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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND TREASURER - CHASE GENERAL CORPdex311.htm
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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

 

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 2-5916

  Chase General Corporation  

(Exact name of small business issuer as specified in its charter)

 

        MISSOURI                       36-2667734            

(State or other jurisdiction of

incorporation or organization)

  (IRS Employer Identification No.)

1307 South 59th, St. Joseph, Missouri 64507

(Address of principal executive offices, Zip Code)

(816) 279-1625

(Issuer’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12, 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 [   ]

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [   ]    No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]      Accelerated filer [   ]
Non-accelerated filer [   ]   (Do not check if a smaller reporting company)    Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)

Yes [   ]    No [X]

As of April 30, 2011, there were 969,834 shares of common stock, $1.00 par value, outstanding.


Table of Contents

Table of Contents

CHASE GENERAL CORPORATION AND SUBSIDIARY

Quarterly Report on Form 10-Q

For the Nine Months Ended March 31, 2011

TABLE OF CONTENTS

 

PART I.    FINANCIAL INFORMATION   

Item 1.

  Condensed Consolidated Financial Statements   
  Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and June 30, 2010      3   
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudited)      5   
  Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)      6   
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)      7   
  Notes to Condensed Consolidated Financial Statements (Unaudited)      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      22   

Item 4T.

  Controls and Procedures      22   
PART II.    OTHER INFORMATION   

Item 1.

  Legal Proceedings      23   

Item 1A.

  Risk Factors      23   

Item 3.

  Defaults Upon Senior Securities      23   

Item 4.

  Submission of Matters to Vote of Security Holders      23   

Item 6.

  Exhibits      23   

SIGNATURES

     24   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

 

     March 31,
2011
     June 30,
2010
 
     (Unaudited)      (Audited)  

CURRENT ASSETS

     

Cash and cash equivalents

   $ 186,209       $ 106,508   

Trade receivables, net of allowance for doubtful accounts, of $15,791 and $14,891, respectively

     131,926         164,753   

Inventories:

     

Finished goods

     131,532         104,022   

Goods in process

     7,503         3,730   

Raw materials

     95,921         109,027   

Packaging materials

     207,666         186,420   

Prepaid expenses

     35,473         4,959   

Deferred income taxes

     6,256         5,844   
                 

Total current assets

     802,486         685,263   

PROPERTY AND EQUIPMENT - NET

     519,947         512,069   
                 

TOTAL ASSETS

   $ 1,322,433       $ 1,197,332   
                 

 

 

The accompanying notes are an integral part of the

condensed consolidated financial statements.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

     March 31,
2011
    June 30,
2010
 
     (Unaudited)     (Audited)  

CURRENT LIABILITIES

    

Accounts payable

   $ 54,345      $ 68,734   

Current maturities of notes payable

     56,937        56,820   

Accrued expenses

     16,663        15,337   

Deferred income

     1,299        1,299   

Income taxes payable

     14,760        2   
                

Total current liabilities

     144,004        142,192   
                

LONG-TERM LIABILITIES

    

Deferred income

     16,883        17,857   

Notes payable, less current maturities

     148,798        150,475   

Deferred income taxes

     113,290        93,869   
                

Total long-term liabilities

     278,971        262,201   
                

Total liabilities

     422,975        404,393   
                

STOCKHOLDERS’ EQUITY

    

Capital stock issued and outstanding:

    

Prior cumulative preferred stock, $5 par value:

    

Series A (liquidation preference $2,092,500 and $2,070,000 respectively)

     500,000        500,000   

Series B (liquidation preference $2,047,500 and $2,025,000 respectively)

     500,000        500,000   

Cumulative preferred stock, $20 par value

    

Series A (liquidation preference $4,764,308 and $4,726,533 respectively)

     1,170,660        1,170,660   

Series B (liquidation preference $783,560 and $770,281 respectively)

     190,780        190,780   

Common stock, $1 par value

     969,834        969,834   

Paid-in capital in excess of par

     3,134,722        3,134,722   

Accumulated deficit

     (5,566,538     (5,673,057
                

Total stockholders’ equity

     899,458        792,939   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,322,433      $ 1,197,332   
                

