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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 December 31, 2009

 

¨	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 January 31, 2010, there were 969,834 shares of common stock, $1.00 par value, outstanding.

 

 

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

Quarterly Report on Form 10-Q

For the Six Months Ended December 31, 2009

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and June 30, 2009		3
		Condensed Consolidated Statements of Operations For the Three Months ended December 31, 2009 and 2008 (Unaudited)		5
		Condensed Consolidated Statements of Operations For the Six Months ended December 31, 2009 and 2008 (Unaudited)		6
		Condensed Consolidated Statements of Cash Flows For the Six Months ended December 31, 2009 and 2008 (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

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

 

		December 31, 2009			June 30, 2009
		(Unaudited)			(Audited)
CURRENT ASSETS
Cash and cash equivalents		$	260,684		$	28,771
Trade receivables, net (less allowance for doubtful accounts, December 31, 2009—$16,366 and June 30, 2009—$15,736)			179,906			229,909
Inventories:
Finished goods			65,858			119,116
Goods in process			10,928			4,932
Raw materials			74,902			69,960
Packaging materials			175,665			172,764
Prepaid expenses			98,779			16,858
Deferred income taxes			3,600			4,626
Total current assets			870,322			646,936
PROPERTY AND EQUIPMENT—NET			293,462			328,482
TOTAL ASSETS		$	1,163,784		$	975,418

 

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

 

		December 31, 2009				June 30, 2009
		(Unaudited)				(Audited)
CURRENT LIABILITIES
Accounts payable		$	77,548			$	158,570
Current maturities of notes payable			30,028				30,142
Accrued expenses			11,503				15,487
Deferred income			1,299				1,299
Income taxes payable			111,151				185
Total current liabilities			231,529				205,683
LONG-TERM LIABILITIES
Deferred income			18,506				19,155
Notes payable, less current maturities			28,099				42,604
Deferred income taxes			18,231				21,986
Total long-term liabilities			64,836				83,745
Total liabilities			296,365				289,428
STOCKHOLDERS’ EQUITY
Capital stock issued and outstanding:
Prior cumulative preferred stock, $5 par value:
Series A (liquidation preference $2,055,000 and $2,040,000 respectively)			500,000				500,000
Series B (liquidation preference $2,010,000 and $1,995,000 respectively)			500,000				500,000
Cumulative preferred stock, $20 par value
Series A (liquidation preference $4,697,267 and $4,668,001 respectively)			1,170,660				1,170,660
Series B (liquidation preference $765,511 and $760,741 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			(5,598,577	)			(5,780,006	)
Total stockholders’ equity			867,419				685,990
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,163,784			$	975,418

 

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 December 31
		2009				2008
NET SALES		$	1,281,122			$	1,470,385
COST OF SALES			860,984				1,000,230
Gross profit on sales			420,138				470,155
OPERATING EXPENSES
Selling			135,456				157,008
General and administrative			79,235				74,237
(Gain) on sale of equipment			—				(5,252	)
Total operating expenses			214,691				225,993
Income from operations			205,447				244,162
OTHER INCOME (EXPENSE)			(1,177	)			(1,952	)
Net income before income taxes			204,270				242,210
PROVISION FOR INCOME TAXES			87,411				67,661
NET INCOME			116,859				174,549
Preferred dividends			(32,018	)			(32,018	)
Net income applicable to common stockholders		$	84,841			$	142,531
NET INCOME PER SHARE OF COMMON STOCK -
BASIC		$	.09			$	.15
DILUTED		$	.04			$	.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)

 

		Six Months Ended December 31
		2009				2008
NET SALES		$	2,042,013			$	2,158,842
COST OF SALES			1,348,647				1,428,501
Gross profit on sales			693,366				730,341
OPERATING EXPENSES
Selling			207,369				230,555
General and administrative			193,960				179,959
(Gain) on sale of equipment			—				(5,252	)
Total operating expenses			401,329				405,262
Income from operations			292,037				325,079
OTHER INCOME (EXPENSE)			(1,986	)			(4,617	)
Net income before income taxes			290,051				320,462
PROVISION FOR INCOME TAXES			108,622				76,793
NET INCOME			181,429				243,669
Preferred dividends			(64,036	)			(64,036	)
Net income applicable to common stockholders		$	117,393			$	179,633
NET INCOME PER SHARE OF COMMON STOCK -
BASIC		$	.12			$	.19
DILUTED		$	.06			$	.09
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)

 

