UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Period Ended February 28, 2005

 

Commission File Number: 1-9852

 

CHASE CORPORATION

(Exact name of registrant as specified in its charter)

 

Massachusetts		11-1797126
(State or other jurisdiction of incorporation of organization		(I.R.S. Employer Identification No.)

 

26 Summer Street, Bridgewater, Massachusetts 02324

(Address of Principal Executive Offices, Including Zip Code)

 

(508) 279-1789

(Registrant’s Telephone Number, Including Area Code)

 

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, and (2) has been subject to such filing requirements for the past 90 days. YES ý  NO o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act).  YES o  NO ý

 

Common Shares Outstanding as of March 31, 2005 was 3,811,098

 

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended February 28, 2005

 

Part I - FINANCIAL INFORMATION
Item 1 – Unaudited Financial Statements
	Consolidated Balance Sheets as of February 28, 2005 and August 31, 2004
	Consolidated Statements of Operations for the three and six months ended February 28, 2005 and February 29, 2004
	Consolidated Statement of Stockholders’ Equity for the six months ended February 28, 2005
	Consolidated Statements of Cash Flows for the six months ended February 28, 2005 and February 29, 2004
	Notes to Consolidated Financial Statements
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Item 4 – Controls and Procedures
Part II – OTHER INFORMATION
Item 1 – Legal Proceedings
Item 4 – Submission of Matters to a Vote of Security Holders
Item 6 – Exhibits
SIGNATURES

 

2

 

Part 1 – FINANCIAL INFORMATION

 

Item 1 – Unaudited Financial Statements

 

CHASE CORPORATION
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		February 28, 2005			August 31, 2004
ASSETS
Current Assets:
Cash		$	118,129		$	1,405,812
Accounts receivable, less allowance for doubtful accounts of $261,861 and $227,056		11,469,191			12,004,031
Inventories		12,390,924			12,227,095
Prepaid expenses and other current assets		1,730,085			925,385
Deferred income taxes		210,678			210,678
Total current assets		25,919,007			26,773,001
Property, plant and equipment, net		17,892,054			17,488,538
Other Assets
Goodwill		8,009,148			7,932,871
Intangible assets, less accumulated amortization of $1,312,484 and $1,235,964		900,375			976,895
Cash surrender value of life insurance		4,607,033			4,127,894
Investment in joint venture		679,189			725,562
Restricted investments		1,350,564			1,222,711
Other assets		10,544			9,880
		$	59,367,914		$	59,257,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	6,089,686		$	5,477,993
Accrued payroll and other compensation		967,933			1,658,662
Accrued expenses		1,323,381			1,297,801
Accrued pension expense - current		391,509			391,509
Current portion of long-term debt		2,080,675			2,820,253
Total current liabilities		10,853,184			11,646,218
Long-term debt, less current portion		9,126,876			8,342,568
Deferred compensation		1,350,564			1,222,711
Accrued pension expense		1,234,847			919,349
Deferred income taxes		146,646			146,646
Commitments and Contingencies (Note 12)
Stockholders’ Equity
First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; none issued		—			—
Common stock, $.10 par value: Authorized 10,000,000 shares; 5,506,471 in February and 5,342,939 in August issued; 3,811,098 in February and 3,773,949 in August outstanding		550,647			534,294
Additional paid-in capital		7,661,640			6,428,284
Treasury stock, at cost, 1,695,373 in February and 1,568,990 in August shares of common stock		(13,040,057		)	(10,942,690		)
Accumulated other comprehensive income (loss)		81,983			(4,866		)
Retained earnings		41,401,584			40,964,838
Total stockholders’ equity		36,655,797			36,979,860
Total liabilities and stockholders’ equity		$	59,367,914		$	59,257,352

 

See accompanying notes to the consolidated financial statements

 

3

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended						Six Months Ended
		February 28, 2005			February 29, 2004			February 28, 2005			February 29, 2004
Revenue
Sales		$	19,610,779		$	19,564,514		$	41,755,258		$	41,612,165
Royalty and commissions		244,649			312,468			498,834			552,438
		19,855,428			19,876,982			42,254,092			42,164,603
Costs and Expenses
Cost of products and services sold		15,194,061			14,030,333			31,059,070			29,985,056
Selling, general and administrative expenses		4,110,801			4,024,002			8,300,147			7,904,745
Loss on impairment of goodwill		—			—			—			579,182
		550,566			1,822,647			2,894,875			3,695,620
Interest expense		(111,865		)	(101,690		)	(207,127		)	(174,510		)
Other income (expense)		38,281			51,980			76,886			61,496
Income before income taxes and minority interest		476,982			1,772,937			2,764,634			3,582,606
Income taxes		178,900			655,700			1,036,700			1,539,900
Income before minority interest		298,082			1,117,237			1,727,934			2,042,706
Loss on impairment of unconsolidated joint venture		—			—			—			(500,000		)
Income (loss) from unconsolidated joint venture		14,999			(12,501		)	22,487			(25,002		)
Net income		$	313,081		$	1,104,736		$	1,750,421		$	1,517,704
Net income per common and common equivalent share
Basic		$	0.08		$	0.30		$	0.47		$	0.39
Diluted		$	0.08		$	0.28		$	0.45		$	0.36
Weighted average shares outstanding
Basic		3,781,695			3,665,353			3,751,124			3,857,480
Diluted		3,925,195			3,973,039			3,918,892			4,158,474

