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Skyline Champion Corp - Annual Report: 2004 (Form 10-K)

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the fiscal year ended May 31, 2004
Commission File No. 1-4714

SKYLINE CORPORATION


(Exact name of registrant as specified in its charter)
     
Indiana   35-1038277

 
 
 
(State of Incorporation)   (IRS Employer Identification No.)
     
P. O. Box 743, 2520 By-Pass Road Elkhart, IN   46515

 
 
 
(Address of principal executive offices)   (Zip Code)
     
294-6521   (574)

 
 
 
(Registrant’s telephone number)   (Area Code)

Securities registered pursuant to section 12 (b) of the Act:

         
Title of Class   Shares Outstanding
July 14, 2004
  Name of each Exchange on
which Registered

 
 
 
 
 
Common Stock   8,391,244   New York Stock Exchange

Securities registered pursuant to section 12 (g) of the Act:

Title of Class


None

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.

YES [X]          NO [  ]

 


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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

[X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [X]          No [  ]

The aggregate market value of the voting stock held by non-affiliates of registrant (6,818,780 shares) based on the closing price on the New York Stock Exchange on July 14, 2004 was $253,454,053.

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DOCUMENTS INCORPORATED BY REFERENCE:

     
Title
  Form 10-K
Proxy Statement dated for Annual Meeting of Shareholders to be held September 30, 2004
  Part III, Items 10 – 14

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FORM 10-K
CROSS-REFERENCE INDEX

Certain information required to be included in this Form 10-K is also included in the registrant’s Proxy Statement used in connection with its 2004 Annual Meeting of Shareholders to be held on September 30, 2004 (“2004 Proxy Statement”). The following cross-reference index shows the page locations in the 2004 Proxy Statement of that information which is incorporated by reference into this Form 10-K and the page location in this Form 10-K of that information not incorporated by reference. All other sections of the 2004 Proxy Statement are not required in this Form 10-K and should not be considered a part hereof.

                         
                    2004
            Form   Proxy
            10-K
  Statement
    PART I                
 
Item 1.   Business     6          
 
Item 2.   Properties     13          
 
Item 3.   Legal Proceedings     14          
 
Item 4.   Submission of Matters to a Vote of Security Holders     14          
 
    PART II                
 
Item 5.   Market for the Registrant’s Common Stock and Related Stockholder Matters     14          
 
Item 6.   Selected Financial Data     15          
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operation     16          
 
Item 8.   Financial Statements and Supplementary Data                
 
      Index to Consolidated Financial Statements     25          
 
      Report of Independent Registered Public Accounting Firm     26          
 
      Consolidated Balance Sheets     27          
 
      Consolidated Statements of Earnings and Retained Earnings     29          
 
      Consolidated Statements of Cash Flows     30          
 
      Notes to Consolidated Financial Statements     32          
 
      Financial Summary by Quarter     39          

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FORM 10-K
CROSS-REFERENCE INDEX
(Continued)

                             
                        2004
                Form   Proxy
                10-K
  Statement
    PART II                
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     40          
 
Item 9A.   Controls and Procedures     40          
 
    PART III                
 
Item 10.   Directors and Executive Officers of the Registrant     40       3–4  
 
Item 11.   Executive Compensation              9–10  
 
Item 12.   Security Ownership of Certain Beneficial Owners and
 Management
            3–4
8–9
 
 
Item 13.   Certain Relationships and Related Transactions             10–11  
 
Item 14.   Principal Accountant Fees and Services             7–8  
 
    PART IV                
 
Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K                
 
 
  (a)   1. Financial Statements     42          
 
      2. Financial Statement Schedules     42          
 
      3. Index to Exhibits     42          
 
 
  (b) Reports on Form 8-K     42          
 
SIGNATURES AND
CERTIFICATIONS
        43          
 Articles of Incorporation
 By-Laws
 Code of Ethics
 Subsidiaries of the Registrant
 Certification
 Certification
 Certification
 Certification

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PART I

Item 1.   Business

    General Development of Business
 
    Skyline Corporation was originally incorporated in Indiana in 1959, as successor to a business founded in 1951. Skyline Corporation and its consolidated subsidiaries (the “Corporation”) design, produce and distribute manufactured housing (mobile homes and multi-sectional homes) and towable recreational vehicles (travel trailers, including park models and fifth wheels).
 
    The Corporation, which is one of the largest producers of manufactured homes in the United States, produced 7,723 manufactured homes in fiscal year 2004.
 
    The Corporation’s manufactured homes are marketed under a number of trademarks. They are available in lengths ranging from 34’ to 80’ and in singlewide widths from 12’ to 18’, doublewide widths from 20’ to 32’, and triplewide widths from 36’ to 42’.
 
    The Corporation’s recreational vehicles are sold under the “Nomad”, “Layton”, “Aljo”, and “Weekender” trademarks for travel trailers and fifth wheels.
 
    In fiscal year 2004, manufactured homes represented 72 percent of total sales, while recreational vehicles accounted for the remaining 28 percent. In the prior year, the sales dollars were 70 percent manufactured homes and 30 percent recreational vehicles. Additional financial data relating to these industry segments is included in Note 5, Industry Segment Information, in the Notes to Consolidated Financial Statements included in this document under Item 8.
 
    Narrative Description of Business
 
    Principal Markets
 
    The principal markets for manufactured homes are the suburban and rural areas of the continental United States. The principal buyers continue to be young married couples and senior citizens, but the market tends to broaden when conventional housing becomes more difficult to purchase and finance.
 
    The recreational vehicle market is made up of primarily vacationing families, retired couples traveling around the country and sports enthusiasts pursuing four-season hobbies.

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Item 1.   Business

    Method of Distribution
 
    The Corporation’s manufactured homes are distributed by approximately 370 dealers at 680 locations throughout the United States and recreational vehicles are distributed by approximately 260 dealers at 290 locations throughout the United States. These are generally not exclusive dealerships and it is believed that most dealers also sell products of other manufacturers.
 
    The Corporation provides the retail purchaser of its manufactured homes with a full fifteen-month warranty against defects in materials and workmanship. Recreational vehicles are covered by a two-year warranty. The warranties are backed by a corporate service department and an extensive field service system.
 
    The Corporation’s products are sold to dealers either through floor plan financing with various financial institutions or on a cash basis. Payments to the Corporation are made either directly by the dealer or by financial institutions, which have agreed to finance dealer purchases of the Corporation’s products. In accordance with industry practice, certain financial institutions which finance dealer purchases require the Corporation to execute repurchase agreements which provide that in the event a dealer defaults on its repayment of the financing, the Corporation will repurchase its products from the financing institution in accordance with a declining repurchase price schedule established by the Corporation. Any loss under these agreements is the difference between the repurchase cost and the resale value of the units repurchased. Further, the risk of loss is spread over numerous dealers. There have been no material losses related to repurchases in past years. Additional information regarding these repurchase agreements is included in Note 2, Contingencies, in the Notes to Consolidated Financial Statements included in this document under Item 8.
 
    Raw Materials and Supplies
 
    The Corporation is basically an assembler of components purchased from outside sources. The major components used by the Corporation are lumber, plywood, shingles, vinyl and wood siding, steel, aluminum, insulation, home appliances, furnaces, plumbing fixtures, hardware, floor coverings and furniture. The suppliers are many and range in size from large national companies to very small local companies. At the present time the Corporation is obtaining sufficient materials to fulfill its needs.
 