The accompanying notes are an integral part of the

condensed consolidated financial statements.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
March  31
 
     2011     2010  

NET SALES

     376,491      $ 441,877   

COST OF SALES

     329,511        382,473   
                

Gross profit on sales

     46,980        59,404   
                

OPERATING EXPENSES

    

Selling

     79,655        58,946   

General and administrative

     86,093        66,846   
                

Total operating expenses

     165,748        125,792   
                

Loss from operations

     (118,768     (66,388

OTHER INCOME (EXPENSE)

     (1,272     (834
                

Net loss before income taxes

     (120,040     (67,222

PROVISION (CREDIT) FOR INCOME TAXES

     (51,191     (26,600
                

NET LOSS

     (68,849     (40,622

Preferred dividends

     (32,018     (32,018
                

Net loss applicable to common stockholders

   $ (100,867   $ (72,640
                

NET LOSS PER SHARE OF COMMON STOCK -

    

BASIC

   $ (0.10   $ (0.07
                

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING

     969,834        969,834   
                

 

The accompanying notes are an integral part of the

condensed consolidated financial statements.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Nine Months Ended
March  31
 
     2011     2010  

NET SALES

   $ 2,572,029      $ 2,483,890   

COST OF SALES

     1,831,878        1,731,120   
                

Gross profit on sales

     740,151        752,770   
                

OPERATING EXPENSES

    

Selling

     310,626        266,315   

General and administrative

     283,362        260,806   

(Gain) on sale of equipment

     (500     —     
                

Total operating expenses

     593,488        527,121   
                

Income from operations

     146,663        225,649   

OTHER INCOME (EXPENSE)

     (6,180     (2,820
                

Net income before income taxes

     140,483        222,829   

PROVISION FOR INCOME TAXES

     33,964        82,022   
                

NET INCOME

     106,519        140,807   

Preferred dividends

     (96,054     (96,054
                

Net income applicable to common stockholders

   $ 10,465      $ 44,753   
                

NET INCOME PER SHARE OF COMMON STOCK -

    

BASIC

   $ 0.01      $ 0.05   
                

DILUTED

   $ 0.01      $ 0.02   
                

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING

     969,834        969,834   
                

 

The accompanying notes are an integral part of the

condensed consolidated financial statements.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended
March  31
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 106,519      $ 140,807   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     82,297        56,469   

Allowance for bad debts

     900        900   

Deferred income amortization

     (974     (973

Deferred income taxes

     19,009        (4,672

(Gain) on sale of equipment

     (500       

Effects of changes in operating assets and liabilities:

    

Trade receivables

     31,927        11,653   

Inventories

     (39,423     (4,849

Prepaid expenses

     (30,514     (103,094

Accounts payable

     (14,389     (71,839

Accrued expenses

     1,326        2,292   

Income taxes payable

     14,758        86,309   
                

Net cash provided by operating activities

     170,936        113,003   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from sale of equipment

     500          

Purchases of property and equipment

     (18,425     (2,574
                

Net cash used in investing activities

     (17,925     (2,574
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from line-of-credit

     40,000        210,000   

Principal payments on line-of-credit

     (40,000     (210,000

Proceeds from equipment notes payable

            143,554   

Principal payments on notes payable

     (73,310     (21,969
                

Net cash provided by (used in) financing activities

     (73,310     121,585   
                

NET INCREASE IN CASH AND CASH EQUIVALENTS

     79,701        232,014   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     106,508        28,771   
                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 186,209      $ 260,785   
                

 

The accompanying notes are an integral part of the

condensed consolidated financial statements.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - GENERAL

The condensed consolidated balance sheet of Chase General Corporation (hereinafter referred to as “Chase”, “we”, “our”, and “us”) at June 30, 2010 has been taken from audited consolidated financial statements at that date and condensed. The condensed consolidated financial statements as of and for the three months and nine months ended March 31, 2011 and for the three months and nine months ended March 31, 2010 are unaudited and reflect all normal and recurring accruals and adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended June 30, 2010. The results of operations for the three and nine months ended March 31, 2011 and cash flows for the nine months ended March 31, 2011 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2011. Where appropriate, items within the condensed consolidated financial statements have been reclassified from the previous periods’ presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.