		Six Months Ended December 31
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	181,429			$	243,669
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			37,594				34,040
Allowance for bad debts			600				600
Deferred income amortization			(649	)			(650	)
Deferred income taxes			(2,729	)			24,720
(Gain) on sale of equipment			—				(5,252	)
Effects of changes in operating assets and liabilities:
Trade receivables			49,403				60,413
Inventories			39,419				7,439
Prepaid expenses			(81,921	)			2,825
Accounts payable			(81,022	)			22,455
Accrued expenses			(3,984	)			(6,826	)
Income taxes payable			110,966				52,073
Net cash provided by operating activities			249,106				435,506
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment			—				13,000
Purchases of property and equipment			(2,574	)			(25,987	)
Net cash (used in) investing activities			(2,574	)			(12,987	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line-of-credit			210,000				145,000
Principal payments on line-of-credit			(210,000	)			(195,000	)
Principal payments on notes payable—stockholder			—				(140,000	)
Principal payments on vehicles notes payable			(14,619	)			(8,222	)
Net cash (used in) financing activities			(14,619	)			(198,222	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			231,913				224,297
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			28,771				24,828
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	260,684			$	249,125

 

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, 2009 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 six months ended December 31, 2009 and for the three months and six months ended December 31, 2008 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, 2009. The results of operations for the three and six months ended December 31, 2009 and cash flows for the six months ended December 31, 2009 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2010. 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.

Pursuant to SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”, the FASB Accounting Standards Codification (“ASC”) (FASB ASC 105) became the sole source of authoritative U.S. GAAP for interim and annual periods ending after September 15, 2009, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. The Company adopted this standard during the first quarter of 2009. Reference to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of the ASC.

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 entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. 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. We plan to adopt the new guidance in fiscal year 2011 and do not expect a material impact on our 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 December 31, 2009, and as of February 11, 2010 (the date of filing of this Form 10-Q). There have been no other 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 six month period ended December 31, 2009.

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 December 31						Six Months Ended December 31
		2009			2008			2009			2008
Net income		$	116,859		$	174,549		$	181,429		$	243,669
Preferred dividend requirements:
6% Prior Cumulative Preferred, $5 par value			15,000			15,000			30,000			30,000
5% Convertible Cumulative Preferred, $20 par value			17,018			17,018			34,036			34,036
Total dividend requirements			32,018			32,018			64,036			64,036
Net income common stockholders		$	84,841		$	142,531		$	117,393		$	179,633
		Three Months Ended December 31						Six Months Ended December 31
		2009			2008			2009			2008
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		$	.09		$	.15		$	.12		$	.19
Diluted earnings per share		$	.04		$	.07		$	.06		$	.09

 

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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 December 31, 2009 and 2008, totaled $7,116,338 and $6,988,266, respectively. Total dividends in arrears, on a per share basis, consist of the following at December 31:

 

		Six Months Ended December 31
		2009			2008
6% Convertible
Series A		$	15		$	15
Series B			15			15
5% Convertible
Series A			60			59
Series B			60			59

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 six months ended December 31, 2009 and 2008, deferred revenue of $649 and $650, respectively, was amortized into income for each period.

NOTE 4—NOTES PAYABLE—VEHICLES

The Company has four vehicle loans payable as follows:

 

Payee		Terms		December 31, 2009			June 30, 2009
Ford Credit		$1,001 monthly payments including interest of 0%; final payment due March 2011, secured by a vehicle.		$	15,006		$	21,010
Ford Credit		$573 monthly payments including interest of 6.99%; final payment due July 2012, secured by a vehicle.			16,356			19,039
Honda		$508 monthly payments including interest of 1.9%; final payment due December 15, 2011, secured by a vehicle.			11,953			14,871
Nissan		$557 monthly payments including interest of 3.9%; final payment due April 2012, secured by a vehicle.			14,812			17,826
		Total			58,127			72,746
		Less current portion			30,028			30,142
		Long-term portion		$	28,099		$	42,604

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4—NOTES PAYABLE—VEHICLES (CONTINUED)

 

Future minimum payments are:

 

2010		$	30,028
2011			24,639
2012			3,460
Total		$	58,127

NOTE 5—NOTE PAYABLE—BANK

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

Management secured financing for $160,050 January 4, 2010, at which time, $63,780 was advanced on the loan. The loan, collateralized by equipment, carries an interest rate of 6.25% and matures June 1, 2010.

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.

As of June 30, 2009, the Company has a net operating loss carryforward of approximately $4,512 and unused contributions carryforward of $874 of which the Company’s profit for the six months ended December 31, 2009 absorbed these amounts.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Six Months Ended December 31
		2009			2008
Cash paid for:
Interest		$	2,780		$	5,347
Income taxes			385			—
Non-cash transaction:
Financing of new vehicle			—			41,792
Reclass of forgivable loan to deferred income			—			5,000

 

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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 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.