    Patents, Trademarks, Licenses, Franchises and Concessions
 
    The Corporation does not rely upon any terminable or nonrenewable rights such as patents, licenses or franchises under the trademarks or patents of others, in the conduct of any segment of its business.

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Item 1.   Business

    Seasonal Fluctuations
 
    While the Corporation maintains production of manufactured homes and recreational vehicles throughout the year, seasonal fluctuations in sales do occur. Sales and production of manufactured homes are affected by winter weather conditions at the Corporation’s northern plants. Recreational vehicle sales are generally higher in the spring and summer months than in the fall and winter months.
 
    Inventory
 
    The Corporation does not build significant inventories of either finished goods or raw materials. In addition, there are no significant inventories sold on consignment.
 
    Dependence Upon Individual Customers
 
    The Corporation does not rely upon any single dealer for a significant percentage of its business in any industry segment.
 
    Backlog
 
    The Corporation does not consider the existence and extent of backlog to be significant in its business. The Corporation’s production is based on a relatively short manufacturing cycle and dealers’ orders, which continuously fluctuate. As such, the existence of backlog is not significant at any given date and does not typically provide a reliable indication of the status of the Corporation’s business.
 
    Government Contracts
 
    The Corporation has had no significant government contracts during the past three years.
 
    Competitive Conditions
 
    The manufactured housing and recreational vehicle industries are highly competitive, with particular emphasis on price and features offered. The Corporation’s competitors are numerous, ranging from multi-billion dollar corporations to relatively small and specialized manufacturers.

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Item 1.   Business

    Competitive Conditions, continued
 
    In the recent years the manufactured housing industry has been in a recession caused primarily by restrictive retail financing, overall economic uncertainty and global tensions. The following chart illustrates the recession’s effect on industry shipments as reported by the Manufacturing Housing Institute (by calendar year):

(BAR CHART)

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Item 1.   Business

    Competitive Conditions, continued
 
    As noted in the chart, the industry shipped approximately 131,000 homes in calendar year 2003. In the same period, the Corporation shipped 7,760 units for a 5.9 percent market share. In calendar year 2002, approximately 168,500 homes were shipped by the industry. In that period, the Corporation shipped 8,711 homes for a 5.2 percent market share.
 
    The recreational vehicle industry shipped 377,800 units in calendar year 2003 compared to 378,700 units in calendar year 2002. The following table shows the Corporation’s competitive position in the recreational vehicle product lines it sells.
                                                 
    Units Shipped           Units Shipped        
    Calendar Year 2003
          Calendar Year 2002
       
                    Market                   Market
    Industry
  Skyline
  Share
  Industry
  Skyline
  Share
Travel Trailers
    137,000       5,943       4.3 %     119,700       6,886       5.8 %
Fifth Wheels
    67,400       1,609       2.4 %     66,100       1,884       2.9 %
Park Models
    7,100       471       6.6 %     7,700       391       5.1 %

    Both the manufactured housing and recreational vehicle segments of the Corporation’s business are dependent upon the availability of financing to dealers and retail financing. Consequently, increases in interest rates and/or tightening of credit through governmental action or otherwise have adversely affected the Corporation’s business in the past and may do so in the future.
 
    The Corporation considers it impossible to predict the future occurrence, duration or severity of cost or availability problems in financing either manufactured homes or recreational vehicles. To the extent that they occur, such public concerns will affect sales of the Corporation’s products.
 
    Regulation
 
    The manufacture, distribution and sale of manufactured homes and recreational vehicles are subject to government regulations in both the United States and Canada, at federal, state or provincial and local levels.

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Item 1.   Business

    Environmental Quality
 
    The Corporation believes that compliance with federal, state and local requirements respecting environmental quality will not require any material capital expenditures for plant or equipment modifications which would adversely affect earnings.
 
    Other Regulations
 
    The U.S. Department of Housing and Urban Development (HUD) has set national manufactured home construction and safety standards and implemented recall and other regulations since 1976. The National Mobile Home Construction and Safety Standards Act of 1974, as amended, under which such standards and regulations are promulgated, prohibits states from establishing or continuing in effect any manufactured home standard that is not identical to the federal standards as to any covered aspect of performance. Implementation of these standards and regulations involves inspection agency approval of manufactured home designs, plant and home inspection by states or other HUD-approved third parties, manufacturer certification that the standards are met, and possible recalls if they are not or if homes contain safety hazards.
 
    HUD has promulgated rules requiring producers of manufactured homes to utilize wood products certified by their suppliers to meet HUD’s established limits on formaldehyde emissions, and to place in each home written notice to prospective purchasers of possible adverse reaction from airborne formaldehyde in the homes. These rules are designated as preemptive of state regulation.
 
    Some components of manufactured homes may also be subject to Consumer Product Safety Commission standards and recall requirements. In addition, the Corporation has voluntarily subjected itself to third party inspection of all of its products nationwide in order to further assure the Corporation, its dealers, and customers of compliance with established standards.
 
    Manufactured homes and recreational vehicles may be subject to the Magnuson-Moss Warranty – Federal Trade Commission Improvement Act, which regulates warranties on consumer products. The Corporation believes that its existing warranties meet all requirements of the Act.
 
    The transportation and placement (in the case of manufactured homes) of the Corporation’s products are subject to state highway use regulations and local ordinances which control the size of units that may be transported, the roads to be used, speed limits, hours of travel, and allowable locations for manufactured homes and parks.

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Item 1.   Business

    Other Regulations, continued
 
    The Corporation’s travel trailers continue to be subject to safety standards and recall and other regulations promulgated by the U.S. Department of Transportation under the National Traffic and Motor Vehicle Safety Act of 1966 and the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act, as well as state laws and regulations.
 
    The Corporation’s operations are subject to the Federal Occupational Safety and Health Act, and are routinely inspected thereunder.
 
    The corporation is also subject to many state manufacturer licensing and bonding requirements, and to dealer day in court requirements in some states.
 
    The Sarbanes-Oxley Act of 2002 has introduced many new requirements applicable to the company regarding corporate governance and reporting. Section 404 of the Act requires management to report on the Corporation’s internal controls over financial reporting. The Corporation may devote substantial time and cost during fiscal year 2005 to ensure compliance. Management is making every effort to comply with Section 404 in a timely fashion.
 
    Number of Employees
 
    The Corporation employs approximately 2,700 people at the present time.
 
    Available Information
 
    The Corporation makes available, free of charge, through the Investors section of its internet website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as practicable after such material is electronically filed or furnished to the Securities Exchange Commission. The Corporation’s internet address is http://www.skylinecorp.com.

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Item 2.   Properties

    The Corporation owns its corporate offices and design facility, which are located in Elkhart, Indiana.

