Notes to Consolidated Financial Statements
NOTE 1
|
Nature of Operations, Accounting Policies of Consolidated Financial Statements
|
Nature of operations
Skyline Corporations core ongoing business activities consists of designing, producing and
marketing manufactured housing, modular housing and park models to independent dealers and manufactured housing communities throughout the United States and Canada. Manufactured housing represents homes built according to a national code, modular
housing represents homes built to a local code, and park models are built to specifications established by the American National Standards Institute. These dealers and communities often utilize floor plan financing arrangements with lending
institutions. The Corporations net sales are predominately from its housing products. Note 2 of Notes to Consolidated Financial Statement describes the recreational vehicle segment that was sold on October 7, 2014. Accordingly, the
accompanying financial statements (including footnote disclosures unless otherwise indicated) reflect these operations as discontinued operations apart from the Corporations continuing housing operations.
The following is a summary of the accounting policies that have a significant effect on the consolidated financial statements.
Basis of presentation
The consolidated financial statements include the accounts of Skyline Corporation and its wholly-owned
subsidiaries of Skyline Homes, Inc., Homette Corporation and Layton Homes Corp. (the Corporation). All intercompany transactions have been eliminated. Certain prior year amounts related to assets and liabilities of discontinued
operations, customer deposits and long-term accrued warranty have been reclassified to conform to current period presentation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Key estimates would include accruals for warranty, workers compensation, marketing programs and health insurance as well as
valuations for long-lived assets and deferred tax assets.
Revenue recognition
Substantially all of the
Corporations 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 customers
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 Corporations premises for delivery to a customer. Freight
billed to customers is considered sales revenue, and the related freight costs are cost of sales. Volume based rebates paid to dealers are classified as a reduction of sales revenue. Sales of parts are classified as revenue.
Accounts Receivable
Trade receivables are based on the amounts billed to dealers and communities. The Corporation does
not accrue interest on any of its trade receivables. In fiscal 2015, a $536,000 allowance for doubtful accounts was established for an accounts receivable the Corporation had with one customer. The allowance for doubtful accounts was
established due to uncertainty in the amount of money that will ultimately be collected. The allowance was reduced by a subsequent payment received of $250,000, and the remaining allowance and related accounts receivable were
eliminated. Deposits from customers are classified as current liabilities.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined under the first-in, first-out method. Physical inventory counts are taken at the end of each reporting quarter.
Workers Compensation Security Deposit
Workers compensation security deposit represents funds placed with
the Corporations workers compensation insurance carrier to offset future medical net claims and benefits.
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
27
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 1
|
Nature of Operations, Accounting Policies of Consolidated Financial Statements (Continued)
|
Property, Plant and Equipment (Continued)
reporting and accelerated methods for income tax reporting purposes. Estimated useful lives for significant classes of property, plant and equipment are as follows: Building and
improvements 10 to 30 years; machinery and equipment 5 to 8 years. At May 31, 2016, undeveloped land in McMinnville, Oregon is 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 May 31, 2016.
Warranty
The Corporation provides the retail purchaser of its homes and park models with a full fifteen-month warranty
against defects in design, materials and workmanship. The warranties are backed by service departments located at the Corporations manufacturing facilities and an extensive field service system.
Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and managements 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, losses in fiscal years 2008 to 2015 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.
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 share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Corporations 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 225,000 stock options granted under the 2015 Stock Incentive Plan had no dilutive effect on earnings per share for the year ended May 31, 2016.
Consolidated statements of cash flows
The Corporations cash flows were not affected by income taxes in fiscal 2016 and
2015. Cash flows were affected by interest paid of approximately $237,000 in fiscal 2016. Cash flows were affected by interest paid of approximately $339,000 in fiscal 2015.
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 lessees obligation to make lease payments arising from a lease, measured on a discounted basis; and
|
28
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 1
|
Nature of Operations, Accounting Policies of Consolidated Financial Statements (Continued)
|
Recently issued accounting pronouncements (Continued)
|
|
|
A right-of-use asset, which is an asset that represents the lessees 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 anticipates
implementing this pronouncement without a material 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
anticipates implementing this pronouncement without a material effect on financial condition and results of operations.
In
March 2016, FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. For public entities, this update is effective for annual periods beginning after December 15, 2016, and for annual and interim periods thereafter. Early
application is permitted. The Corporation will evaluate how this pronouncement will affect financial condition and results of operations.