During the third quarter 2010, Chase adopted FASB ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820). This ASU requires new disclosures for transfers in and out of Levels 1 and 2, and Activity in Level 3 fair value measurements. The update also clarifies the level disaggregation and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The requirement related to Level 3 fair value measurements is effective for the Company for interim and annual reporting periods beginning after January 28, 2011. The adoption of the effective portions of this new standard did not have a material impact on the Company’s condensed consolidated financial statements and the Company does not expect a material impact on its condensed consolidated financial statements related to the Level 3 fair value disclosures.

In June 2009, the FASB issued new guidance on the consolidation of variable interest entities (“VIE”) in response to concerns about the application of certain key provisions of pre-existing guidance, including those regarding the transparency of the involvement with a VIE. Specifically, this new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE and requires ongoing assessment of whether an interest in a VIE makes the holder the primary beneficiary of the VIE and whether an entity is a VIE when a triggering event occurs. In addition, this new guidance requires additional disclosures about the involvement with a VIE and any significant changes in risk exposure due to that involvement. This new guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted the new guidance in the first quarter of fiscal year 2011, which did not have a material impact on its condensed consolidated financial statements.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - GENERAL (CONTINUED)

 

Management has performed an evaluation of events that have occurred subsequent to March 31, 2011, through the date of filing of this Form 10-Q. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of or for the nine month period ended March 31, 2011.

NOTE 2 - NET INCOME PER SHARE

The income per share was computed on the weighted average of outstanding common shares during the period. Diluted earnings per share is calculated by including contingently issuable shares with the weighted average shares outstanding.

 

     Three Months Ended
March 31
    Nine Months Ended
March 31
 
     2011     2010     2011      2010  

Net income (loss)

   $ (68,849   $ (40,622   $ 106,519       $ 140,807   
                                 

Preferred dividend requirements:

         

6% Prior Cumulative Preferred, $5 par value

     15,000        15,000        45,000         45,000   

5% Convertible Cumulative Preferred, $20 par value

     17,018        17,018        51,054         51,054   
                                 

Total dividend requirements

     32,018        32,018        96,054         96,054   
                                 

Net income (loss) common stockholders

   $ (100,867   $ (72,640   $ 10,465       $ 44,753   
                                 
     Nine Months Ended
March 31
    Three Months Ended
March 31
 
     2011     2010     2011      2010  

Weighted average shares - basic

     969,834        969,834        969,834         969,834   

Dilutive effect of contingently issuable shares

     1,033,334        1,033,334        1,033,334         1,033,334   
                                 

Weighted Average Shares - diluted

     2,003,168        2,003,168        2,003,168         2,003,168   
                                 

Basic earnings per share

   $ (.10   $ (.07   $ .01       $ .05   
                                 

Diluted earnings per share

   $      $      $ .01       $ .02   
                                 

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 - NET INCOME PER SHARE (CONTINUED)

 

Cumulative Preferred Stock dividends in arrears at March 31, 2011 and 2010 totaled $7,276,428 and $7,148,356, respectively. Total dividends in arrears, on a per share basis, consist of the following at December 31:

 

     Nine Months Ended
March 31
 
     2011      2010  

6% Convertible

     

Series A

   $ 16       $ 15   

Series B

     15         15   

5% Convertible

     

Series A

     62         61   

Series B

     62         61   

The 6% convertible prior cumulative preferred stock may, upon thirty days prior notice, be redeemed by the Corporation at $5.25 a share plus unpaid accrued dividends to date of redemption. In the event of voluntary liquidation, holders of this stock are entitled to receive $5.25 per share plus accrued dividends. It may be exchanged for common stock at the option of the shareholders in the ratio of 4 common shares for one share of Series A and 3.75 common shares for one share of Series B.

