during the three and nine months ended February 29, 2016second quarter of 2017 was approximately $22,000$31,000 and $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)

$62,000 for the first half of fiscal 2017. At February 29,November 30, 2016, the intrinsic value of all options outstanding approximated $169,000$2,229,000 and had a weighted-average remaining contractual life of approximately nine years. In addition, the intrinsic value of all vested and exercisable options outstanding approximated $387,000 and had a remaining contractual life of approximately nine years. Total unrecognized compensation expense related to stock-based awards outstanding at February 29,November 30, 2016 was $434,000$499,000 and is to be recorded over a weighted-average life of approximately four years.

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Continued)

NOTE 10 Stock-Based Compensation — (Continued)

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, 2016first half of fiscal 2017 were estimated at the date of grant using the following weighted average assumptions:

 

Volatility

   55.866.0

Risk-free interest rate

   2.221.47

Expected option life in years

   9.727.50  

Dividend yield

   0

Volatility is estimated based on historical volatility measured monthly for a time period equal to the expected life of the option ending on the date of grant. The risk-free interest rate is determined based on observed U.S. Treasury yields in effect at the time of the grant for maturities equivalent to the expected life of the options. The expected option life (estimated average period of time 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 adjusted for any expected changes during the life of the options.

NOTE 11 Earnings Per Share

Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Corporation’s Stock Incentive Plan and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):

Item 1.Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Continued)

NOTE 11 Earnings Per Share (Continued)

   Three-Months Ended   Six-Months Ended 
   November 30,   November 30, 
   2016   2015   2016   2015 

Net income (loss)

  $(595  $1,706    $149    $872  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average share outstanding:

        

Basic

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

Common stock equivalents—treasury stock method

   —       —       121,659     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   8,391,244     8,391,244     8,512,903     8,391,244  

Net income (loss) per share:

        

Basic

  $(.07  $.20    $.02    $.10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $(.07  $.20    $.02    $.10  
  

 

 

   

 

 

   

 

 

   

 

 

 

For the second quarters of fiscal 2017 and fiscal 2016, there were 139,532 and 119,225 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share, respectively. There were 8,727 and 121,217 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the six months ended November 30, 2016 and 2015, respectively.

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 nineten manufacturing facilities in eight states.nine states; including a facility in Elkhart, Indiana that commenced operations in June 2016. Manufactured housing, modular housing and park models are sold to customers 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, modular housing and park models are affected by winter weather conditions at the Corporation’s northern plants. 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 “Shore Park” trademark.

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)

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.

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

  2011   2012  2013  2014  2015 

Industry

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

Percentage Increase (Decrease)

     6.4  9.7  6.8  9.7

Corporation

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

Percentage Increase (Decrease)

     (1.7%)   19.3  21.5  7.2

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)

Manufactured Housing

  2011   2012 2013 2014 2015 

Industry

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

Percentage Increase

     6.4 9.7 6.8 9.7

Corporation

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

Percentage Increase (Decrease)

     (1.7%)  19.3 21.5 7.2

Modular Housing

  2011   2012 2013 2014 2015        

*Industry

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

Percentage Increase (Decrease)

     8.9 5.5 (1.3%)  .9     8.9 5.5 (1.3%)  0.9

**Corporation

   347     382   350   477   341     347     382   350   477   341  

Percentage Increase (Decrease)

     10.1 (8.4%)  36.3 (28.5%)      10.1 (8.4%)  36.3 (28.5%) 

Park Models

              

Industry

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

Percentage Increase (Decrease)

     0.7 29.4 5.1 (3.5%)      0.7 29.4 5.1 (3.5%) 

Corporation

   170     138   171   307   380     170     138   171   307   380  

Percentage Increase (Decrease)

     (18.8%)  23.9 79.5 23.8     (18.8%)  23.9 79.5 23.8

 

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

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

Fiscal 2017 Second Quarter and First Half Results

The Corporation experienced the following results during the second quarter of fiscal 2017:

Net sales were $64,226,000, an approximate 9.4 percent increase from the $58,684,000 reported in the same period a year ago.

Loss from continuing operations was $595,000 as compared to income of $1,748,000 for the same period a year ago.

No income or loss from discontinued operations as compared to a loss of $42,000 for the same period a year ago.

Net loss for fiscal 2017 was $595,000 as compared to net income of $1,706,000 for fiscal 2016. On a basic per share basis, net loss was $.07 as compared to a net income of $.20 for the comparable period a year ago.