    The Corporation’s 22 manufacturing facilities, all of which are owned, are as follows:
     
Location
  Products
California, San Jacinto
California, Hemet
California, Hemet
California, Woodland
Florida, Ocala
Florida, Ocala
Florida, Ocala
Indiana, Bristol
Indiana, Elkhart
Indiana, Goshen
Kansas, Arkansas City
Kansas, Halstead
Louisiana, Bossier City
Ohio, Sugarcreek
Oregon, McMinnville
Oregon, McMinnville
Pennsylvania, Ephrata
Pennsylvania, Leola
Pennsylvania, Leola
Texas, Mansfield
Vermont, Fair Haven
Wisconsin, Lancaster
  Manufactured Housing
Recreational Vehicles
Recreational Vehicles
Manufactured Housing
Manufactured Housing
Manufactured Housing
Manufactured Housing
Manufactured Housing
Recreational Vehicles
Manufactured Housing
Manufactured Housing
Manufactured Housing
Manufactured Housing
Manufactured Housing
Manufactured Housing
Recreational Vehicles
Manufactured Housing
Manufactured Housing
Recreational Vehicles
Recreational Vehicles
Manufactured Housing
Manufactured Housing

    The above facilities range in size from approximately 50,000 square feet to approximately 160,000 square feet. In November 2003 the Corporation idled its manufacturing housing facility in Mocksville, North Carolina. This property’s net book value is not significant to the assets of the Corporation.
 
    It is extremely difficult to determine the unit productive capacity of the Corporation because of the ever-changing product mix.
 
    The Corporation believes that its plant facilities, machinery and equipment are well maintained and are in good operating condition.

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Item 3.   Legal Proceedings

    Neither the Corporation nor any of its subsidiaries is a party to any pending legal proceedings which could have a material effect on operations.

Item 4.   Submission of Matters to a Vote of Security Holders

    No matters were submitted to a vote of security holders during the fourth quarter of fiscal year ended May 31, 2004.

PART II

Item 5.   Market for the Registrant’s Common Stock and Related Stockholder Matters

    Skyline Corporation (SKY) is traded on the New York Stock Exchange. A quarterly cash dividend of 18 cents ($0.18) per share was paid in fiscal 2004 and 2003. At May 31, 2004, there were approximately 1,100 holders of record of Skyline Corporation common stock. A quarterly summary of the market price is listed for the fiscal years ended May 31, 2004 and 2003.
                                 
    2004
  2003
Quarter
  High   Low   High   Low
First
  $ 32.60     $ 27.80     $ 34.40     $ 27.20  
Second
  $ 34.60     $ 31.30     $ 31.10     $ 26.30  
Third
  $ 41.22     $ 31.91     $ 30.10     $ 24.60  
Fourth
  $ 45.39     $ 34.94     $ 30.33     $ 24.60  

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Item 6.   Selected Financial Data

    Dollars in thousands except per share data
                                         
    2004
  2003
  2002
  2001
  2000
FOR THE YEAR
                                       
Sales
  $ 432,381     $ 419,817     $ 450,722     $ 463,824     $ 579,551  
Net earnings
  $ 6,141     $ 6,193     $ 12,254     $ 11,170     $ 15,028  
Cash dividends paid
  $ 6,042     $ 6,041     $ 6,042     $ 6,124     $ 6,410  
Capital expenditures
  $ 1,928     $ 1,523     $ 3,330     $ 2,499     $ 4,115  
Depreciation
  $ 3,450     $ 3,785     $ 3,884     $ 3,919     $ 4,022  
Weighted average common shares outstanding
    8,391,244       8,391,244       8,391,244       8,468,321       8,858,628  
AT YEAR END
                                       
Working capital
  $ 161,985     $ 158,795     $ 156,360     $ 149,591     $ 123,401  
Current ratio
    5.4:1       5.4:1       5.3:1       4.8:1       4.2:1  
U.S. Treasury Notes
  $     $     $     $ 25,006     $ 25,072  
Property, plant and equipment, net
  $ 36,930     $ 39,131     $ 41,477     $ 42,044     $ 44,188  
Total assets
  $ 241,168     $ 239,141     $ 238,752     $ 235,678     $ 235,666  
Shareholders’ equity
  $ 198,484     $ 198,385     $ 198,233     $ 192,021     $ 192,949  
Treasury stock
  $ 65,744     $ 65,744     $ 65,744     $ 65,744     $ 59,770  
PER SHARE
                                       
Basic earnings
  $ .73     $ .74     $ 1.46     $ 1.32     $ 1.70  
Cash dividends paid
  $ .72     $ .72     $ .72     $ .72     $ .72  
Shareholders’ equity
  $ 23.65     $ 23.64     $ 23.62     $ 22.88     $ 22.22  

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Corporation sells manufactured housing and towable recreational vehicle products to independent dealers located throughout the United States. To better serve the needs of its dealers, the Corporation has twenty-two manufacturing facilities in eleven states. Manufactured housing and recreational vehicles are sold to dealers either through floor plan financing with various financial institutions or on a cash basis.

Sales in both business segments are affected by the strength of the U.S. economy, interest rate levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing segment is currently affected by an industry recession. This recession, caused primarily by restrictive retail financing, economic uncertainty and global tensions, is resulting in industry sales to be the lowest in decades. In the recreational vehicle segment, the Corporation sells travel trailers, fifth wheels and park models. Industry sales of travel trailers and fifth wheels have seen steady growth in recent years.

Despite the recession in the manufactured housing industry, demand for multi-section homes is increasing. This product is often sold as part of a land-home package and is financed with a conventional mortgage. Multi-section homes have an appearance similar to site-built homes and are notably less expensive. During fiscal 2004, the Corporation capitalized on the increased demand for multi-section homes by expanding manufacturing capabilities. Twelve manufacturing housing facilities obtained approval to produce modular homes, which will extend existing product offerings.

The recreational vehicle segment is witnessing a shift in consumer demand for both metal-sided products and products with bonded fiberglass exteriors. The Corporation is positioning itself to take advantage of the expanding towable recreational vehicle segment in which it competes.

Results of Operations - Fiscal 2004 Compared to Fiscal 2003

Sales and Unit Shipments
(Dollars in thousands)

                                         
                                    Change
                                    Increase
    2004
  Percent
  2003
  Percent
  (Decrease)
Sales
                                       
Manufactured Housing
  $ 310,367       71.8     $ 293,448       69.9     $ 16,919  
Recreational Vehicles
    122,014       28.2       126,369       30.1       (4,355 )
 
   
 
     
 
     
 
     
 
     
 
 
Total Sales
  $ 432,381       100.0     $ 419,817       100.0     $ 12,564  
 
   
 
     
 
     
 
     
 
     
 
 
Unit Shipments
                                       
Manufactured Housing
    7,723       48.0       7,922       47.6       (199 )
Recreational Vehicles
    8,375       52.0       8,720       52.4       (345 )
 
   
 
     
 
     
 
     
 
     
 
 
Total Unit Shipments
    16,098       100.0       16,642       100.0       (544 )
 
   
 
     
 
     
 
     
 
     
 
 

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Results of Operations - Fiscal 2004 Compared to Fiscal 2003, continued

Manufactured housing unit sales continue to be affected by difficult market conditions, restrictive retail financing, economic uncertainty and increased global tensions. Average sales per unit increased due to a product mix shift toward multi-section homes, representing 80.2 percent of total unit sales in fiscal 2004 versus 76.6 percent in fiscal 2003.

