| NOTE 11 | Commitments and Contingencies |
The Corporation was contingently liable at May 31, 2013, 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 Corporation’s independent dealers. The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $71 million at May 31, 2013 and $64 million at May 31, 2012. As a result of favorable experience regarding repurchased units, which is largely due to the strength of dealers selling the Corporation’s products, the Corporation maintained at May 31, 2013 and 2012 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, 2013 will not be material to its financial position or results of operations.
The amounts of obligations from repurchased units and incurred net losses for the periods presented are as follows:
| Year ended May 31, | ||||||||
| 2013 | 2012 | |||||||
| (Dollars in thousands) | ||||||||
|
Number of units repurchased |
3 | — | ||||||
|
Obligations from units repurchased |
$ | 31 | $ | — | ||||
|
Net losses on repurchased units |
$ | — | $ | — | ||||
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.
As referenced in Note 2, the Corporation pledged a $600,000 certificate of deposit as security for certain performances in providing 60 manufactured homes to Oakridge Family Homes, L.P. The certificate of deposit will remain pledged until terms of the certificate of deposit proceeds and security agreement between the Corporation and Oakridge Family Homes, L.P. are completed, which is expected to occur by November 30, 2013.
The Corporation leases office and manufacturing equipment under non-cancelable operating lease agreements. Leases have various renewal terms, and generally provide that the Corporation pays the cost of insurance, taxes and maintenance. Lease expense totaled approximately $372,000 and $440,000 for fiscal years 2013 and 2012, respectively.
Future minimum lease commitments under operating leases are as follows:
|
Year ending May 31, |
Amount | |||
| (Dollars in thousands) |
||||
|
2014 |
$ | 352 | ||
|
2015 |
269 | |||
|
2016 |
192 | |||
|
2017 |
95 | |||
|
2018 |
36 | |||
|
Thereafter |
10 | |||
|
|
|
|||
| $ | 954 | |||
|
|
|
|||
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.