 

See accompanying notes to the consolidated financial statements

4

 

CHASE CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED FEBRUARY 28, 2005

(UNAUDITED)

 

							Additional								Accumulated Other						Total
		Common Stock					Paid-In			Treasury Stock					Comprehensive			Retained			Stockholders’			Comprehensive
		Shares		Amount			Capital			Shares		Amount			Income (loss)			Earnings			Equity			Income
Balance at August 31, 2004		5,342,939		$	534,294		$	6,428,284		1,568,990		$	(10,942,690	)	$	(4,866	)	$	40,964,838		$	36,979,860
Exercise of stock options		200,759		20,076			1,044,152														1,064,228
Shares withheld to pay statutory minimum taxes		(37,227	)	(3,723		)	(610,607		)												(614,330		)
Tax benefit from exercise of stock options							799,811														799,811
Common stock received for payment of stock option exercise										47,008		(774,186		)							(774,186		)
Common stock received to pay stautory minimum withholding taxes on restricted stock										79,375		(1,323,181		)							(1,323,181		)
Cash dividend paid, $.35 per share																		(1,313,675		)	(1,313,675		)
Unrealized gain on marketable securities															86,849						86,849			86,849
Net income																		1,750,421			1,750,421			1,750,421
Comprehensive income																								$	1,837,270
Balance at February 28, 2005		5,506,471		$	550,647		$	7,661,640		1,695,373		$	(13,040,057	)	$	81,983		$	41,401,584		$	36,655,797

 

 

See accompanying notes to the consolidated financial statements

 

5

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended
		February 28, 2005			February 29, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,750,421		$	1,517,704
Adjustments to reconcile net income to net cash provided by operating activities (Income) loss from unconsolidated joint venture		(22,487		)	25,002
Loss on impairment of unconsolidated joint venture		—			500,000
Loss on sale of equipment		—			73,860
Loss on impairment of goodwill		—			579,182
Depreciation		1,155,789			1,121,178
Amortization		76,520			52,852
Provision for losses on trade receivables		27,053			232,044
Stock issued for compensation		—			49,213
Tax benefit from exercise of stock options		799,811			208,368
Increase (decrease) from changes in assets and liabilities
Accounts receivable		507,787			(1,084,564		)
Inventories		(163,829		)	(1,350,115		)
Prepaid expenses & other assets		(805,364		)	(285,611		)
Accounts payable		611,693			26,711
Accrued expenses		(349,651		)	(13,831		)
Income taxes payable		—			(411,570		)
Deferred compensation		127,853			176,571
Net cash provided by operating activities		3,715,596			1,416,994
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(1,559,305		)	(2,858,375		)
Purchases of intangible assets		—			(200,000		)
Payments for acquisitions, net of cash acquired		—			(667,000		)
Contingent purchase price for acquisition		(76,277		)	—
Restricted cash		—			(500,000		)
Proceeds from sale of equipment		—			15,000
Investment in restricted investments, net of withdrawals		(41,004		)	(176,571		)
Distributions from investment in minority interests		68,860			1,539
(Increase) decrease in net cash surrender value of life insurance, net		(479,139		)	638,479
Net cash (used in) investing activities		(2,086,865		)	(3,746,928		)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on long-term debt		13,532,108			14,696,446
Payments of principal on debt		(13,487,378		)	(8,040,357		)
Net payments under line-of-credit		—			(462,199		)
Dividend paid		(1,313,675		)	(1,254,841		)
Proceeds from exercise of common stock options		290,042			701,713
Payments of statutory minimum taxes on stock options and restricted stock		(1,937,511		)	—
Repurchase of common stock		—			(3,255,125		)
Net cash (used in) provided by financing activities		(2,916,414		)	2,385,637
INCREASE (DECREASE) IN CASH		(1,287,683		)	55,703
CASH, BEGINNING OF PERIOD		1,405,812			166,562
CASH, END OF PERIOD		$	118,129		$	222,265
Supplemental schedule of noncash investing and financing activities Common stock received for payment of stock option exercises		$	774,186		$	—

 

See accompanying notes to the consolidated financial statements

 

6

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and therefore do not include all information and footnote disclosure necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles.  Chase Corporation (“Chase” or the “Company”) filed audited financial statements which included all information and notes necessary for such presentation for the three years ended August 31, 2004 in conjunction with the Company’s 2004 Annual Report on Form 10-K.