The Corporation experienced the following results during the first half of fiscal 2017:

Net sales were $125,402,000, an approximate 16.7 percent increase from the $107,426,000 reported in the same period a year ago.

Income from continuing operations was $149,000 as compared to income of $853,000 for the same period a year ago.

No income or loss from discontinued operations as compared to income of $19,000 for the same period a year ago.

Net income for fiscal 2017 was $149,000 as compared to a net income of $872,000 for fiscal 2016. On a basic per share basis, net income was $.02 as compared to a net income of $.10 for the comparable period a year ago.

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, the Corporation completed the sale of certain assets associated with its recreational vehicle segment to Evergreen Recreational Vehicles, LLC.

The following table summarizes the results of 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).

 

Fiscal 2016 ResultsDiscontinued Operations — (Continued)

The Corporation experiencedfollowing table summarizes the following results during the third quarter of fiscal 2016:discontinued operations:

 

Net sales from continuing operations were $47,697,000, a 25.2 percent increase from the $38,109,000 reported in the same period a year ago.

Loss from continuing operations for fiscal 2016 was $514,000 as compared to a loss of $2,911,000 for the same period a year ago.

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. On a per share basis, net loss was $.06 as compared to a 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 ago.

Income from discontinued operations, net of incomes taxes, was $13,000 for fiscal 2016 as compared to a loss of $6,175,000 for the same period a year ago.

Net income for fiscal 2016 was $352,000 as compared to a net loss of $10,214,000 for the first nine months of fiscal 2015. On a per share basis, net income was $.04 as compared to a net loss of $1.22 for the comparable period a year ago.
   Three-Months Ended   Six-Months Ended 
   November 30,   November 30, 
   2016   2015   2016   2015 
   (Unaudited) 
   (Dollars in thousands) 

Net Sales

  $ —      $45    $ —     $66  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income of discontinued operations

   —      $(42   —      $19  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

   —       (42   —       19  

Income tax expense

   —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from discontinued operations, net of taxes

  $—      $(42  $—      $19  
  

 

 

   

 

 

   

 

 

   

 

 

 

Secured Revolving Credit Facility

On March 20, 2015, the Corporation (“Borrower(s)”) 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 CorporationBorrowers for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term. The Corporation may obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. In addition, loan advances bear interest at 3.75% in excess ofThe Wall Street Journal’s published one year LIBOR rate, and are secured by substantially all of the Corporation’sBorrowers’ 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

DuringAgreement. First Business Capital also agreed under the first quarterLoan Agreement to issue, or cause to be issued by a bank affiliate or other bank, letters of fiscalcredit for the account of the Corporation. However, no advances have yet been made in connection with such letters of credit. . In November 2016 the Corporation on two occasions did not meet a covenant requiring a monthly loss not exceeding $500,000. Consequently,to exceed $250,000. The inability to meet this covenant represents an event of default, which if not cured and waived could negatively affect the Corporation’s ability to obtain financing under the facility and thereby have an adverse effect on liquidity. Subsequent to November 30, 2016, the Corporation received a waiver for the default that occurred in the second quarter a waiver of the defaults that occurred.quarter. In addition, the following modifications were made to the Loan Agreement.

A covenant specifying that a monthly loss not exceed $500,000Agreement was modified to $1,500,000 foreliminate the monthly maximum Net Loss covenant effective with the fiscal month ended December 2015, $1,000,000 for January 2016, and $1,000,000 for February,31, 2016. Following February 2016,Except as provided herein, the maximum monthly net loss as noted in the original Loan Agreement returns to $500,000 for March to May 2016, and $250,000 thereafter;
all other loan documentation related thereto shall remain in full force and effect in accordance with their terms.

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

Secured Revolving Credit Facility — (Continued)

 

The limit for the lease, purchase or acquisition

Results of any asset increased from $600,000 per yearOperations – Three-Month Period Ended November 30, 2016 Compared to $800,000 per year; and

Three-Month Period Ended November 30, 2015

 

Net Sales and Unit Shipments                    
   November 30,       November 30,       Increase 
   2016   Percent   2015   Percent   (Decrease) 
   (Unaudited) 
   (Dollars in thousands) 

Net Sales

          

Manufactured Housing

  $54,207     84.4    $48,660     82.9    $5,547  

Modular Housing

   6,718     10.5     7,904     13.5     (1,186

Park Models

   3,301     5.1     2,120     3.6     1,181  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Sales