RESULTS OF OPERATIONS—Three Months Ended December 31, 2009 Compared with Three Months Ended December 31, 2008 and Six Months Ended December 31, 2009 Compared with Six Months Ended December 31, 2008

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 December 31						Six Months Ended December 31
		2009			2008			2009			2008
Net sales		100	%		100	%		100	%		100	%
Cost of sales		67			68			66			66
Gross profit		33			32			34			34
Operating expenses		17			15			20			19
Income from operations		16			17			14			15
Net income before income taxes		16			17			14			15
Provision for income taxes		7			5			5			4
Net income		9	%		12	%		9	%		11	%

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

NET SALES

Net sales decreased $189,263 or 13% for the three months ended December 31, 2009 to $1,281,122 compared to $1,470,385 for the three months ended December 31, 2008. Gross sales for Chase Candy decreased $21,663 to $455,781 for the three months ended December 31, 2009 compared to $477,444 for 2008. Gross sales for Seasonal Candy decreased $175,451 to $832,754 for the three months ended December 31, 2009 compared to $1,008,205 for 2008.

Net sales decreased $116,829 or 5% for the six months ended December 31, 2009 to $2,042,013 compared to $2,158,842 for the six months ended December 31, 2008. Gross sales for Chase Candy decreased $26,891 to $897,826 for the six months ended December 31, 2009 compared to $924,717 for 2008. Gross sales for Seasonal Candy decreased $100,689 to $1,160,120 for the six months ended December 31, 2009 compared to $1,260,809 for 2008.

The 5% decrease in net sales of $116,829 for the six month period ended December 31, 2009, over the same period ended December 31, 2008, is primarily due to reduced orders from several customers and discontinuation of the Mini Mash Limited Addition Tin. Additionally, during 2008, the Company increased pricing and was unable to do so in 2009. Certain Seasonal Candy customers placed orders earlier this year of approximately $82,000, which are reflected in the prior quarter sales rather than in the current quarter. Seasonal sales for the six months were reduced approximately $90,000 from loss of a customer as well as $27,000 sales not repeated from last year by one customer.

COST OF SALES

The cost of sales decreased $139,246 to $860,984 decreasing to 67% of related revenues for the three months ended December 31, 2009, compared to $1,000,230 or 68% of related revenues for the three months ended December 31, 2008. The cost of sales decreased $79,854 to $1,348,647 or 66% of related revenues for the six months ended December 31, 2009, compared to $1,428,501 or 66% of related revenues for the six months ended December 31, 2008.

Direct costs of goods for materials manufactured and production labor force for the six months ended December 31, 2009, decreased $78,804 to $925,578 as compared to $1,004,382 for the six months ended December 31, 2008, which is a result of no raw material price increases. In addition, new transportation vendors were used, which resulted in a decrease of 13% in freight costs from $124,127 for the six months ended December 31, 2008, to $108,329 for the six months ended December 31, 2009.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

COST OF SALES (CONTINUED)

The Company decreased finished goods inventory for the six months ended December 31, 2009 to $65,858 or 45% from the June 30, 2009 finished goods inventory of $119,116 due to the end of the Company’s busy season. Raw material inventory of $74,902 and packaging materials inventory of $175,665 is 3% higher than the June 30, 2009 inventories of $69,960 raw material and $172,764 packaging materials as a result of purchasing inventory to take advantage of favorable pricing, but not all of this inventory was used during the second quarter ending December 31, 2009.

SELLING EXPENSES

Selling expenses for the three months ended December 31, 2009 decreased $21,552 to $135,456, which is 11% of sales, compared to $157,008 or 10% of sales for the three months ended December 31, 2008. Selling expenses for the six months ended December 31, 2009 decreased $23,186 to $207,369, which is 10% of sales, compared to $230,555 or 11% of sales for the six months ended December 31, 2008.

The decrease of $21,552 in selling expenses for the three months ended December 31, 2009 is due to lower commissions and premium promotions being paid and sample costs for the period. Commissions and premium promotions, and sample costs decreased 20% to $91,108 for this period from $114,522 for the three months ended December 31, 2008.

The decrease of $23,186 in selling expenses for the six months ended December 31, 2009 is also due to lower commissions and premium promotions being paid as a result of decreased sales along with sample costs for this period. Commissions and premium promotions, and sample costs decreased 18% to $123,594 for this period from $150,597 for the six months ended December 31, 2008.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the three months ended December 31, 2009 increased $4,998 to $79,235, and increased to 6% of sales, compared to $74,237 or 5% of sales for the three months ended December 31, 2008. General and administrative expenses for the six months ended December 31, 2009 increased $14,001 to $193,960, and increased to 10% of sales, compared to $179,959 or 8% of sales for the six months ended December 31, 2008. The increased costs are primarily because of a $14,109 increase in employee health and directors insurance.