 

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items as well as adjustments to reflect the impact of fiscal 2004 non-recurring events) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of February 28, 2005, the results of operations and cash flows for the interim periods ended February 28, 2005 and February 29, 2004, and changes in stockholders’ equity for the interim period ended February 28, 2005.

 

The financial statements include the accounts of the Company and its wholly-owned subsidiaries.  Investments in unconsolidated companies which are at least 20% owned are carried under the equity method since acquisition or investment.  All intercompany transactions and balances have been eliminated in consolidation.  The Company uses the U.S. dollar as the functional currency for financial reporting.

 

The results of operations for the interim periods ended February 28, 2005 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2004, which are contained in the Company’s Annual Report on Form 10-K.

 

Note 2 – Inventories

 

Inventories consist of the following as of February 28, 2005 and August 31, 2004:

 

		2005			2004
Raw materials		$	6,662,934		$	6,353,577
Finished and in process		5,727,990			5,873,518
Total Inventories		$	12,390,924		$	12,227,095

 

7

 

Note 3 – Net Income Per Share

 

Net income per share is calculated as follows:

 

		Three Months Ended						Six Months Ended
		February 28, 2005			February 29, 2004			February 28, 2005			February 29, 2004
Net income		$	313,081		$	1,104,736		$	1,750,421		$	1,517,704
Weighted average common shares outstanding		3,781,695			3,665,353			3,751,124			3,857,480
Additional dilutive common stock equivalents		143,500			307,686			167,768			300,994
Diluted shares outstanding		3,925,195			3,973,039			3,918,892			4,158,474
Net income per share - Basic		$	0.08		$	0.30		$	0.47		$	0.39
Net income per share - Diluted		$	0.08		$	0.28		$	0.45		$	0.36

 

Note 4 – Stock Based Compensation

 

The Company grants stock options to its employees and directors.  Such grants are for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant.  The Company follows the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” (SFAS 148). The Company continues to recognize compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.  Other than grants to non-employee directors, the Company has not granted stock options to non-employees.

 

Grants of restricted stock are recorded as compensation expense over the vesting period at the fair market value of the stock at the date of grant.  No compensation expense is recorded for options granted in which the exercise price equals or exceeds the market price of the underlying stock on the date of grant.

 

The following table illustrates the pro forma effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 and SFAS 148 to stock-based employee compensation:

 

		Three Months Ended						Six Months Ended
		February 28, 2005			February 29, 2004			February 28, 2005			February 29, 2004
Net income, as reported		$	313,081		$	1,104,736		$	1,750,421		$	1,517,704
Less: Total stock-based compensation costs determined  under the fair value based method, net of tax		(125,799		)	(409,945		)	(387,228		)	(616,703		)
Net income, pro forma		$	187,282		$	694,791		$	1,363,193		$	901,001
Net income per share - as reported
Basic		$	0.08		$	0.30		$	0.47		$	0.39
Diluted		$	0.08		$	0.28		$	0.45		$	0.36
Net income per share - pro forma
Basic		$	0.05		$	0.19		$	0.36		$	0.23
Diluted		$	0.05		$	0.17		$	0.35		$	0.22

 

8

 

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for fiscal year 2005.  There were no option grants during fiscal year 2004.

 

		2005
Expected Dividend yield		3.0	%
Expected life		5 years
Expected volatility		125.0	%
Risk-free interest rate		3.5	%

 

Note 5 – Sale of Subsidiary to Related Party

 

On December 10, 2003, the Company sold its Sunburst Electronics Manufacturing Solutions, Inc. subsidiary (“Sunburst”).  Sunburst is located in West Bridgewater, MA and was sold to the Edward L. Chase Revocable Trust (the “Trust”) in exchange for 230,406 shares of Chase common stock, valued at $3,000,000, that were held by the Trust.  The closing date of the transaction was December 10, 2003 with an effective date for accounting purposes of December 1, 2003.

 

The sale of Sunburst resulted in a charge of $579,182, recorded in the first quarter of fiscal 2004, representing the write down of the book value of the Sunburst business to its market value as required by generally accepted accounting principles.