The Company has the privilege of redemption of 5% convertible cumulative preferred stock at $21.00 a share plus unpaid accrued dividends. In the event of voluntary or involuntary liquidation, holders of this stock are entitled to receive $20.00 a share plus unpaid accrued dividends. It may be exchanged for common stock at the option of the shareholders, in the ratio of 3.795 common shares for one of preferred.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 - FORGIVABLE LOAN AND DEFERRED INCOME

 

During 2004, the Company received a $25,000 economic development incentive from Buchanan County, which is a five year forgivable loan at a rate of $5,000 per year. The Nodaway Valley Bank established an Irrevocable Standby Letter of Credit in the amount of $25,000 as collateral for this loan, with a maturity date of January 3, 2010. The Company met the criteria of occupying a 20,000 square foot building and creating a minimum of two new full-time equivalent jobs during the first year of operation in the new facility. In addition, the Company maintained 19 existing jobs during the five year term. Notice was received February 6, 2009 from the Buchanan County Commission, that the Company had fulfilled its minimum loan requirements so that the loan was forgiven in full with no further obligations. Since the Company was no longer legally required to return the monies, the liability was reclassified as deferred revenue and amortized into income over the life of the lease term of the new facility. At June 30, 2009, a total of $25,000 has been reclassified to deferred revenue. Deferred revenue is recognized on a straight-line basis over the lease term of 20 years. During the nine months ended March 31, 2011 and 2010, deferred revenue of $974 and $973, respectively, was amortized into income for each period.

NOTE 4 - NOTES PAYABLE

The Company’s long-term debt consists of:

 

Payee

  

Terms

   March 31,
2011
     June 30,
2010
 

Ford Credit

   $1,001 monthly payments including interest of 0%; secured by a vehicle. Note was paid in full during the quarter ending December 31, 2010.    $       $ 9,003   

Ford Credit

   $573 monthly payments including interest of 6.99%; secured by a vehicle. Note was paid in full during quarter ending March 31, 2011.              13,636   

Ford Credit

   $679 monthly payments including interest of 0%; final payment due March 2016, secured by a vehicle.      40,750           

Ford Credit

   $517 monthly payments including interest of 0%; final payment due March 2016, secured by a vehicle.      31,000           

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 - NOTES PAYABLE (CONTINUED)

 

Payee

  

Terms

   March 31,
2011
     June 30,
2010
 

Honda

   $508 monthly payments including interest of 1.9%; final payment due December 15, 2011, secured by a vehicle.      4,535         9,007   

Nissan

   $557 monthly payments including interest of 3.9%; final payment due April 2012, secured by a vehicle.      7,028         11,740   

Nodaway Valley Bank

   $3,192 monthly payments including interest of 6.25%; final payment due June 2015, secured by equipment.      122,422         163,909   
                    
   Total      205,735         207,295   
   Less current portion      56,937         56,820   
                    
   Long-term portion    $ 148,798       $ 150,475   
                    

Future minimum payments for the twelve months ending March 31 are:

     
  

2012

   $ 56,937      
  

2013

     48,441      
  

2014

     50,081      
  

2015

     35,926      
  

2016

     14,350      
              
  

Total

   $ 205,735      
              

NOTE 5 - NOTE PAYABLE - BANK

Effective June 30, 2009, the Company had a $250,000 line-of-credit agreement which expired on January 3, 2011. The line-of-credit agreement was renewed on that date to extend until January 3, 2012 with a variable interest rate at prime, which was 5% at March 31, 2011. The line-of-credit is collateralized by certain equipment. At March 31, 2011 and June 30, 2010, there was no outstanding balance on the line-of-credit.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 - INCOME TAXES

The recognition of income tax expense related to uncertain tax positions is determined under the provisions of FASB ASC - 740-10. The Company had no unrecognized tax benefits as of the date of adoption. The income tax positions taken for open years are appropriately stated and supported for all open years. The Company’s federal tax returns for the fiscal years ended 2008, 2009 and 2010 are subject to examination by the IRS taxing authority.

As of March 31, 2011, the Company has unused contributions carryforward of $1,771 of which the Company’s profit for the nine months ended March 31, 2011 fully absorbed this amount.