Two factors caused the decline in recreational vehicle sales. Demand for towable metal-sided recreational vehicles shifted toward product with price points lower than those historically offered by the Corporation. This shift in demand began in the third quarter of fiscal year 2003. Sales were affected by a timing issue in introducing the new 2004 product line, which addressed this shift in demand. In addition, the market is dictating a higher priced bonded fiberglass exterior. The Corporation currently offers a limited number of models with similar exteriors. The following table shows the Corporation’s competitive position in the recreational vehicle product lines it sells relative to the recreational vehicle industry.

                                                 
    Units Shipped           Units Shipped        
    Calendar Year 2003
          Calendar Year 2002
       
                    Market                   Market
    Industry
  Skyline
  Share
  Industry
  Skyline
  Share
Travel Trailers
    137,000       5,943       4.3 %     119,700       6,886       5.8 %
Fifth Wheels
    67,400       1,609       2.4 %     66,100       1,884       2.9 %
Park Models
    7,100       471       6.6 %     7,700       391       5.1 %

Cost of Sales
(Dollars in thousands)

                                         
                                    Change
            Percent of           Percent of   Increase
    2004
  Sales
  2003
  Sales
  (Decrease)
Cost of Sales-
Consolidated
  $ 377,807       87.4     $ 366,633       87.3     $ 11,174  
Cost of Sales-
Manufactured Housing
  $ 268,773       86.6     $ 254,416       86.7     $ 14,357  
Cost of Sales-
Recreational Vehicles
  $ 109,034       89.4     $ 112,217       88.8     $ (3,183 )

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Results of Operations - Fiscal 2004 Compared to Fiscal 2003, continued

The percentage increase in cost of sales for recreational vehicles is the result of a product mix shift toward lower margin models. Cost of sales for both segments was negatively affected in the fourth quarter of fiscal 2004 by an unprecedented increase in the cost of lumber, lumber-related materials and steel.

Selling and Administrative Expenses
(Dollars in thousands)

                                         
                                    Change
            Percent of           Percent of   Increase
    2004
  Sales
  2003
  Sales
  (Decrease)
Selling and Administrative Expenses
  $ 45,715       10.6     $ 44,843       10.7     $ 872  


Operating Earnings
(Dollars in thousands)

                                         
                                    Change in
                                    Operating
                                    Earnings
            Percent of           Percent of   Increase
    2004
  Segment Sales
  2003
  Segment Sales
  (Decrease)
Manufactured Housing
  $ 13,035       4.2     $ 11,116       3.8     $ 1,919  
 
Recreational Vehicles
  $ 150       0.1     $ 439       0.3     $ (289 )
                                         
            Percent of           Percent of        
            Total Sales
          Total Sales
       
General Corporate Expenses
  $ (4,326 )     1.0     $ (3,214 )     0.8     $ (1,112 )
 
   
 
             
 
             
 
 
Total Operating Earnings
  $ 8,859       2.0     $ 8,341       2.0     $ 518  
 
   
 
             
 
             
 
 

Operating earnings for manufactured housing increased due to increased sales of higher margin multi-section homes. Operating earnings for recreational vehicles declined primarily due to an overall decrease in sales, and sales of lower margin products. General corporate expenses increased primarily due to a change in valuation of the Corporation’s liability for post-retirement benefits offered to certain employees.

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Interest Income
(Dollars in thousands)

                         
                    Change
                    Increase
    2004
  2003
  (Decrease)
Interest Income
  $ 1,247     $ 1,995     $ (748 )

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.

Results of Operations - Fiscal 2003 Compared to Fiscal 2002

Sales and Unit Shipments

(Dollars in thousands)

                                         
                                    Change
                                    Increase
    2003
  Percent
  2002
  Percent
  (Decrease)
Sales
                                       
Manufactured Housing
  $ 293,448       69.9     $ 339,260       75.3     $ (45,812 )
Recreational Vehicles
    126,369       30.1       111,462       24.7       14,907  
 
   
 
     
 
     
 
     
 
     
 
 
Total Sales
  $ 419,817       100.0     $ 450,722       100.0     $ (30,905 )
 
   
 
     
 
     
 
     
 
     
 
 
Unit Shipments
                                       
Manufactured Housing
    7,922       47.6       9,849       55.1       (1,927 )
Recreational Vehicles
    8,720       52.4       8,028       44.9       692  
 
   
 
     
 
     
 
     
 
     
 
 
Total Unit Shipments
    16,642       100.0       17,877       100.0       (1,235 )
 
   
 
     
 
     
 
     
 
     
 
 

Manufactured housing sales were affected by difficult market conditions, restrictive retail financing, economic uncertainty and increased global tensions.

The increase in recreational vehicle sales was a reflection of an industry-wide improvement in market conditions for towable recreational vehicles. This trend began in early calendar year 2002. There was, however, a softening of demand in the Corporation’s fourth quarter of fiscal 2003. This softening was due to consumers purchasing metal-sided products with price points lower than those historically offered by the Corporation. Sales for that period totaled $31,762,000 versus $36,527,000 from the prior year.

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Results of Operations - Fiscal 2003 Compared to Fiscal 2002, continued

Cost of Sales

(Dollars in thousands)

                                         
                                    Change
            Percent of           Percent of   Increase
    2003
  Sales
  2002
  Sales
  (Decrease)
Cost of Sales-
Consolidated
  $ 366,633       87.3     $ 387,050       85.9     $ (20,417 )
Cost of Sales-
Manufactured Housing
  $ 254,416       86.7     $ 288,395       85.0     $ (33,979 )
Cost of Sales-
Recreational Vehicles
  $ 112,217       88.8     $ 98,655       88.5     $ 13,562  

As a percentage of segment sales, manufactured housing cost of sales increased as a result of certain manufacturing expenses being fixed and semi-fixed during a period of declining sales.

Recreational vehicle cost of sales, as a percentage of segment sales, increased slightly due to a shift in model mix.

Selling and Administrative Expenses

(Dollars in thousands)

                                         
                                    Change
            Percent of           Percent of   Increase
    2003
  Sales
  2002
  Sales
  (Decrease)
Selling and Administrative Expenses
  $ 44,843       10.7     $ 47,545       10.6     $ (2,702 )

The decrease was due to a reduction in expenses for group health insurance, legal services and bonuses for certain administrative employees.

20


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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Results of Operations - Fiscal 2003 Compared to Fiscal 2002, continued

Operating Earnings
(Dollars in thousands)

                                         
                                    Change in
                                    Operating
                                    Earnings
            Percent of           Percent of   Increase
    2003
  Segment Sales
  2002
  Segment Sales
  (Decrease)
Manufactured Housing
  $ 11,116       3.8     $ 19,107       5.6     $ (7,991 )
 
                                       
Recreational Vehicles
  $ 439       0.4     $ 925       0.8     $ (486 )
                                         
            Percent of           Percent of        
            Total Sales
          Total Sales
       
General Corporate Expenses
  $ (3,214 )     0.8     $ (3,905 )     0.9     $ 691  
 
   
 
             
 
             
 
 
Total Operating Earnings
  $ 8,341       2.0     $ 16,127       3.6     $ (7,786 )
 
   
 
             
 
             
 
 

Earnings for manufactured housing declined due to the continuation of difficult market conditions noted above. Recreational vehicle operating earnings decreased due to increased cost of sales as noted above. General corporate expenses declined due to a reduction in bonuses paid to certain administrative employees.