 

The following table summarizes certain financial information about Sunburst and Chase for the six months ended February 29, 2004.

 

		Chase Corporation Consolidated			Sunburst Electronic Manufacturing Solutions, Inc.			Chase Corporation Excluding Sunburst
Six Months Ended February 29, 2004
Revenue		$	42,164,603		$	2,548,583		$	39,616,020
Income (loss) before income taxes and minority interest		3,582,606			(460,554		)	4,043,160
Loss on impairment of goodwill		(579,182		)	(579,182		)	—
Income before income taxes and minority interest excluding loss on impairment of goodwill		4,161,788			118,628			4,043,160

 

Note 6 – Segment Information

 

The Company operates in two business segments, a Specialized Manufacturing segment, consisting of protective coatings and tapes and an Electronic Manufacturing Services segment.  Specialized Manufacturing products include insulating and conducting materials for wire and cable manufacturers, protective coatings for pipeline applications and moisture protective coatings for electronics and printing services.  Electronic Manufacturing Services include printed circuit board and electro-mechanical assembly services for the electronics industry.  The Company evaluates segment performance based upon operating profit or loss.

 

9

 

The following table summarizes information about the Company’s reportable segments:

 

		Three Months Ended						Six Months Ended
		February 28, 2005			February 29, 2004			February 28, 2005			February 29, 2004
Revenues from external customers
Specialized Manufacturing		$	16,961,608		$	15,832,028		$	36,201,991		$	32,137,020
Electronic Manufacturing Services		2,893,820			4,044,954			6,052,101			10,027,583
Total		$	19,855,428		$	19,876,982		$	42,254,092		$	42,164,603
Income before income taxes and minority interest
Specialized Manufacturing		$	1,600,547		$	2,275,808		$	4,623,164		$	5,255,008
Electronic Manufacturing Services		150,631			748,667			626,952			700,703		*
Total for reportable segments		1,751,178			3,024,475			5,250,116			5,955,711
Corporate and Common Costs		(1,274,196		)	(1,251,538		)	(2,485,482		)	(2,373,105		)
Total		$	476,982		$	1,772,937		$	2,764,634		$	3,582,606

 

* Includes loss on impairment of goodwill of $579,182 (See Notes 5 and 7)

 

		February 28, 2005			August 31, 2004
Total assets
Specialized Manufacturing		$	38,070,339		$	38,078,812
Electronic Manufacturing Services		10,761,961			10,228,259
Total for reportable segments		48,832,300			48,307,071
Corporate and Common Assets		10,535,614			10,950,281
Total		$	59,367,914		$	59,257,352

 

Note 7 – Goodwill and Other Intangibles

 

The Company has two reporting units with goodwill, the Specialized Manufacturing unit and the Electronic Manufacturing Services unit.  These reporting units are also reportable segments (see Note 6).  As discussed in Note 5, the Company recorded a $579,182 charge in the first quarter of fiscal year 2004 related to the impairment of goodwill as a result of the sale of its Sunburst subsidiary.  Goodwill related to Sunburst, having a pre-impairment book value of $1,412,125, was written down to its fair value of $832,943.  The adjusted fair value of the remaining goodwill related to Sunburst was eliminated from the Company’s consolidated balance sheet as part of the accounting for the sale of Sunburst in the quarter ending February 29, 2004.

 

The changes in the carrying value of goodwill, by reporting unit, are as follows:

 

		Specialized Manufacturing			Electronic Manufacturing Services			Consolidated
Balance at August 31, 2004		$	1,933,983		$	5,998,888		$	7,932,871
Acquisition of Paper Tyger - Contingent Purchase Price		76,277			—			76,277
Balance at February 28,. 2005		$	2,010,260		$	5,998,888		$	8,009,148

 

The Company evaluates the possible impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.

 

10

 

Intangible assets subject to amortization consist of the following at February 28, 2005 and August 31, 2004:

 

		Weighted-Average		Gross Carrying		Accumulated		Net Carrying
		Amortization Period		Value		Amortization		Value
February 28, 2005
Patents and agreements		14.4 years		1,841,244		1,267,484		573,760
Customer lists and relationships		10.0 years		360,000		45,000		315,000
August 31, 2004
Patents and agreements		14.4 years		1,841,244		1,208,964		632,280
Customer lists and relationships		10.0 years		360,000		27,000		333,000

 

In addition to the intangible assets summarized above, the Company also has a corporate trademark with a carrying value of $11,615 and an indefinite life.