NOTE 7 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

     Nine Months Ended
March 31
 
     2011      2010  

Cash paid for:

     

Interest

   $ 8,157       $ 3,346   

Income taxes

     197         385   

Non-cash transaction:

     

Financing of vehicles

   $ 71,750       $   

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS

OVERVIEW

Chase General Corporation (Chase) is a holding company for its wholly-owned subsidiary, Dye Candy Company. This subsidiary is the main operating company that is engaged in the manufacture of confectionery products which are sold primarily to wholesale houses, grocery accounts, vendors, and repackers. The subsidiary (Company) operates two divisions, Chase Candy division and Seasonal Candy division, which share a common labor force and utilize the same basic equipment and raw materials. Therefore, segment reporting for the two divisions is not maintained by Management.

The Company’s business, like that of many other confectionary product manufacturers, is seasonal. Historically, the Company has realized more of its revenue and earnings in the fiscal second quarter, which includes the majority of the holiday shopping season, than in any other fiscal quarter.

RESULTS OF OPERATIONS - Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010 and Nine Months Ended March 31, 2011 Compared with Nine Months Ended March 31, 2010

The following management comments regarding Chase’s results of operations and outlook should be read in conjunction with the condensed consolidated financial statements included pursuant to Item 1 of the quarterly report.

The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:

 

     Three Months Ended
March 31
    Nine Months Ended
March 31
 
     2011     2010     2011     2010  

Net sales

     100     100     100     100

Cost of sales

     88        87        71        70   
                                

Gross profit

     12        13        29        30   

Operating expenses

     44        28        23        21   
                                

Income (loss) from operations

     (32     (15     6        9   

Net income (loss) before income taxes

     (32     (15     5        9   

Provision (credit) for income taxes

     (14     (6     1        3   
                                

Net income (loss)

     (18 )%      (9 )%      4     6
                                

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS (CONTINUED)

 

NET SALES

Net sales decreased $65,386 or 15% for the three months ended March 31, 2011 to $376,491 compared to $441,877 for the three months ended March 31, 2010. Gross sales for Chase Candy decreased $12,987 to $379,545 for the three months ended March 31, 2011 compared to $392,532 for 2010. Gross sales for Seasonal Candy decreased $46,350 to $10,644 for the three months ended March 31, 2011 compared to $56,994 for 2010.

The 3% decrease in gross sales of Chase Candy of $12,987 for the three months ended March 31, 2011 over the same period ended March 31, 2010, is primarily due to the net effect of increased sales for the Mini Mash Bag and Cherry Mash Merchandisers of approximately $24,000 combined with the discontinuation of the Mini Mash Limited Addition Tin and one customer reducing orders by approximately $28,000 versus third quarter a year ago. The 81% decrease in gross sales of Seasonal Candy of $46,350 for the three months ended March 31, 2011 over the same period ended March 31, 2010, is primarily due to decreased orders from one customer totaling approximately $45,000 versus third quarter a year ago.

Net sales increased $88,139 or 4% for the nine months ended March 31, 2011 to $2,572,029 compared to $2,483,890 for the nine months ended March 31, 2010. Gross sales for Chase Candy decreased $42,614 to $1,247,744 for the nine months ended March 31, 2011 compared to $1,290,358 for 2010. Gross sales for Seasonal Candy increased $161,936 to $1,385,050 for the nine months ended March 31, 2011 compared to $1,223,114 for 2010.

The 3% decrease in gross sales of Chase Candy of $42,614 for the nine months ended March 31, 2011 over the same period ended March 31, 2010, is primarily due to the discontinuation of the Mini Mash Limited Addition Tin. The 13% increase in gross sales of Seasonal Candy of $161,936 for the nine months ended March 31, 2011 over the same period ended March 31, 2010, is primarily due to increased orders from two customers.

COST OF SALES

The cost of sales decreased $52,962 to $329,511 increasing to 88% of related revenues for the three months ended March 31, 2011, compared to $382,473 or 87% of related revenues for the three months ended March 31, 2010.