Interest Income
(Dollars in thousands)

                                         
                                    Change
                        Increase
    2003
    2002
    (Decrease)
Interest Income
  $ 1,995             $ 4,102             $ (2,107 )

Interest income is directly related to the amount available for investments and the prevailing yields of U.S. Government Securities.

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Liquidity and Capital Resources
(Dollars in thousands)

                         
    May 31,
  Change
Increase
    2004
  2003
  (Decrease)
Cash and U.S. Treasury Bills
  $ 150,449     $ 154,457     $ (4,008 )
Current Assets Exclusive of Cash and U.S. Treasury Bills
    48,478       40,514       7,964  
Current Liabilities
    36,942       36,176       766  
Working Capital
    161,985       158,795       3,190  

The Corporation’s policy is to invest in U.S. Government Securities when cash exceeds immediate operating requirements. Cash and U.S. Treasury Bills declined primarily as a result of a $3,300,000 prepayment to a new carrier for workers compensation insurance. The payment consists of anticipated administrative expenses as well as an amount the carrier believes will be needed to fund worker compensation claims over the next twelve months. Current assets exclusive of cash and U.S. Treasury Bills increased due to this payment. In addition, accounts receivable increased $3,798,000 as a result of sales for May 2004 being greater than May 2003 sales.

Various factors contributed to the increase in current liabilities. Accounts payable increased $1,786,000 due to a greater amount of sales for May 2004 versus May 2003. Income taxes payable decreased $1,620,000 due to the timing of tax payments at May 31, 2004 versus May 31, 2003.

Other deferred liabilities increased $1,162,000 primarily as a result of a change in valuation of the Corporation’s liability for post-retirement benefits offered to certain employees.

Capital expenditures totaled $1,928,000 for fiscal 2004 compared to $1,523,000 in the previous year. Capital expenditures during this period were made primarily to replace or refurbish machinery, equipment and facilities in addition to improving manufacturing efficiencies.

The cash provided by operating activities, along with current cash and other short-term investments, is expected to be adequate to fund any capital expenditures and treasury stock purchases during the year. Historically, the Corporation’s financing needs have been met through funds generated internally.

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Contractual Obligations and Commitments

The following table summarizes the Corporation’s contractual obligation for operating lease agreements as of May 31, 2004 (dollars in thousands):

                                         
            Payments Due by Period
            Less Than                   After
    Total
  1 Year
  1-3 Years
  3-5 Years
  5 Years
Operating Leases
  $ 1,674     $ 804     $ 678     $ 192     $  

     The following table summarizes the Corporation’s commitments for repurchase agreements as of May 31, 2004 (dollars in thousands):

                                         
            Payments Due by Period
            Less Than                   After
    Total
  1 Year
  1-3 Years
  3-5 Years
  5 Years
Repurchase Agreements
  $ 100,000     $ 100,000     $     $     $  

Additional information regarding the nature of the repurchase agreements and the operating leases is in Note 2 to the Notes to the Consolidated Financial Statements. During fiscal 2004, the Corporation did not experience any losses on the sale of repurchased units, while incurring losses of $50,000 and $179,000 during fiscal years 2003 and 2002, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires the Corporation to make certain estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates are periodically evaluated using historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ from these estimates. The following accounting policies are considered to require significant estimates:

Product Warranties

As referenced in Note 1 of the Notes to Consolidated Financial Statements, manufactured homes are sold with a fifteen-month warranty and recreational vehicles are sold with a two-year warranty. Estimated warranty costs are accrued at the time of sale based upon sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. Significant changes in these factors could have a material adverse impact on future results of operations.

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Critical Accounting Policies, continued

Workers’ Compensation Insurance

The Corporation is insured for expenses associated with workers’ compensation. Costs are accrued based on estimates of future medical claims provided by the carrier that insures the Corporation. Accruals are made up to a specified limit per individual injured and for an aggregate limit determined by the carrier.

Health Insurance

As referenced in Note 4 of the Notes to Consolidated Financial Statements, the Corporation utilizes insurance companies and a third party administrator in offering health insurance coverage to its employees. Costs of claims incurred but not paid are accrued based on past claims experience and relevant trend factors provided by the insurance companies and the third party administrator.

Other Matters

The provisions for federal income taxes in each year approximates the statutory rate and for state income taxes reflects current state rates effective for the period based upon activities within the taxable entities.

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. The Corporation believes that inflation has not had a material effect on its operations during fiscal years 2003 and 2002. During fourth quarter of fiscal year 2004, the Corporation experienced significant increases in the cost of lumber, lumber-related materials and steel. Although the Corporation was unable to recover all of the increases in that quarter, on a long-term basis it has demonstrated an ability to adjust selling prices in reaction to changing costs due to inflation.

24


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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Forward Looking Information

Certain statements in this report are considered forward looking as indicated by the Private Securities Litigation Reform Act of 1995. These statements involve uncertainties that may cause actual results to materially differ from expectations as of the report date. These uncertainties include but are not limited to:

  Cyclical nature of the manufactured housing and recreational vehicle industries

  General or seasonal weather conditions affecting sales

  Potential periodic inventory adjustments by independent retailers

  Availability of wholesale and retail financing

  Interest rate levels

  Impact of inflation

  Cost of labor and raw materials

  Competitive pressures on pricing and promotional costs

  Catastrophic events impacting insurance costs

  Consumer confidence and economic uncertainty

  Market demographics

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

  Increased global tensions, market disruption resulting from a terrorist or other attack and any armed conflict involving the United States.
     
Item 8.
  Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

         
Report of Independent Registered Public Accounting Firm
    26  
Consolidated Balance Sheets
    27  
Consolidated Statements of Earnings and Retained Earnings
    29  
Consolidated Statements of Cash Flows
    30  
Notes to Consolidated Financial Statements
    32  
Financial Summary by Quarter
    39  

All other schedules are omitted because they are not applicable or the required information is show in the financial statements or notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Skyline Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings and retained earnings, and of cash flows present fairly, in all material respects, the financial position of Skyline Corporation and its subsidiaries at May 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Chicago, Illinois
June 17, 2004

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Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets
May 31, 2004 and 2003
(Dollars in thousands)

                 
    2004
  2003
ASSETS
               
Current Assets
               
Cash
  $ 8,838     $ 8,736  
U.S. Treasury Bills, at cost plus accrued interest
    141,611       145,721  
Accounts receivable, trade, less allowance for doubtful accounts of $150 in 2004 and 2003
    26,090       22,292  
Inventories
    9,895       9,414  
Deferred income tax benefits
    8,851       8,552  
Other current assets
    3,642       256  
 
   
 
     
 
 
Total Current Assets
    198,927       194,971  
 
   
 
     
 
 
Property, Plant and Equipment, At Cost
               
Land
    6,572       6,637  
Buildings and improvements
    63,241       64,806  
Machinery and equipment
    27,206       26,937  
 
   
 
     
 
 
 
    97,019       98,380  
Less accumulated depreciation
    60,089       59,249  
 
   
 
     
 
 
Net Property, Plant and Equipment
    36,930       39,131  
 
   
 
     
 
 
Other Assets
    5,311       5,039  
 
   
 
     
 
 
 
  $ 241,168     $ 239,141  
 
   
 
     
 
 