In November 2015, FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 requires deferred tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. For public this update is effective for annual periods beginning after December 15, 2016, and for annual and interim periods thereafter.
Early application is permitted as of the beginning of an interim or annual period. The Corporation anticipates implementing this
pronouncement without a material effect on financial condition and results of operations.
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. In addition, FASB subsequently issued ASU
2016-08,
Principal versus Agent Considerations
,
ASU 2016-10,
Identifying Performance Obligations and Licensing
, ASU 2016-11,
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to
Staff Announcements at the March 3, 2016 EITF Meeting
, and ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
.
The Corporation is currently evaluating how the adoption of ASU 2014-09 will impact its financial
position and result of operations.
29
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 2
|
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).
The assets of the recreational vehicle segment disposed of in the Transaction include, but are 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
|
|
|
|
Evergreen had the right, but not the obligation, to purchase the raw material inventory at 50 percent of the Corporations cost of approximately
$1,631,000. Consequently, the Corporation incurred an approximate $910,000 charge in fiscal 2015 reflecting the reduction in value of the inventory plus inventory that will not be used by Evergreen. The Corporation received approximately $721,000
for inventory used by Evergreen.
|
In addition, under the Asset Purchase Agreement Evergreen will not assume
or agree to pay, perform, or discharge any of the Corporations 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.
The following table summarizes the results of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Net Sales
|
|
$
|
71
|
|
|
$
|
9,676
|
|
|
|
|
|
|
|
|
|
|
Operating loss of discontinued operations
|
|
$
|
(195
|
)
|
|
$
|
(5,986
|
)
|
Loss on disposal of discontinued operations
|
|
|
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(195
|
)
|
|
|
(6,226
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
|
$
|
(195
|
)
|
|
$
|
(6,226
|
)
|
|
|
|
|
|
|
|
|
|
30
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 2
|
Discontinued Operations (Continued)
|
For fiscal 2016, Operating loss of discontinued operations is primarily the result of a
charge for future warranty claim payments. For fiscal 2015, Loss on disposal of discontinued operations consisted of a $910,000 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 Corporations 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.
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.
Total
inventories from continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Raw materials
|
|
$
|
7,198
|
|
|
$
|
5,828
|
|
Work in process
|
|
|
3,447
|
|
|
|
3,137
|
|
Finished goods
|
|
|
736
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,381
|
|
|
$
|
9,119
|
|
|
|
|
|
|
|
|
|
|
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.
NOTE 5
|
Gain on Sale of Property, Plant and Equipment
|
During the fourth quarter of fiscal 2015, an idle housing facility located in Ocala, Florida was sold for a gain of $243,000.
Other
assets consist primarily of the cash surrender value of life insurance policies which totaled $6,885,000 and $6,677,000 at May 31, 2016 and 2015, respectively.
31
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
A
reconciliation of accrued warranty is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Balance at the beginning of the period
|
|
$
|
6,911
|
|
|
$
|
5,697
|
|
Accruals for warranties
|
|
|
6,898
|
|
|
|
8,395
|
|
Settlements made during the period
|
|
|
(6,492
|
)
|
|
|
(7,181
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
|
7,317
|
|
|
|
6,911
|
|
Non-current balance
|
|
|
2,500
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
Accrued warranty
|
|
$
|
4,817
|
|
|
$
|
4,511
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016, the total current obligation for warranty and related expenses associated with
discontinued operations is estimated to be $150,000 as compared $642,000 at May 31, 2015.
NOTE 8
|
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. Prepaid interest associated with the life insurance loans totaled approximately $88,000 at May 31, 2016 and May 31, 2015, respectively; which is recorded in Other current assets.
NOTE 9
|
Customer Concentration
|
During fiscal 2016, net sales of homes and park models to Sun Home Services, Inc. totaled approximately $22,231,000 or 10 percent of total
net sales. During fiscal 2015, net sales to this customer totaled $20,187,000 or 11 percent of total net sales. No other individual customer in fiscal 2016 and 2015 had net sales greater than 10 percent of net total sales.
The
Corporation had no federal and state income tax benefit or expense for the years ended May 31, 2016 and 2015.