The 14% decrease in cost of sales of $52,962 is primarily due to and comparable to the 15% decrease in net sales of $65,386. Direct costs of goods for materials manufactured for the three months ended March 31, 2011, decreased $58,501 to $89,971 as compared to $148,472 for the three months ended March 31, 2010, which is primarily due to decreases in sales. Freight in/out for the three months ended March 31, 2011 decreased $2,321 to $25,573 as compared to $27,894 for the three months ended March 31, 2010, which is primarily due to a decrease in sales. Direct labor costs for the three months ended March 31, 2011 decreased $24,207 to $67,891 as compared to $92,098 for the three months ended March 31, 2010, which is primarily due to a decrease in sales.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS (CONTINUED)

 

The cost of sales increased $100,758 to $1,831,878 or 71% of related revenues for the nine months ended March 31, 2011, compared to $1,731,120 or 70% of related revenues for the nine months ended March 31, 2010.

Direct costs of goods for materials manufactured and net change in inventories for the nine months ended March 31, 2011, increased $57,936 to $915,689 as compared to $857,753 for the nine months ended March 31, 2010, which is primarily due to raw material price increases in chocolate, peanuts, and sugar which were not passed along to customers. Freight in/out for the nine months ended March 31, 2011 increased $3,534 to $122,657 as compared to $119,123 for the nine months ended March 31, 2010 as a result of having to ship product using refrigeration services as summer temperatures continued to be high into late fall. Direct labor costs for the nine months ended March 31, 2011 increased $8,347 to $347,741 as compared to $339,394 for the nine months ended March 31, 2010, which is a 2% increase due to increased bonus payments paid at the end of the busy season.

The Company increased finished goods inventory during the nine months ended March 31, 2011 to $131,532 or 26% from the June 30, 2010 finished goods inventory of $104,022 as a result of building up finished goods for product to be delivered in April 2011. Raw material inventory of $95,921 is 12% lower than the June 30, 2010 inventories of $109,027 raw material as a result of not purchasing excess raw materials inventory to carry into the next quarter, due to higher pricing. Packaging materials inventory of $207,666 is 11% higher than the June 30, 2010 inventories of $186,420 as a result of purchasing packaging materials inventory to take advantage of favorable pricing, but not all of this inventory was used during the third quarter ending March 31, 2011.

SELLING EXPENSES

Selling expenses for the three months ended March 31, 2011 increased $20,709 to $79,655, which is 21% of sales, compared to $58,946 or 13% of sales for the three months ended March 31, 2010.

The increase of $20,709 in selling expenses for the three months ended March 31, 2011 is primarily due to higher commissions and premium promotions being paid, and sample costs for the period in an effort to increase sales volume. Commissions and premium promotions, and sample costs increased $18,464 to $33,048 for this period from $14,584 for the three months ended March 31, 2010.

Selling expenses for the nine months ended March 31, 2011 increased $44,311 to $310,626, which is 12% of sales, compared to $266,315 or 11% of sales for the nine months ended March 31, 2010.

The increase of $44,311 in selling expenses for the nine months ended March 31, 2011 is primarily due to higher commissions and premium promotions being paid, and sample costs for the period in an effort to increase sales volume. Commissions and premium promotions, and sample costs increased $35,845 to $174,023 for this period from $138,178 for the nine months ended March 31, 2010.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS (CONTINUED)

 

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the three months ended March 31, 2011 increased $19,247 to $86,093 and increased to 23% of sales, compared to $66,846 or 15% of sales for the three months ended March 31, 2010. The increased costs are primarily because of a $5,079 increase in insurance expense, a $6,870 increase in professional fees, a $428 increase in office supplies, and a $2,102 increase in website expense.

General and administrative expenses for the nine months ended March 31, 2011 increased $22,556 to $283,362, or 11% of sales, compared to $260,806 or 10% of sales for the nine months ended March 31, 2010. The increased costs are primarily because of a $6,139 increase in insurance expense, a $5,589 increase in professional fees, a $2,405 increase in office supplies, and a $5,087 increase in website expense.