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets
May 31, 2004 and 2003
(Dollars in thousands)

                 
    2004
  2003
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable, trade
  $ 7,776     $ 5,990  
Accrued salaries and wages
    6,222       6,290  
Accrued profit sharing
    2,454       2,327  
Accrued marketing programs
    5,368       5,397  
Accrued warranty and related expenses
    11,121       10,609  
Other accrued liabilities
    3,835       3,777  
Income taxes payable
    166       1,786  
 
   
 
     
 
 
Total Current Liabilities
    36,942       36,176  
 
   
 
     
 
 
Other Deferred Liabilities
    5,742       4,580  
 
   
 
     
 
 
Commitments and Contingencies – See Note 2
               
Shareholders’ Equity
               
Common stock, $.0277 par value, 15,000,000 shares authorized; Issued 11,217,144 shares
    312       312  
Additional paid-in capital
    4,928       4,928  
Retained earnings
    258,988       258,889  
Treasury stock, at cost, 2,825,900 shares in 2004 and 2003
    (65,744 )     (65,744 )
 
   
 
     
 
 
Total Shareholders’ Equity
    198,484       198,385  
 
   
 
     
 
 
 
  $ 241,168     $ 239,141  
 
   
 
     
 
 

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Statements of Earnings and Retained Earnings
For the Years Ended May 31, 2004, 2003 and 2002
(Dollars in thousands, except per share data)

                         
    2004
  2003
  2002
EARNINGS
                       
Sales
  $ 432,381     $ 419,817     $ 450,722  
Cost of sales
    377,807       366,633       387,050  
 
   
 
     
 
     
 
 
Gross profit
    54,574       53,184       63,672  
Selling and administrative expenses
    45,715       44,843       47,545  
 
   
 
     
 
     
 
 
Operating earnings
    8,859       8,341       16,127  
Interest income
    1,247       1,995       4,102  
 
   
 
     
 
     
 
 
Earnings before income taxes
    10,106       10,336       20,229  
Provision for income taxes
                       
Federal
    3,330       3,545       6,825  
State
    635       598       1,150  
 
   
 
     
 
     
 
 
 
    3,965       4,143       7,975  
 
   
 
     
 
     
 
 
Net earnings
  $ 6,141     $ 6,193     $ 12,254  
 
   
 
     
 
     
 
 
Basic earnings per share
  $ .73     $ .74     $ 1.46  
 
   
 
     
 
     
 
 
Weighted average common shares outstanding
    8,391,244       8,391,244       8,391,244  
 
   
 
     
 
     
 
 
RETAINED EARNINGS
                       
Balance at beginning of year
  $ 258,889     $ 258,737     $ 252,525  
Add net earnings
    6,141       6,193       12,254  
Less cash dividends paid ($.72 per share in 2004, 2003 and 2002)
    6,042       6,041       6,042  
 
   
 
     
 
     
 
 
Balance at end of year
  $ 258,988     $ 258,889     $ 258,737  
 
   
 
     
 
     
 
 

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows
For the Years Ended May 31, 2004, 2003 and 2002
Increase (Decrease) in Cash
(Dollars in thousands)

                         
    2004
  2003
  2002
CASH FLOWS FROM OPERATING ACTIVITIES
                       
Net earnings
  $ 6,141     $ 6,193     $ 12,254  
 
   
 
     
 
     
 
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Interest income earned on U.S. Treasury Bills and Notes
    (1,247 )     (1,995 )     (4,102 )
Depreciation
    3,450       3,785       3,884  
Amortization of discount or premium on U.S. Treasury Notes
                6  
Working capital items:
                       
Accounts receivable
    (3,798 )     5,736       2,729  
Inventories
    (481 )     218       (606 )
Other current assets
    (3,685 )     (671 )     165  
Accounts payable, trade
    1,786       131       (1,328 )
Accrued liabilities
    600       (1,048 )     (1,240 )
Income taxes payable
    (1,620 )     630       (884 )
Other assets
    (272 )     (587 )     (324 )
Other deferred liabilities
    1,162       524       314  
 
   
 
     
 
     
 
 
Total Adjustments
    (4,105 )     6,723       (1,386 )
 
   
 
     
 
     
 
 
Net cash provided by operating activities
    2,036       12,916       10,868  
 
   
 
     
 
     
 
 

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows, continued
For the Years Ended May 31, 2004, 2003 and 2002
Increase (Decrease) in Cash
(Dollars in thousands)

                         
    2004
  2003
  2002
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Proceeds from sale or maturity of U. S. Treasury Bills
  $ 381,434     $ 366,398     $ 410,274  
Purchase of U.S. Treasury Bills
    (376,077 )     (371,797 )     (434,253 )
Maturity of U.S. Treasury Notes
                25,000  
Interest received from U. S. Treasury Notes
                719  
Proceeds from sale of property, plant and equipment
    679       84       13  
Purchase of property, plant and equipment
    (1,928 )     (1,523 )     (3,330 )
 
   
 
     
 
     
 
 
Net cash provided by (used in) investing activities
    4,108       (6,838 )     (1,577 )
 
   
 
     
 
     
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Cash dividends paid
    (6,042 )     (6,041 )     (6,042 )
 
   
 
     
 
     
 
 
Net cash used in financing activities
    (6,042 )     (6,041 )     (6,042 )
 
   
 
     
 
     
 
 
Net increase in cash
    102       37       3,249  
Cash at beginning of year
    8,736       8,699       5,450  
 
   
 
     
 
     
 
 
Cash at end of year
  $ 8,838     $ 8,736     $ 8,699  
 
   
 
     
 
     
 
 

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 1 Nature of Operations and Accounting Policies

Nature of operations—Skyline Corporation designs, manufactures and sells at wholesale both a broad line of single and multi-section manufactured homes and a large selection of towable recreational vehicle models. Both product lines are sold through numerous independent dealers throughout the United States who often utilize floor plan financing arrangements with lending institutions.

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 all of its subsidiaries (the “Corporation”), each of which is wholly-owned. All intercompany transactions have been eliminated. 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.

Revenue recognition—Substantially all of the Corporation’s products are made to order. Revenue is recognized upon shipment.

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.

Consolidated statements of cash flows—For purposes of the statements of cash flows, investments in U. S. Treasury Bills are included as investing activities. The Corporation’s cash flows from operating activities were reduced by income taxes paid of $5,884,000, $4,079,000 and $8,870,000 in 2004, 2003 and 2002, respectively.

Inventory—Inventories are stated at cost, determined under the first-in, first-out method, which is not in excess of market. Physical inventory counts are taken at the end of each reporting quarter.

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Notes to Consolidated Financial Statements

NOTE 1 Nature of Operations and Accounting Policies, continued

Total inventories for the periods presented consisted of (dollars in thousands):

                 
    May 31,
    2004
  2003
Raw Materials
  $ 4,158     $ 4,132  
Work In Process
    5,650       5,282  
Finished Goods
    87        
 
   
 
     
 
 
 
  $ 9,895     $ 9,414  
 
   
 
     
 
 

Property, plant and equipment—Property, plant and equipment is stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for financial statement reporting and accelerated methods for income tax 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 15 years.

Investments—The Corporation invests in United States Government Securities. These securities are typically held until maturity or reasonable proximity to maturity and are therefore classified as held-to-maturity and carried at amortized cost.