The difference
between the Corporations statutory federal income tax rate of 34 percent in fiscal 2016 and 2015, and the effective income tax rate is due primarily to state income taxes and changes in deferred tax assets valuation allowance and are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Income taxes at statutory federal rate
|
|
$
|
637
|
|
|
$
|
(1,424
|
)
|
State income taxes
|
|
|
199
|
|
|
|
(45
|
)
|
State net operating loss
|
|
|
252
|
|
|
|
(110
|
)
|
New Energy Efficient Home Credit
|
|
|
(237
|
)
|
|
|
(134
|
)
|
(Decrease) increase in deferred tax assets valuation allowance
|
|
|
(1,031
|
)
|
|
|
1,570
|
|
Other, net
|
|
|
180
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
32
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 10
|
Income Taxes (Continued)
|
Components of the net deferred tax assets include:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Current deferred tax assets
|
|
|
|
|
|
|
|
|
Accrued marketing programs
|
|
$
|
181
|
|
|
$
|
144
|
|
Accrued warranty expense
|
|
|
1,901
|
|
|
|
1,800
|
|
Accrued workers compensation
|
|
|
1,011
|
|
|
|
886
|
|
Accrued vacation
|
|
|
346
|
|
|
|
325
|
|
Other
|
|
|
305
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
Gross current deferred tax assets
|
|
|
3,744
|
|
|
|
3,677
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets
|
|
|
|
|
|
|
|
|
Liability for certain post-retirement benefits
|
|
|
1,850
|
|
|
|
2,017
|
|
Accrued warranty expense
|
|
|
987
|
|
|
|
958
|
|
Federal net operating loss carryforward
|
|
|
32,380
|
|
|
|
33,120
|
|
Federal tax credit carryforward
|
|
|
1,787
|
|
|
|
1,501
|
|
State net operating loss carryforward
|
|
|
7,717
|
|
|
|
8,133
|
|
Depreciation
|
|
|
714
|
|
|
|
668
|
|
Other
|
|
|
(171
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
Gross noncurrent deferred tax assets
|
|
|
45,264
|
|
|
|
46,230
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
49,008
|
|
|
|
49,907
|
|
Valuation allowance
|
|
|
(49,008
|
)
|
|
|
(49,907
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016, the Corporation had gross federal net operating loss carryforwards of approximately $95
million and gross state net operating loss carryforwards of approximately $102 million. The federal net operating loss and tax credit carryforwards have a life expectancy of between twelve 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 fiscal 2016, the
Corporation reported the utilization of previously fully-reserved federal net operating loss carryforwards of $695,000 and state operating loss carryforwards of $191,000 and released corresponding amounts of the valuation allowance to offset federal
and state income tax expense.
Income tax returns are filed in the U.S. federal jurisdiction and in several state
jurisdictions. For the majority of taxing jurisdictions the Corporation is no longer subject to examination by taxing authorities for years before 2012. The Corporation did not incur any interest or penalties related to income tax matters in fiscal
years 2016 and 2015.
The Corporation has no unrecognized tax benefits in its financial statements during fiscal years 2016 and
2015, and does not expect any significant changes related to unrecognized tax benefits in the twelve months following May 31, 2016.
33
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 11
|
Commitments and Contingencies
|
The Corporation was contingently liable at May 31, 2016 and 2015, 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 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.
The maximum repurchase liability is the total amount that would be
paid upon the default of the Corporations independent dealers.
The maximum potential repurchase liability for continuing
and discontinued operations, without reduction for the resale value of the repurchased units, was approximately $25 million at May 31, 2016 and approximately $60 million at May 31, 2015. At May 31, 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 $0.2 million and $19 million, respectively. As a result of favorable experience regarding
repurchased units, which is largely due to the strength of dealers selling the Corporations products, the Corporation maintained at May 31, 2016 and May 31, 2015, a $100,000 loss reserve that is a component of other accrued liabilities. 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 May 31, 2016 will not be material to its financial position or results of operations.
The amounts of obligations from repurchased units, all of which were from discontinued operations, and incurred net losses for the periods
presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Number of units repurchased
|
|
|
6
|
|
|
|
42
|
|
Obligations from units repurchased
|
|
$
|
115
|
|
|
$
|
689
|
|
Net losses on repurchased units
|
|
$
|
50
|
|
|
$
|
177
|
|
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 Corporations 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 12
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Secured Revolving Credit Facility
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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 Borrowers 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,
34
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 12
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Secured Revolving Credit Facility (Continued)
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loan advances bear interest at 3.75% in excess of
The Wall Street Journals
published one year LIBOR rate, and are secured by substantially all of the Borrowers 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 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.