OTHER INCOME (EXPENSE)

Other income and (expense) increased by $438 for the three months ended March 31, 2011 to $(1,272), compared to $(834) for the three months ended March 31, 2010 primarily due to an increase in interest expenses. Other income and (expense) increased by $3,360 for the nine months ended March 31, 2011 to $(6,180), compared to $(2,820) for the nine months ended March 31, 2010 primarily due to an increase in interest expenses.

PROVISION (CREDIT) FOR INCOME TAXES

The Company recorded a tax benefit for the three months ended March 31, 2011 of $(51,191) as compared to $(26,600) for the three months ended March 31, 2010. The net tax benefit recorded for the three months ended March 31, 2011 and 2010 is primarily due to the loss from operations in those periods. The Company recorded tax expense for the nine months ended March 31, 2011 of $33,964 as compared to the tax expense of $82,022 for the nine months ended March 31, 2010. The net tax expense recorded for the nine months ended March 31, 2011 and 2010 is primarily due to recognizing taxes related to current profitable operations. The net change in deferred taxes for the three months and nine months ended March 31, 2011 was $27,727 and $19,009, respectively.

NET INCOME (LOSS)

The Company reported a net loss for the quarter ended March 31, 2011 of $68,849, compared to a net loss of $40,622 for the quarter ended March 31, 2010. This increase of $28,227 is explained above.

The Company reported a net income for the nine months ended March 31, 2011 of $106,519 compared to a net income of $140,807 for the nine months ended March 31, 2010. This decrease of $34,288 is explained above.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS (CONTINUED)

 

PREFERRED DIVIDENDS

These amounts reflect additional preferred stock dividends in arrears for the three and six months ended December 31, 2011 and 2010, respectively, on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS

Net loss applicable to common stockholders for the three months ended March 31, 2011 was $100,867 which is an increase of $28,227 as compared to the three months ended March 31, 2010 of $72,640.

Net income applicable to common stockholders for the nine months ended March 31, 2011 was $10,465, which is a decrease of $34,288 as compared to the nine months ended March 31, 2010 of $44,753. These items are explained above.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents the summary of cash flow for the fiscal period indicated.

 

     2011     2010  

Net cash provided by operating activities

   $ 170,936      $ 113,003   

Net cash used in investing activities

   $ (17,925   $ (2,574

Net cash provided by (used in) financing activities

   $ (73,310   $ 121,585   

The $17,925 of cash used in investing activities was the result of capital expenditures. Management has no material commitments for capital expenditures during the remainder of fiscal 2011. The $73,310 of cash used in financing activities is principal payments on equipment and vehicle loans. Management believes that the projected cash flow from operations, combined with its existing cash balances, will be sufficient to meet its funding requirements for the foreseeable future. Chase does have $250,000 remaining on its bank line-of-credit, which could be utilized to help fund any working capital requirements.

Management believes that inflation will have only a minimal effect on future operations since such effects will be offset by sales price increases, which are not expected to have a significant effect upon demand.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS (CONTINUED)

 

CRITICAL ACCOUNTING POLICIES

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates used in preparing these condensed consolidated financial statements include those assumed in computing the carrying value of equipment and allowance for doubtful trade receivables. Accordingly, actual results could differ from those estimates. Any changes in estimates are recorded in the period in which they become known.

Disclosures about Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, trade receivables and payables, and notes payable. There are no significant differences between the carrying value and fair value of any of these consolidated financial instruments. As of March 31, 2011, the amount of the Company’s long-term debt approximates fair value based on the present value of estimated future cash flows using a discount rate commensurate with a borrowing rate available to the Company.

Credit Risk

Financial instruments that potentially subject Chase to concentrations of credit risk consist principally of cash and accounts receivable. Chase grants unsecured credit to substantially all of its customers. Management does not believe that it is exposed to any extraordinary credit risk as a result of this policy. Chase deposits all monies at the Nodaway Valley Bank. These accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation. Chase has not experienced any losses in such accounts. Management does not believe Chase is exposed to any significant credit risk with respect to its cash and cash equivalents.