The carrying value of U.S. Treasury Bills, which approximates their fair market value, totaled $141,611,000 and $145,721,000 at May 31, 2004 and 2003, respectively. These securities mature within one year. The Corporation does not have any other financial instruments which have market values differing from recorded values.

Warranty—The Corporation provides the retail purchaser of its manufactured homes with a fifteen-month warranty against defects in design, materials and workmanship. Recreational vehicles are covered by a two-year warranty. The warranties are backed by a corporate service department and an extensive field service system. Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. The adequacy of the recorded warranty liability is periodically assessed and the amount is adjusted as necessary.

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Table of Contents

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

Note 1 Nature of Operations and Accounting Policies, continued

A reconciliation of accrued warranty and related expenses is as follows (dollars in thousands):

                         
    Year ended May 31,
    2004
  2003
  2002
Balance at the beginning of the period
  $ 10,609     $ 10,100     $ 10,084  
Accruals for warranties
    11,478       11,425       12,853  
Settlements made during the period
    (10,966 )     (10,916 )     (12,837 )
 
   
 
     
 
     
 
 
Balance at the end of the period
  $ 11,121     $ 10,609     $ 10,100  
 
   
 
     
 
     
 
 

Income taxes—The difference between the Corporation’s statutory federal income tax rate and the effective income tax rate is due primarily to state income taxes as follows (dollars in thousands):

                         
    Year ended May 31,
    2004
  2003
  2002
Income taxes at statutory federal rate
  $ 3,437     $ 3,518     $ 7,080  
State income taxes, net of federal tax effect
    419       394       748  
Other
    109       231       147  
 
   
 
     
 
     
 
 
Income tax expense
  $ 3,965     $ 4,143     $ 7,975  
 
   
 
     
 
     
 
 
Effective tax rate
    39.2%       40.1%       39.4%  

The Corporation’s deferred tax assets consist primarily of temporary differences in the basis of certain liabilities for financial statement and tax return purposes, and its deferred tax liabilities are due to the use of accelerated depreciation methods for tax purposes. The amounts of such deferred tax items are not significant individually or in the aggregate.

Recently issued accounting pronouncements—The Corporation has determined that the effects on the financial statements from any recently issued accounting standards are not applicable.

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Table of Contents

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 2 Commitments and Contingencies

The Corporation was contingently liable at May 31, 2004, under repurchase agreements with certain financial institutions providing inventory financing for retailers of its products. Under these arrangements, which are customary in the manufactured housing and recreational vehicle industries, the Corporation agrees to repurchase homes and recreational vehicles in the event of default by the retailer at declining prices over the term of the agreement, generally 12 months. 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, without reduction for the resale value of the repurchase units, was approximately $100 million at May 31, 2004 and 2003. The risk of loss under these agreements is spread over many retailers 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 allowance for doubtful accounts includes a reserve for potential net losses on repurchased units. The amounts of obligations from repurchased units and incurred net losses for the periods presented are as follows (dollars in thousands):

                         
    Year Ended May 31,
    2004
  2003
  2002
Obligations from units repurchased
  $ 23     $ 1,001     $ 922  
Net loss on repurchased units
          50       179  

The Corporation leases office and manufacturing equipment under operating lease agreements. Leases generally provide that the Corporation pays the cost of insurance, taxes and maintenance. Lease expense for fiscal year ended May 31, 2004 was approximately $1,100,000, while lease expense for each of the fiscal years ended May 31, 2003 and 2002 was approximately $1,200,000. Future minimum lease commitments under operating leases are as follows (dollars in thousands):

         
Year Ending    
    May 31,   Amount

 
2005
  $ 804  
2006
    436  
2007
    242  
2008
    148  
2009
    44  
Thereafter
     
 
   
 
 
 
  $ 1,674  
 
   
 
 

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Table of Contents

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 2 Contingencies, continued

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.

NOTE 3 Purchase of Treasury Stock

The Corporation’s board of directors from time to time has authorized the repurchase of shares of the Corporation’s common stock, in the open market or through negotiated transactions, at such times and at such prices as management may decide.

In fiscal 2004, 2003 and 2002, the Corporation did not acquire any shares of its common stock.

The effect of the aggregate repurchases on basic earnings per share was $.18 per share in 2004, $.19 per share in 2003 and $.37 per share in 2002. At May 31, 2004, the Corporation had authorization to repurchase an additional 391,300 shares of its common stock.

NOTE 4 Employee Benefits

A) HEALTH INSURANCE

The Corporation offers health insurance to eligible employees and dependents. This benefit is administered by utilizing a combination of insurance companies and a third party administrator. These parties provide individual reinsurance coverage limiting the Corporation’s liability for any catastrophic claims. Claims incurred but not reported are accrued based on estimates that incorporate the Corporation’s past experience and other considerations such as the nature of each claim and other relevant trend factors provided by the insurance companies and the third party administrator. Expenses associated with the health insurance benefit were $3,860,000, $3,737,000 and $ 4,685,000 for fiscal years ended May 31, 2004, 2003 and 2002, respectively.

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Table of Contents

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 4 Employee Benefits, continued

B) PROFIT SHARING AND 401(K) PLANS

The Corporation has two deferred profit sharing plans (“Plans”), which together cover substantially all of its employees. The Plans are defined contribution plans to which the Corporation has the right to modify, suspend or discontinue contributions. Assets of the Plans are invested in United States Government Securities. For the years ended May 31, 2004, 2003 and 2002, contributions to the Plans were $2,447,000, $2,356,000 and $2,413,000, respectively.

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 currently provide a matching contribution to the 401(k) Plan.

C) RETIREMENT AND DEATH BENEFIT PLANS

The Corporation has entered into arrangements with certain employees which provide for benefits to be paid to the employees’ estates in the event of death during active employment or retirement benefits to be paid over 10 years beginning at the date of retirement. To fund all such arrangements, the Corporation purchased life insurance or annuity contracts on the covered 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 6.5 percent in fiscal 2004, 6.0 percent in fiscal 2003 and 7.0 percent in fiscal 2002. The amount accrued for such arrangements totaled $5,742,000 and $4,580,000 at May 31, 2004 and 2003, respectively. The amount charged to operations under these arrangements was $1,145,000 in fiscal year 2004, $252,000 in fiscal 2003 and $352,000 in fiscal year 2002.