 

Amortization expense related to intangible assets for the six months ended February 28, 2005 and February 29, 2004 was $76,520 and $52,852, respectively.  Estimated amortization expense for the remainder of fiscal year 2005 and for each of the five succeeding fiscal years is as follows:

 

Years ending August 31,
2005 (remaining 6 months)		75,250
2006		150,500
2007		150,500
2008		150,500
2009		124,010
2010		56,000
		$	706,760

 

Note 8 – Investment in Joint Venture

 

In fiscal 1995, the Company formed a joint venture, The Stewart Group, Inc. (“SGI”), with The Stewart Group, Ltd. of Canada, to produce various products for the fiber optic cable market.  Chase Corporation owned a 42% interest in the joint venture at February 28, 2005 and August 31, 2004.

 

In accordance with the Company’s accounting policies, the carrying value of this investment is reviewed periodically or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable, and an impairment may exist.  In November 2003 (the Company’s first quarter of fiscal 2004), the Company recorded an impairment charge of $500,000 related to the Company’s investment in SGI due to changes in SGI’s projected future cash flows as a result of delays in distributing a key product.  Additionally, there were increased competitive pressures in the market resulting from the merger between a competitor and a significant customer of SGI during the Company’s first quarter of fiscal year 2004.  This impairment charge was determined based upon an updated understanding of SGI’s businesses through discussions with SGI’s majority shareholder as well as an analysis of SGI’s projected future cash flows.

 

11

 

Note 9 - Restricted Stock

 

The Board of Directors granted 250,000 shares of restricted common stock to the Company’s President and CEO, Mr. Peter R. Chase.  The fair market value of the Company’s common stock was $3.375 on the date of grant (July 18, 1995).  Compensation expense of approximately $98,000 per year was being recognized over the vesting period (nine years) of the restricted stock grant.  Other than the restrictions which limit the sale and transfer of these shares, Mr. Chase is entitled to all the rights of a shareholder.

 

Under the terms of the original Stock Agreement, Mr. Chase was granted an aggregate of 250,000 shares of restricted stock (the “Shares”) that were to vest on September 6, 2004.  The Stock Agreement grants the Company a right of first refusal with respect to any proposed sale or transfer of the Shares by Mr. Chase after the vesting date.  In addition, the original Stock Agreement had granted Mr. Chase the right to put to the Company all or part of the Shares during the 180-day period after the vesting date and during each 90-day period after the first, second, and third anniversaries of the vesting date.  The purchase price for the put option was calculated based upon the average trading price of the Company’s common stock over the 60-day period beginning 30 days prior to the exercise of the put option and ending 30 days after such exercise.

 

On August 31, 2004, the Board of Directors and, separately, the Audit Committee of the Company approved the amendment of the Stock Agreement between the Company and Mr. Chase to eliminate the put option and to include a provision that permits Mr. Chase the right to tender a portion of the Shares (valued at fair market value on the vesting date) to the Company to satisfy the minimum tax withholding obligations of the Company with respect to the vesting of the Shares.  Furthermore, the Company has agreed to waive its right of first refusal with respect to any sale or transfer of the Shares by Mr. Chase within six months after the vesting date.  The Company’s minimum tax withholding obligation for Mr. Chase upon the vesting of the shares was equal to approximately 31.5% of the fair market value of the shares on the vesting date.

 

Upon the vesting of the 250,000 Shares, Mr. Chase tendered 79,375 shares to the Company on September 6, 2004 in satisfaction of the approximately $1.3 million minimum tax withholding obligation with respect to the vesting of the Shares, which was then paid by the Company in cash, to the appropriate tax authorities.

 

Note 10 – Acquisitions

 

Paper Tyger

 

In December 2003, the Company acquired the assets of Paper Tyger, LLC (“Paper Tyger”), headquartered in Middlefield, Connecticut.  The Paper Tyger business manufactures and markets laminated, durable papers produced with patented technology.  The total purchase price for this acquisition was $702,125 with additional contingent payments to be made by the Company annually for the three subsequent years, if certain revenue and product margin targets are met with respect to the Paper Tyger products over the three years ending November 30, 2006.  The additional contingent payments will be recorded as goodwill in accordance with SFAS 141. An additional contingent payment of $76,277, calculated based on the results of Paper Tyger for the year ending November 30, 2004, was recorded in the six months ended February 28, 2005.

 

The primary reason for the Company’s purchase of the Paper Tyger business was due to (a) synergies between the manufacturing of Paper Tyger products and the manufacturing process for the Company’s existing Coating & Laminating products and (b) the benefit that the Company’s sales and marketing team

 

12

 

and research and development capabilities will have on enhancing future growth of the Paper Tyger business.  The effective date for this acquisition for accounting purposes was December 1, 2003 and the results of Paper Tyger have been included in the Company’s financial results since then.  The purchase price was funded through operating cash and borrowings under the Company’s credit facility.