Revenue Recognition

The Company recognizes revenues as product is shipped to the customers. Net sales are comprised of the total sales billed during the period including shipping and handling charges to customers, less the estimated returns, customer allowances and customer discounts.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS (CONTINUED)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

 

Allowance for Doubtful Accounts

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of amounts that will not be collected. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than the historical experience, management’s estimates of the recoverability of amounts due the Company could be adversely affected. All accounts or portions thereof deemed to be uncollectible, or to require an excessive collection cost, are written off to the allowance for doubtful accounts.

Inventories

Inventories are carried at the “lower of cost or market value” with cost being determined on the “first-in, first-out” basis of accounting. Finished goods and goods in process include a provision for manufacturing overhead.

Property and Equipment

Property and equipment are recorded at cost. The Company’s property and equipment are being depreciated on straight-line and accelerated methods over the following estimated useful lives:

 

Buildings

   39 years

Machinery and equipment

   5 – 7 years

Trucks and autos

   5 years

Office equipment

   5 – 7 years

Leasehold improvements

  

Lesser of estimated

useful life or the

lease term

Cash Flows

For purposes of the statements of cash flows, Chase considers all short-term investments purchased with original maturity dates of three months or less to be cash equivalents.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS (CONTINUED)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

 

Impact of New Accounting Pronouncements

During the third quarter 2010, Chase adopted FASB ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820). This ASU requires new disclosures for transfers in and out of Levels 1 and 2, and Activity in Level 3 fair value measurements. The update also clarifies the level disaggregation and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The requirement related to Level 3 fair value measurements is effective for the Company for interim and annual reporting periods beginning after January 29, 2011. The adoption of the effective portions of this new standard did not have a material impact on the Company’s condensed consolidated financial statements and the Company does not expect a material impact on its condensed consolidated financial statements related to the Level 3 fair value disclosures.

In June 2009, the FASB issued new guidance on the consolidation of variable interest entities (“VIE”) in response to concerns about the application of certain key provisions of pre-existing guidance, including those regarding the transparency of the involvement with a VIE. Specifically, this new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE and requires ongoing assessment of whether an interest in a VIE makes the holder the primary beneficiary of the VIE and whether an entity is a VIE when a triggering event occurs. In addition, this new guidance requires additional disclosures about the involvement with a VIE and any significant changes in risk exposure due to that involvement. This new guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted the new guidance in the first quarter of fiscal year 2011, which did not have a material impact on its condensed consolidated financial statements.

Forward-Looking Information

This report, as well as our other reports filed with the Securities and Exchange Commission (“SEC”), contains forward-looking statements made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,” “predict” and similar expressions are intended to identify forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, and management’s plans and objectives. Accordingly, these forward-looking statements are based on assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks and uncertainties that could cause actual results to be different from what appear here. These risk factors include: the ability to adequately pass through customers unanticipated future increases in raw material costs, decreased demand for products, expected orders that do not occur, loss of key customers, the impact of competition and price erosion as well as supply and manufacturing constraints, and other risks and uncertainties. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate, and our actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.

 

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to a smaller reporting company.

ITEM 4T. - CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

Chase’s management, with the participation of the Chief Executive Officer, has evaluated the effectiveness of Chase’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, this officer has concluded that Chase’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in periodic filings under the Exchange Act is accumulated and communicated to management, including those officers, and to members of the Board of Directors, to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting

There were no significant changes in Chase’s internal control over financial reporting or in other factors that in management’s estimates are reasonably likely to materially affect Chase’s internal control over financial reporting subsequent to the date of the evaluation.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

    a. None

 

ITEM 1A. RISK FACTORS

  Not applicable to a smaller reporting company.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

    a. None

 

    b. The total cumulative preferred stock dividends contingency at March 31, 2011 is $7,276,428.

 

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

  None

 

ITEM 6. EXHIBITS

 

    a. Exhibits.

 

Exhibit 31.1    Certification of Chief Executive Officer and Treasurer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Exhibit 32.1    Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

Chase General Corporation and Subsidiary

(Registrant)

 
May 17, 2011     /s/ Barry M. Yantis  
Date     Barry M. Yantis  
    Chairman of the Board, Chief Executive Officer and  
    Chief Financial Officer,
President and Treasurer
 

 

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