  $64,226     100.0    $58,684     100.0    $5,542  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unit Shipments

          

Manufactured Housing

   1,037     84.8     900     84.0     137  

Modular Housing

   100     8.2     114     10.6     (14

Park Models

   85     7.0     57     5.4     28  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Unit Shipments

   1,222     100.0     1,071     100.0     151  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales increased approximately 9.4 percent. The monthly bank assessment fee increasedincrease was comprised of a 11.4 percent increase in manufactured housing net sales, a 15.0 percent decrease in modular housing net sales, and a 55.7 percent increase in park model net sales. Current year net manufactured housing sales includes approximately $4,168,000 attributable to the Elkhart, Indiana facility which commenced operations in June 2016. Modular net sales declined primarily due to decreased need from .25% per annumMidwest-based dealers as manufactured housing products are able to .35% per annum.

The Corporation was in compliance with Loan Agreement covenantssatisfy demand from retail customers.Park model net sales rose as a result of February 29, 2016.Management’s initiative to increase this product’s exposure at substantially all of the Corporation’s facilities.

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 inFor the ordinary course of business. Due to recurring losses during certainfollowing three-month periods, the Corporation has historically experienced negative cash flowspercentage increase or decrease in unit shipments from operating activities.the comparable period last year are as follows:

The level of historical negative cash flows from operations raise substantial doubt about

   November 30, 2016  October 31, 2016 
   Skyline  Industry 

Manufactured Housing

   15.2  11.9

Modular Housing

   (12.3%)   Not Available  

Park Models

   49.1  5.4

Total

   14.1  Not Available  

Compared to the Corporation’s ability to continueprior year, the average net sales price for manufactured housing and modular housing decreased 3.3 and 3.1 percent, respectively, primarily 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 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.

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 financial 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 operations.

In July 2015, FASB issued ASU No. 2015-11,Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the 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 Corporation will evaluate how the adoption of ASU 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 transfer 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 financial position and result of operations.homes sold with less square footage and fewer amenities and was partially offset by a price increase.

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

 

Results of Operations Three-Month Period Ended February 29,November 30, 2016 Compared to Three-Month Period Ended February 28,November 30, 2015

Net Sales and Unit Shipments — (Continued)

 

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

Net Sales

          

Manufactured Housing

  $38,709     81.2    $30,067     78.9    $8,642  

Modular Housing

   5,084     10.6     4,382     11.5     702  

Park Models

   3,904     8.2     3,660     9.6     244  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Sales

  $47,697     100.0    $38,109     100.0    $9,588  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unit Shipments

          

Manufactured Housing

   695     79.7     507     76.5     188  

Modular Housing

   73     8.4     58     8.7     15  

Park Models

   104     11.9     98     14.8     6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Unit Shipments

   872     100.0     663     100.0     209  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales increased 25.2 percent. The increase was comprised of a 28.7 percent increase in manufactured housing net sales, a 16.0 percent increase in modular housing net sales, and a 6.7 percent increase in park model net sales.

For the three-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

   37.1  19.6

Modular Housing

   25.9  Not available  

Park Models

   6.1  (7.7%) 

Total

   31.5  Not applicable  

Compared to the prior year, the average net sales price for manufactured and modular housing decreased 6.1 percent and 7.8 percent, respectively. The decrease primarily results from the sale of homes with smaller square footage and fewer 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).

Resultsincreased 4.4 percent as a result of Operations — Three-Month Period Ended February 29, 2016 Compared to Three-Month Period Ended February 28, 2015 — (Continued)

a price increase and product sold with greater square footage and additional amenities.

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  
   November 30,   Percent of   November 30,   Percent of     
   2016   Net Sales   2015   Net Sales   Increase 
   (Unaudited) 
   (Dollars in Thousands) 

Cost of Sales

  $58,996     91.9    $51,457     87.7    $7,539  

Cost of sales, in dollars, increased primarily as a result of increased net sales. In addition, current year cost of sales includes approximately $4,524,000 attributable to the ongoing operation of the Elkhart, Indiana facility as the Corporation re-establishes a presence in the Central Great Lakes region of the Midwest market. As a percentage of net sales, cost of sales decreased in partincreased primarily due to more effectively controlling materialhigher labor costs duringassociated with hiring and training employees at facilities which are increasing production output. In addition, increased employee inexperience resulted in higher workers compensation costs for the procurement and manufacturing process, and certain manufacturing costs remaining fixed amid rising sales.period.