 

The allocation of the purchase price, including direct costs of the acquisition was based on the fair values of the acquired assets and liabilities assumed as follows:

 

Current assets		$	262,629
Accounts payable		(672,281		)
Acquisition costs		(11,488		)
Intangible assets - customer lists		360,000
Goodwill		839,542
Total purchase price		$	778,402

 

All assets, including goodwill, acquired as part of Paper Tyger are included in the Specialized Manufacturing segment.  Identifiable intangible assets purchased with this transaction are being amortized over a period of 10 years.  Goodwill associated with this acquisition totaling $839,542 will be deducted for income tax purposes over 15 years.

 

All acquisitions have been accounted for using the purchase method, and the operations of the acquired entity or assets are included in consolidated operations from the effective date.

 

Note 11 – Income Taxes

 

In fiscal 2004, the sale of Sunburst created a capital loss carryforward for income tax purposes of approximately $2.3 million.  This capital loss expires in 2008 and will be used to offset capital gains generated by the Company in future periods.  As of February 28, 2005, management has concluded that it is more likely than not that the Company will not realize the benefit of this capital loss carryforward and thus the deferred tax asset has been offset by a full valuation allowance.

 

Note 12 – Commitments and Contingencies

 

From time to time, the Company is involved in litigation incidental to the conduct of its business. The Company is not party to any lawsuit or proceeding that, in management’s opinion, is likely to seriously harm the Company’s business, results of operations, financial conditions or cash flows.

 

The Company is one of over 100 defendants in each of two personal injury lawsuits, all of which allege personal injury from exposure to asbestos contained in Chase products.  Of these lawsuits, one is pending in Mississippi and one is pending in Ohio.  The Mississippi lawsuit is a wrongful death action that is in discovery and has not yet been given a firm trial date. The Ohio lawsuit has been inactive with respect to Chase since Chase was named as a defendant in July 2004.  The Company had been a defendant in a another personal injury lawsuit in Ohio alleging injury from exposure to asbestos contain in Chase products.  However, the Company was dismissed from the lawsuit in early 2005.

 

The Company is also a defendant in a case pending in Massachusetts Superior Court alleging that two of its employees had disclosed confidential information and/or trade secrets of their former employer to the

 

13

 

Company and that the Company had improperly used that information.  In addition, the complaint alleges that the Company engaged in unfair and deceptive trade practices pursuant to M.G.L. c. 93A.  Discovery in the case is closed but no trial date has yet been set.

 

Note 13 - Pensions and Other Post Retirement Benefits

 

The Company has adopted the revised disclosure provisions of SFAS 132.  The components of net periodic benefit cost for the six months ended February 28, 2005 and February 29, 2004 are as follows:

 

		2005			2004
Service cost		$	170,588		$	186,146
Interest cost		250,688			287,430
Expected return on plan assets		(205,174		)	(200,872		)
Amortization of prior service cost		43,992			46,236
Amortization of unrecognized loss		32,414			23,282
Net periodic benefit cost		$	292,508		$	342,222

 

As of February 28, 2005, the Company has contributed $0 in the current fiscal year to fund its obligations under the pension plan. The Company plans to contribute $391,509 to fund pension plan obligations in the fiscal year ending August 31, 2005.

 

Note 14 – Recent Accounting Pronouncements

 

In October 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was passed. The AJCA provides a deduction for income from qualified domestic production activities which will be phased in from 2005 though 2010. In return, the AJCA also provides for a two-year phase-out of the existing extra-territorial income exclusion for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities by the American Jobs Creation Act of 2004.” FSP 109-1 treats the deduction as a “special deduction” as described in FAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the same period in which the deduction is claimed in our tax return. We are currently evaluating the impact the AJCA will have on our results of operations and financial position.

 

In November 2004, the FASB issued FAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” This statement amends Accounting Research Bulletin No. 43, Chapter 4, to clarify that abnormal amounts of idle facility, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The provisions of Statement No. 151 should be applied prospectively. The adoption of FAS No. 151 is not expected to have a material impact on our financial position or results of operations.

 

In December 2004, the Financial Accounting Standards Board issued a revision to Statement of Financial Accounting Standards 123 (SFAS 123(R)), Share-Based Payment. The revision requires all entities to

 

14

 

recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statement eliminates the alternative method of accounting for employee share-based payments previously available under Accounting Principles Board Opinion No. 25.  The Statement is effective for the Company beginning in the first quarter of fiscal year 2006.  The Company is currently evaluating the impact that will result from adopting SFAS 123(R).