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Table of Contents

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 5 Industry Segment Information
(Dollars in thousands)

                         
    2004
  2003
  2002
SALES
                       
Manufactured housing
  $ 310,367     $ 293,448     $ 339,260  
Recreational vehicles
    122,014       126,369       111,462  
 
   
 
     
 
     
 
 
Total sales
  $ 432,381     $ 419,817     $ 450,722  
 
   
 
     
 
     
 
 
EARNINGS BEFORE INCOME TAXES
                       
OPERATING EARNINGS
                       
Manufactured housing
  $ 13,035     $ 11,116     $ 19,107  
Recreational vehicles
    150       439       925  
General corporate expenses
    (4,326 )     (3,214 )     (3,905 )
 
   
 
     
 
     
 
 
Total operating earnings
    8,859       8,341       16,127  
Interest income
    1,247       1,995       4,102  
 
   
 
     
 
     
 
 
Earnings before income taxes
  $ 10,106     $ 10,336     $ 20,229  
 
   
 
     
 
     
 
 
IDENTIFIABLE ASSETS
                       
OPERATING ASSETS
                       
Manufactured housing
  $ 75,079     $ 71,225     $ 77,846  
Recreational vehicles
    24,478       22,195       22,579  
 
   
 
     
 
     
 
 
Total operating assets
    99,557       93,420       100,425  
U.S. TREASURY BILLS
    141,611       145,721       138,327  
 
   
 
     
 
     
 
 
Total assets
  $ 241,168     $ 239,141     $ 238,752  
 
   
 
     
 
     
 
 
DEPRECIATION
                       
Manufactured housing
  $ 2,777     $ 3,103     $ 3,268  
Recreational vehicles
    673       682       616  
 
   
 
     
 
     
 
 
Total depreciation
    3,450     $ 3,785     $ 3,884  
 
   
 
     
 
     
 
 
CAPITAL EXPENDITURES
                       
Manufactured housing
    1,158     $ 1,230     $ 2,085  
Recreational vehicles
    770       293       1,245  
 
   
 
     
 
     
 
 
Total capital expenditures
  $ 1,928     $ 1,523     $ 3,330  
 
   
 
     
 
     
 
 

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Table of Contents

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 5 Industry Segment Information

Operating earnings represent earnings before interest income and provision for income taxes with non-traceable operating expenses being allocated to industry segments based on percentages of sales.

Identifiable assets, depreciation and capital expenditures, by industry segment, are those items that are used in operations in each industry segment, with jointly used items being allocated based on a percentage of sales.

Financial Summary by Quarter
Unaudited
(Dollars in thousands, except per share data)

                                         
    1st   2nd   3rd   4th    
2004
  Quarter
  Quarter
  Quarter
  Quarter
  Year
Sales
  $ 109,679     $ 114,583     $ 90,995     $ 117,124     $ 432,381  
Gross profit
    15,224       15,059       9,396       14,895       54,574  
Net earnings (loss)
    2,037       2,068       (718 )     2,754       6,141  
Basic earnings (loss) per share
    .24       .25       (.09 )     .33       .73  
                                         
    1st   2nd   3rd   4th    
2003
  Quarter
  Quarter
  Quarter
  Quarter
  Year
Sales
  $ 116,492     $ 112,467     $ 87,709     $ 103,149     $ 419,817  
Gross profit
    14,941       14,911       8,878       14,454       53,184  
Net earnings (loss)
    1,822       1,951       (827 )     3,247       6,193  
Basic earnings (loss) per share
    .22       .23       (.10 )     .39       .74  

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Table of Contents

     
Item 9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
   
  None
     
Item 9A.
  Controls and Procedures
         
  (a)   Evaluation of disclosure controls and procedures: The Corporation’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a date within 90 days of the filing date of the annual report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Corporation’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Corporation would be made known to them by others within the Corporation, particularly during the period in which this annual report was being prepared.
 
       
  (b)   Changes in internal controls: There were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the Corporation’s internal controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions.

PART III

     
Item 10.
  Executive Officers of the Registrant (Officers are elected annually)
             
Name
  Age
  Position
Thomas G. Deranek
    68     Vice Chairman and Chief Executive Officer
 
           
William H. Murschel
    59     President – Chief Operations Officer
 
           
Terrence M. Decio
    52     Executive Vice President
 
           
James R. Weigand
    49     Vice President – Finance & Treasurer and Chief Financial Officer
 
           
Christopher R. Leader
    45     Vice President – Operations
 
           
Charles W. Chambliss
    54     Vice President – Product Development and Engineering
 
           
Jon S. Pilarski
    41     Corporate Controller

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Table of Contents

     
Item 10.
  Executive Officers of the Registrant (Officers are elected annually), continued
 
   
  Thomas G. Deranek, Vice Chairman and Chief Executive Officer, joined the Corporation in 1964. He served as Chief of Staff from 1991 to 2001 and was elected Vice Chairman and Chief Executive Officer in September 2001.
 
   
  William H. Murschel, President-Chief Operations Officer, joined the Corporation in 1969. He was elected Vice President in 1986, and President and Chief Operations Officer in 1991.
 
   
  Terrence M. Decio, Executive Vice President, joined the Corporation in 1973. He was elected Vice President in 1985, Senior Vice President in 1991, Senior Executive Vice President in 1993 and Executive Vice President in 2004.
 
   
  James R. Weigand, Vice President-Finance & Treasurer and Chief Financial Officer, joined the Corporation in 1991 as Controller. He was elected an officer in 1994 and Vice President-Finance & Treasurer and Chief Financial Officer in 1997.
 
   
  Christopher R. Leader, Vice President-Operations, joined the Corporation in January 1997 and was elected Vice President in September 1997.
 
   
  Charles W. Chambliss, Vice President-Product Development and Engineering, joined the Corporation in 1973 and was elected Vice President in 1996.
 
   
  Jon S. Pilarski, Corporate Controller, joined the Corporation in 1994 and was elected Corporate Controller in 1997.

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Table of Contents

     
Item 15.
  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
             
    (a) (1)   Financial Statements
 
           
          Financial statements for the Corporation are listed in the index under Item 8 of this document.
             
    (a) (2)   Financial Statement Schedules
 
           
          All financial statement schedules are omitted because they are not applicable or the required information is show in the financial statements or notes thereto.
             
    (a) (3)   Index to Exhibits
 
           
          Exhibits (Numbered according to Item 601 of Regulation S-K, Exhibit Table)
 
           
      (3)(i)   Articles of Incorporation
 
           
      (3)(ii)   By-Laws
 
           
      (14)   Code of Ethics
 
           
      (21)   Subsidiaries of the Registrant
 
           
      (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)
 
           
      (32.1)   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
 
           
      (32.2)   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
             
    (b)     Reports on Form 8-K
 
           
          A Form 8-K was filed on March 19, 2004. The filing was made to publicize the Corporation’s financial results for the quarter ended February 29, 2004.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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
Registrant
 
DATE: July 14, 2004
  BY: /s/ Thomas G. Deranek
       
 
        Thomas G. Deranek, Vice Chairman,
Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

           
DATE: July 14, 2004
  BY: /s/ James R. Weigand
       
 
        James R. Weigand, Vice
President-Finance and Treasurer and
Chief Financial Officer
 
         
DATE: July 14, 2004
  BY: /s/ Jon S. Pilarski
       
 
        Jon S. Pilarski, Corporate Controller
 
         
DATE: July 14, 2004
  BY: /s/ Arthur J. Decio
       
 
        Arthur J. Decio, Director, Chairman of the Board,
serving in a non-executive officer capacity
 
         
DATE: July 14, 2004
  BY: /s/ Jerry Hammes
       
 
        Jerry Hammes, Director
 
         
DATE: July 14, 2004
  BY: /s/ Ronald F. Kloska
       
 
        Ronald F. Kloska, Director
 
         
DATE: July 14, 2004
  BY:  
       
 
        William H. Lawson, Director
 
         
DATE: July 14, 2004
  BY: /s/ David T. Link
       
 
        David T. Link, Director
 
         
DATE: July 14, 2004
  BY: /s/ Andrew J. McKenna
       
 
        Andrew J. McKenna, Director

43