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  
   November 30,   Percent of   November 30,   Percent of     
   2016   Net Sales   2015   Net Sales   Increase 
   (Unaudited) 
   (Dollars in thousands) 

Selling and administrative expenses

  $5,739     8.9    $5,400     9.2    $339  

Selling and administrative expenses increased primarily as a result of an increase$194,000 in sales-based compensation and performance-based compensation; which was partially offset by the absence of any expensescosts associated with the Special Committee ofElkhart, Indiana facility. In addition, the Board of DirectorsCorporation benefitted in prior year from a $250,000 final payment received in the current year as compared to approximately $176,000 in the same period last year.second quarter on an account that had been previously fully reserved. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining fixedrelatively constant 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 — Nine-Month– Three-Month Period Ended February 29,November 30, 2016 Compared to Nine-MonthThree-Month Period Ended February 28,November 30, 2015

Interest Expense

   November 30,   November 30,   Increase 
   2016   2015   (Decrease) 
   (Unaudited) 
   (Dollars in thousands) 

Interest on life insurance policies loans

  $55    $56    $(1

Amortization on debt financing costs

   26     20     6  

Interest on secured revolving credit facility

   5     3     2  
  

 

 

   

 

 

   

 

 

 
  $86    $79    $7  
  

 

 

   

 

 

   

 

 

 

Interest expense primarily increased as the result of debt financing costs incurred in the fourth quarter of fiscal 2016 that are being amortized over the remaining term of the Secured Revolving Credit Facility.

Results of Operations – Six Month Period Ended November 30, 2016 Compared to Six-Month Period Ended November 30, 2015

Net Sales and Unit Shipments

 

  November 30,       November 30,       Increase 
  February 29,
2016
   Percent   February 28,
2015
   Percent   Increase
(Decrease)
   2016   Percent   2015   Percent   (Decrease) 
  (Unaudited)   (Unaudited) 
  (Dollars in thousands)   (Dollars in thousands) 

Net Sales

                    

Manufactured Housing

  $127,300     82.1    $109,370     79.6    $17,930    $103,964     82.9    $88,591     82.4    $15,373  

Modular Housing

   19,671     12.7     19,288     14.0     383     13,863     11.1     14,587     13.6     (724

Park Models

   8,152     5.2     8,722     6.4     (570   7,575     6.0     4,248     4.0     3,327  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Net Sales

  $155,123     100.0    $137,380     100.0    $17,743    $125,402     100.0    $107,426     100.0    $17,976  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Unit Shipments

                    

Manufactured Housing

   2,325     82.1     2,009     79.6     316     1,985     83.4     1,630     83.2     355  

Modular Housing

   291     10.3     282     11.2     9     197     8.3     218     11.1     (21

Park Models

   216     7.6     232     9.2     (16   197     8.3     112     5.7     85  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Unit Shipments

   2,832     100.0     2,523     100.0     309     2,379     100.0     1,960     100.0     419  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net sales increased 12.9approximately 16.7 percent. The increase was comprised of a 16.417.4 percent increase in manufactured housing net sales, a 2.05.0 percent increasedecrease in modular housing net sales, and a 6.578.3 percent decreaseincrease in park model net sales. Current year net manufactured housing sales includes approximately $6,254,000 attributable to the Elkhart, Indiana facility which commenced operations in June 2016. Modular net sales declined primarily due to decreased need from Midwest-based dealers as manufactured housing products are able to satisfy demand from retail customers.Park model net sales rose as a result of Management’s initiative to increase this product’s exposure at substantially all of the Corporation’s facilities.

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

Results of Operations – Six Month Period Ended November 30, 2016 Compared to Six-Month Period Ended November 30, 2015

Net Sales and Unit Shipments — (Continued)

For the nine-monthfollowing six-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.

   November 30, 2016  October 31, 2016 
   Skyline  Industry 

Manufactured Housing

   21.8  10.1

Modular Housing

   (9.6%)   Not Available  

Park Models

   75.9  5.4

Total

   21.4  Not Available  

Compared to the prior year, the average net sales price for manufactured housing decreased 3.6 primarily as a result of homes sold with less square footage and park models is relatively unchanged.fewer amenities and was partially offset by a price increase. The average net sales price for modular housing decreased 1.2and park models increased 5.2 and 1.4 percent, respectively, as a result of homesa price increase and product sold with smallgreater square footage and feweradditional amenities.