 

In March 2005, the SEC staff issued guidance on FASB Statement No. 123 (revised 2004), Share-Based Payment, (FAS 123(R)). Staff Accounting Bulletin No. 107 (SAB 107) was issued to assist preparers by simplifying some of the implementation challenges of FAS 123(R) while enhancing the information that investors receive.  SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required by preparers to successfully implement FAS 123(R), specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation models – SAB 107 reinforces the flexibility allowed by FAS 123(R) to choose an option-pricing model that meets the standard’s fair value measurement objective; (b) expected volatility – the SAB provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term – the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances.  The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).

 

Note 15 – Subsequent Event

 

On April 6, 2005 the Company completed its acquisition of E-POXY Engineered Materials (“E-POXY”) of Albany, New York.  E-POXY is a manufacturer of expansion and control joint systems designed for roads, bridges, stadiums and airport runways.  It also produces specialty bonding agents, grouts, mortars, injection resins, secondary containment systems and protective coatings.  E-POXY will become part of the Chase Specialty Coatings division, which is included in the Specialized Manufacturing Segment.

 

This acquisition, effective April 1, 2005, is an asset purchase and will be accounted for in the Company’s third quarter ending May 31, 2005.

 

15

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion provides an analysis of the Company’s financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 2004.

 

Overview

 

While sales in the Company’s Specialized Manufacturing segment were solid, profitability was impacted significantly by several large raw material increases on petroleum related materials.  Price increases which are currently being introduced to customers will partially alleviate the increased costs.  During the remainder of the fiscal year management expects more margin squeeze as cost increases outpace the ability to raise prices putting more pressure on productivity improvements.

 

A slowdown in orders in the Company’s Electronic Manufacturing Services segment, along with the costs associated with the relocation to a more efficient facility also affected profitability in the current quarter.  This transition has been completed effective March 1, 2005 and the Company is beginning to see positive results in the form of new customers and improved productivity related to equipment enhancements.  As discussed in the prior quarter, the market for products and services in this segment is expected to continue to be a bit soft as the Company’s key customers assess their inventory levels and their own customer demand for the remainder of 2005.  Although the Company’s operating results from this segment should continue to be positive, they may not be at the same level as fiscal year 2004.

 

The financial impact of implementing the internal control provisions of the Sarbanes-Oxley Act imposes significant costs on small businesses such as Chase.  These costs will be greatest during the implementation phase of the project, which will last through August 2006.  Ongoing compliance costs beyond the initial implementation will lessen; however, they will still be present in fiscal years beyond 2006.  Chase must comply with the internal control provisions of Section 404 of the Sarbanes-Oxley Act as of August 31, 2006.

 

Our new facility in North Carolina continues to make solid improvements and we expect positive financial results for the remainder of the fiscal year.

 

On April 6, 2005 the Company completed its acquisition of E-Poxy Engineered Materials (“E-Poxy”) of Albany, New York.  E-Poxy is a manufacturer of expansion and control joint systems designed for roads, bridges, stadiums and airport runways.  It also produces specialty bonding agents, grouts, mortars, injection resins, secondary containment systems and protective coatings.  E-Poxy will become part of the Chase Specialty Coatings division, which is included in the Specialized Manufacturing Segment.

 

This acquisition, effective April 1, 2005, is an asset purchase and will be accounted for in the Company’s third quarter ending May 31, 2005.

 

Management also continues to move forward with completing its due diligence for the Company’s potential acquisition of Concoat Holdings based in the United Kingdom.

 

In the six months ended February 29, 2004, the Company’s net income was negatively impacted by (a) the impairment of the Company’s investment in an unconsolidated joint venture, Stewart Group Inc, (“SGI”), of $500,000; and (b) the impairment of goodwill related to Sunburst of $579,000.  Consistent with the past two fiscal years, the Company is continuing to restructure its manufacturing operations as a means of better positioning its businesses and maximizing resources.

 

16

 

The Company has two reportable segments summarized below:

 

Segment		Divisions		Manufacturing Focus and Products
Specialized Manufacturing Segment		•      Chase Coating & Laminating •      Chase Specialty Coatings •      NEQP		Produces protective coatings and tape products including insulating and conducting materials for wire and cable manufacturers, protective coatings for pipeline applications and moisture protective coatings for electronics and printing services.
Electronic Manufacturing Services Segment		•      Chase EMS		Provides assembly and turnkey contract manufacturing services including printed circuit board and electromechanical assembly services to the electronics industry operating principally in the United States.