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A covenant specifying that a monthly loss not exceed $500,000 was modified to $1,500,000 for December 2015, $1,000,000 for January 2016, and $1,000,000
for February, 2016. Following February 2016, 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;
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The limit for the lease, purchase or acquisition of any asset increased from $600,000 per year to $800,000 per year; and
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The monthly bank assessment fee increased from .25% per annum to .35% per annum.
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Subsequent to May 31, 2016, additional amendments were made to the Loan Agreement:
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An increase in the capital expenditure limit for the fiscal year ended May 31, 2016 from $800,000 in the aggregate to $1,250,000 in the aggregate;
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An increase in the capital expenditure limit for the fiscal year ending May 31, 2017 from $800,000 in the aggregate to $1,500,000 in the
aggregate. In the absence of any subsequent amendment, the capital expenditure limit for subsequent fiscal years shall remain at $800,000 in the aggregate per fiscal year; and
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A covenant specifying that a monthly net loss in fiscal 2017 not exceed $250,000 was increased to $500,000 for June 2016, $1,000,000 for July 2016, and
$1,000,000 for December 2016. Such increases will be effective only for the months identified. In the absence of any subsequent amendment, the maximum monthly net loss for all other months of fiscal year 2017 and thereafter remain at
$250,000.
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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. The Corporation was in compliance with Loan Agreement covenants as of May 31, 2016.
NOTE 13
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Stock-Based Compensation
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On June 25, 2015, the Corporations 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
Corporations long-term objectives and strategic plan. The Plan was subsequently approved by shareholders at the Corporations 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 Corporations 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.
During fiscal 2016,
the Corporation granted 225,000 stock options at a weighted average exercise price per share of $3.28 and a weighted average grant-date fair value per share of $2.19 with a five year vesting period.
35
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 13
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Stock-Based Compensation (Continued)
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Stock-based compensation expense for the fair value of the stock options vested during fiscal 2016 was approximately $82,000. There were no stock options that were either forfeited or expired
during fiscal 2016.
At May 31, 2016, the intrinsic value of all options outstanding approximated $1,584,000 and had a
weighted-average remaining contractual life of approximately nine years. Total unrecognized compensation expense related to stock-based awards outstanding at May 31, 2016 was $409,000 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 fiscal 2016 were estimated at the date of grant using the following weighted average assumptions:
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Volatility
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55.8
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%
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Risk-free interest rate
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2.22
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%
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Expected option life in years
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9.72
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Dividend yield
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0
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%
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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.
The
Corporations Board of directors from time to time has authorized the repurchase of shares of the Corporations common stock, in the open market or through negotiated transactions, at such times and at such prices as management may decide.
In fiscal 2016 and 2015, the Corporation did not acquire any shares of its common stock.
The
Corporation has an employee savings plan (the 401(k) Plan) that is intended to provide participating employees with an additional method of saving for retirement. The 401(k) Plan covers all employees who meet certain minimum
participation requirements. The Corporation does not provide a matching contribution to the 401(k) Plan, but can make discretionary profit sharing contributions. No profit sharing contributions were made in fiscal 2016 and 2015.
NOTE 16
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Retirement and Death Benefit Plans
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The Corporation has entered into various arrangements with certain employees or former employees for benefits to be paid in the following manner:
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to an employees estate in the event of death
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an employee in the event of retirement or disability to be paid over 10 years beginning at the date of retirement or disability
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in the event of death, the employees beneficiary will receive the balance due the employee
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36
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 16
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Retirement and Death Benefit Plans (Continued)
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The Corporation also purchased life insurance contracts on the covered employees or
former employees. The present value of the principal cost of such arrangements is being accrued over the period from the date of such arrangements to full eligibility using a discount rate of 4.0 percent in fiscal 2016 and fiscal 2015. The
current and non-current amounts accrued for such arrangements totaled $5,340,000 and $5,707,000 at May 31, 2016 and 2015, respectively. The amount charged to operations under these arrangements was approximately $10,000 and $161,000 in fiscal
years 2016 and 2015, respectively.