Cost of Sales

   November 30,   Percent of   November 30,   Percent of     
   2016   Net Sales   2015   Net Sales   Increase 
   (Unaudited) 
   (Dollars in Thousands) 

Cost of Sales

  $113,592     90.6    $95,556     89.0    $18,036  

Cost of sales, in dollars, increased primarily as a result of increased net sales. In addition, current year cost of sales includes approximately $7,169,000 attributable to the startup and ongoing operation of the Elkhart, Indiana facility as the Corporation re-establishes a presence in the Central Great Lakes region of the Midwest market. As a percentage of net sales, cost of sales increased primarily due to higher labor costs associated with hiring and training employees at facilities which are increasing production output. In addition, increased employee inexperience resulted in higher workers compensation costs for the period.

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

Results of Operations — Nine-Month– Six Month Period Ended February 29,November 30, 2016 Compared to Nine-MonthSix-Month Period Ended February 28,November 30, 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

  $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 more effectively controlling material costs during the procurement and manufacturing process.

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

  $16,105     10.4    $15,347     11.2    $758  
   November 30,   Percent of   November 30,   Percent of     
   2016   Net Sales   2015   Net Sales   Increase 
   (Unaudited) 
   (Dollars in thousands) 

Selling and administrative expenses

  $11,489     9.2    $10,859     10.1    $630  

Selling and administrative expenses increased primarily as a result of increased salaries, wages, sales-based compensation, performance-based compensation and increased marketing costs; which was partially offset by the absence of any expenses$366,000 in costs associated with the Special Committee of the Board of Directors in the current year as compared to approximately $237,000 in the same period last year.Elkhart, Indiana facility. In addition, the Corporation benefitedbenefitted in prior year from a $250,000 final payment received in the second quarter on an account that had been previously been fully reserved. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining fixedrelatively constant amid rising sales.

Interest Expense

   November 30,   November 30,     
   2016   2015   Increase 
   (Unaudited) 
   (Dollars in thousands) 

Interest on life insurance policies loans

  $112    $112    $—    

Amortization on debt financing costs

   51     39     12  

Interest on secured revolving credit facility

   9     7     2  
  

 

 

   

 

 

   

 

 

 
  $172    $158    $14  
  

 

 

   

 

 

   

 

 

 

Interest expense of $167,000 and $279,000 forincreased primarily as the for the first nine months of fiscal 2016 and 2015, respectively, related to interest on life insurance policy loans. Interest expense in the for the first nine months of fiscal 2016 included $58,000 of amortizationresult of debt financing costs incurred in the fourth quarter of fiscal 2016 that are being amortized over the remaining term of the Secured Revolving Credit Facility.

Liquidity and $11,000 of interest expense associated with the secured revolving credit facility.Capital Resources

   November 30, 2016   May 31, 2016   Increase 
   (Unaudited)         
   (Dollars in thousands) 

Cash

  $8,902    $7,659    $1,243  

Current assets, exclusive of cash

  $29,517    $28,159    $1,358  

Current liabilities

  $20,625    $18,031    $2,594  

Working capital

  $17,794    $17,787    $7  

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

 

Liquidity and Capital Resources — (Continued)

 

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

Cash

  $6,260    $4,995    $1,265  

Current assets, exclusive of cash

  $25,834    $26,586    $(752

Current liabilities

  $14,956    $15,117    $(161

Working capital

  $17,138    $16,464    $674  

As noted in the Consolidated Statements of Cash Flows, cash increased due to cash flow from operating activities increasing $1,626,000$2,055,000 and cash flow from investing activities decreasing $361,000.$812,000. Current assets, exclusive of cash, decreased mainlyincreased primarily due to a $2,550,000 decrease$670,000 increase in accountsAccounts receivable, partiallya $575,000 increase in Inventories, and a $717,000 increase in Other current assets; offset by a $1,804,000 increase$604,000 decrease in inventories.Workers’ compensation security deposit. Accounts receivable declinedincreased as a result of the timing of payments from dealers and communities at February 29,November 30, 2016 as compared to May 31, 2015.2016. Inventories rose primarily due to increased as a result of increased production and homes awaiting shipment to dealers and communitiesstocking at February 29,the Elkhart, Indiana facility at November 30, 2016 as compared to May 31, 2015.2016. Other current assets increased primarily as a result of annual insurance premiums paid during the first quarter of fiscal 2017. Workers’ compensation security deposit decreased to fund workers compensation claims for the current fiscal year.