 

Chase Canada, the Company’s only manufacturing plant located outside of the United States, in Winnipeg, Canada was reorganized within the domestic operating facilities of the Company’s Specialized Manufacturing segment in fiscal year 2004.  This reorganization of plant facilities was a result of the continued consolidation of Chase Canada’s customer base, predominantly to the United States. The plant located in Winnipeg was officially shut down in the fourth quarter of fiscal year 2004.

 

In January 2004, the Company purchased certain manufacturing equipment to be utilized in the manufacturing operations at a newly leased facility in Taylorsville, North Carolina.  This new operating facility is part of the Company’s Specialized Manufacturing segment. The equipment purchase was financed through an increase in the Company’s long-term debt.

 

On December 10, 2003, the Company sold its subsidiary, Sunburst Electronics Manufacturing Solutions, Inc. (“Sunburst”) to the Edward L. Chase Revocable Trust (the “Trust”) in exchange for shares of Chase common stock that were held by the Trust.  The closing date of the transaction was December 10, 2003, with an effective date for accounting purposes of December 1, 2003.  The Company received 230,406 shares of Chase common stock valued at $3,000,000.  Sunburst was part of the Company’s Electronic Manufacturing Services segment through the end of the first quarter of fiscal year 2004.

 

In December 2003, the Company acquired the assets of Paper Tyger, LLC (“Paper Tyger”), headquartered in Middlefield, Connecticut.  The Paper Tyger business manufactures and markets laminated, durable papers produced with patented technology.  Paper Tyger products, marketed under the names Paper Tygerâ, NaturalWhite and SuperWhite, are sold primarily to the envelope converting and commercial printing industries.  Thus far the total purchase price for this acquisition is $779,000 including contingent payments of $77,000 recorded in the six months ended February 28, 2005, with additional contingent payments to be made by the Company if certain revenue and product margin targets are met with respect to the Paper Tyger products over the next two years.  The additional contingent payments will be recorded as goodwill in accordance with SFAS 141.  In connection with the acquisition, the Company recorded $840,000 of goodwill and $360,000 of intangible assets related to the customer relationships of Paper Tyger.  The amount allocated to goodwill includes $763,000 recorded at the time of the acquisition plus the additional contingent payment of $77,000 recorded in the six months ended February 28, 2005.  The Paper Tyger products are being manufactured in the Company’s Webster facility and are part of the Coating & Laminating division which is part of the Specialized Manufacturing segment.

 

17

 

Results of Operations

 

Revenues and Operating Profit by Segment are as follows (dollars in thousands)

 

					Income Before
					Income Taxes and			% of
		Revenue			Minority Interest			Revenue
Three Months Ended February 28, 2005
Specialized Manufacturing		$	16,961		$	1,601		9	%
Electronic Manufacturing Services		2,894			151			5
		$	19,855		1,752			9
Less corporate and common costs					(1,275		)
Income before income taxes and minority interest					$	477
Three Months Ended February 29, 2004
Specialized Manufacturing		$	15,832		$	2,276		14	%
Electronic Manufacturing Services		4,045			749			19
		$	19,877		3,025			15
Less corporate and common costs					(1,252		)
Income before income taxes and minority interest					$	1,773

 

Total Revenues

 

Total revenues remained relatively flat at $19,855,000 for the quarter ended February 28, 2005 compared to $19,877,000 for the same period in fiscal 2004.  Total revenues increased $89,000 to $42,254,000 for the fiscal year to date period ended February 28, 2005 compared to $42,165,000 for the same period in fiscal 2004.  The increase in revenues for both the quarter and year to date periods from the Company’s Specialized Manufacturing segment is primarily due to the following: (a) the acquisition of Paper Tyger; (b) increased sales of the Coating & Laminating division’s wire and cable product lines; (c) continued increased demand for Chase BLH2OCK®; and (d) increased demand internationally for HumiSeal® products.

 

The increases in Specialized Manufacturing were offset by a decrease in revenues from the Company’s Electronic Manufacturing Services segment.  This decrease was $1,151,000 and $3,975,000 for the quarter and year to date periods, respectively.  This segment’s revenues were negatively affected by the December 2003 sale of Sunburst, which accounted for $2.5 million in revenues in the first half of fiscal year 2004 (Sunburst revenues were included for only three months of fiscal year 2004 prior to being sold).  Additionally the market for products and services in this segment continues to be softer than last year as the Company’s key customers assess their inventory levels and their own customer demand for the remainder of 2005.

 

The restructuring of one of the Company’s royalty arrangements, in the Specialized Manufacturing segment, caused a decrease in royalty revenues in Asia Pacific.  This modest decrease was offset by a corresponding increase in direct sales from the same customer base.

 

18