Current liabilities decreasedincreased primarily as a result of a $652,000 decrease$562,000 increase in accounts payable,Accrued warranty and a $401,000 decrease in accrued salaries and wages, a $575,000$1,871,000 increase in accrued marketing programs, and a $244,000 increase in accrued warranty. Accounts payable and accrued salaries and wages decreasedprograms. Accrued warranty rose due to the timing of payments to vendors and employees at February 29, 2016 as compared to May 31, 2015.increased unit sales. Accrued marketing programs increasedrose as a result of accruals for an ongoing marketing program for manufactured housing dealers.customers. Accruals are made monthly, and the majority of payments are made during the Corporation’s fourth fiscal quarter. Accrued warranty increased primarily due to increased unit sales in fiscal 2016.

Capital expenditures totaled $312,000$787,000 for the first nine monthshalf of fiscal 20162017 as compared to $178,000$245,000 for the first nine monthshalf of fiscal 2015.2016. The increase is the result of building improvements, purchasing equipment for the Elkhart, Indiana facility, and replacing equipment that had reached its full economic useful life.

In November 2016 the Corporation did not meet a covenant requiring a monthly loss not to exceed $250,000. The inability to meet this covenant represents an event of default, which if not cured and waived could negatively affect the Corporation’s ability to obtain financing under the facility and thereby have an adverse effect on liquidity. Subsequent to November 30, 2016, the Corporation received a waiver for the default that occurred in the second quarter. In addition, the Loan Agreement was modified to eliminate the monthly maximum Net Loss covenant effective with the fiscal month ended December 31, 2016. Except as provided herein, the Loan Agreement and all other loan documentation related thereto shall remain in full force and effect in accordance with their terms.

If necessary, the Corporation has the ability to borrow moneyapproximately $2,300,000 under the Secured Revolving Credit Facility, and against the cash surrender value of certain life insurance policies. In addition, the Corporation anticipates that cash needs associated with discontinued operations will be insignificant in future periods since it will not be funding significant operating losses.

As noted in “Management’s Plan”, the Corporation is aggressively pursuing strategies in order to increase sales and decrease costs. Management believes that it will be able to execute its 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 adjusted 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

The preceding Management’s Discussion and Analysis contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements are also made elsewhere in this report. The Corporation publishes other forward-looking statements from time to time.

Statements that are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions, are intended to identify forward-looking statements. We caution to be aware of the speculative nature of “forward-looking statements.” Although these statements reflect the Corporation’s good faith belief based on current expectations, estimates, and projections about (among other things) the industry and the markets in which the Corporation operates, they are not guarantees of future performance.

Whether actual results will conform to management’s expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the following:

 

Consumer confidence and economic uncertainty;

 

Availability of wholesale and retail financing;

 

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

 

Regulations pertaining to the housing and park model industries;

 

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

 

General or seasonal weather conditions affecting sales;

 

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

 

Potential periodic inventory adjustments by independent retailers;

 

Interest rate levels;

 

Impact of inflation;

 

Impact of fuel and labor costs;

 

Competitive pressures on pricing and promotional costs;

 

Catastrophic events impacting insurance costs;

 

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

 

Market demographics; and

 

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

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 29,November 30, 2016, the Corporation conducted an evaluation, under the supervision and with the 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 (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 29,November 30, 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 overOver 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 thirdfiscal quarter ended February 29,November 30, 2016 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II OTHER INFORMATION

 

Item 1.Legal Proceedings.Proceedings:

The Corporation is a party to various pending legal proceedings in the normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Corporation’s results of operations or financial position.

 

Item 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, 2015.2016.

PART II OTHER INFORMATION (CONTINUED)

 

Item 6.Exhibits.

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

 

10.1  Skyline 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).
10.2FirstThird Amendment to Loan and Security Agreement and Waiver of Defaults dated October 14, 2015January 10, 2017 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).Corp.
31.1  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Rule 13a-14(a)/15d-14(a).
31.2  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Rule 13a-14(a)/15d-14(a).
32  Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101  The following materials from the Corporation’s Form 10-Q for the fiscal quarter ended February 29,November 30, 2016 formatted in an XBRL 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 January 12, 2017    

/s/ Jon S. Pilarski

    Jon S. Pilarski
    Chief Financial Officer
DATE:April 14, 2016 January 12, 2017    

/s/ Martin R. Fransted

    

Martin R. Fransted

Controller

 

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