OTHER INCOME (EXPENSE)

Other income and (expense) decreased by $775 for the three months ended December 31, 2009 to $(1,177), compared to $(1,952) for the three months ended December 31, 2008. Other income and expense decreased by $2,631 for the six months ended December 31, 2009 to $(1,986), compared to $(4,617) for the six months ended December 31, 2008 due to a decrease in interest expenses.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

PROVISION FOR INCOME TAXES

The Company recorded a tax provision for the three months ended December 31, 2009 of $87,411 as compared to $67,661 for the three months ended December 31, 2008. The Company recorded tax expense for the six months ended December 31, 2009 of $108,622 as compared to the tax expense of $76,793 for the six months ended December 31, 2008. The net tax expense recorded for the three and six months ended December 31, 2009 is primarily due to recognizing taxes related to current profitable operations. The net tax expense recorded for the three and six months ended December 31, 2008 was primarily due to recognizing deferred taxes related to a carryover of operating losses.

NET INCOME

The Company reported a net income for the quarter ended December 31, 2009 of $116,859, compared to a net income of $174,549 for the quarter ended December 31, 2008. This decrease of $57,690 is explained above.

The Company reported a net income for the six months ended December 31, 2009 of $181,429, compared to a net income of $243,669 for the six months ended December 31, 2008. This decrease of $62,240 is explained above.

PREFERRED DIVIDENDS

These amounts reflect additional preferred stock dividends in arrears for the three and six months ended December 31, 2009 and 2008, 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 APPLICABLE TO COMMON STOCKHOLDERS

Net income applicable to common stockholders for the three months ended December 31, 2009 was $84,841, which is a decrease of $57,690 as compared to the three months ended December 31, 2008 of $142,531.

Net income applicable to common stockholders for the six months ended December 31, 2009 was $117,393 which is a decrease of $62,240 as compared to the six months ended December 31, 2008 of $179,633. These items are explained above.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

LIQUIDITY AND CAPITAL RESOURCES

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

 

		2009				2008
Net cash provided by operating activities		$	249,106			$	435,506
Net cash used in investing activities		$	(2,574	)		$	(12,987	)
Net cash used in financing activities		$	(14,619	)		$	(198,222	)

The $2,574 of cash used in investing activities was the result of capital expenditures. Management has approximately $226,000 commitment for capital expenditures during the remainder of fiscal 2009. Management has secured financing for $160,050 effective January 4, 2010. The balance of the commitment will be paid with cash funds held by the Company.

The $14,619 of cash used in financing activities includes receipt of $210,000 from its line-of-credit, which has been paid in full as of December 31, 2009 and its payments on the 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.

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.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

CRITICAL ACCOUNTING POLICIES (CONTINUED)

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.

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.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Property and Equipment

Property and equipment is 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.

New Accounting Pronouncements

Pursuant to SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”, the FASB Accounting Standards Codification (“ASC”) (FASB ASC 105) became the sole source of authoritative U.S. GAAP for interim and annual periods ending after September 15, 2009, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. The Company adopted this standard during the first quarter of 2009. The adoption of ASC 105 did not have any effect on Chase’s results of operations, financial condition and cash flows. The adoption impacted references to specific accounting standards in the footnotes to our consolidated financial statements which have been changed to refer to the appropriate section of the ASC.

 

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CHASE GENERAL CORPORATION AND SUBSIDIARY

 

ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Effective July 1, 2008, Chase adopted FASB Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FASB ASC 825) – Including an amendment of FASB Statement of Financial Accounting Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (FASB ASC 320). ASC 825 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings cause by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. ASC 825 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to ASC 320 applies to all entities with available-for-sale and trading securities. The adoption of ASC 825 did not have any effect on Chase’s results of operations, financial condition and cash flows.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FASB ASC 805) and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements (FASB ASC 810). These statements significantly change the accounting for and reporting of business combinations and noncontrolling (minority) interests in consolidated financial statements. These statements will require noncontrolling interests to be reclassified to equity, consolidated net income to be adjusted to include net income attributed to the noncontrolling interest, and consolidated comprehensive income to be adjusted to include the comprehensive income attributed to the noncontrolling interest. ASC 805 and ASC 810 are required to be adopted simultaneously. ASC 805 is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 14, 2008. ASC 810 is to be applied prospectively as of the beginning of the fiscal year in which it is initially adopted except for the presentation and disclosure requirements which will be applied retrospectively for all periods. Early adoption is prohibited. The adoption of ASC 805 and ASC 810 did not have any effect on Chase’s results of operations, financial condition and cash flows.

 

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ITEM 2.		-		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

 

CRITICAL ACCOUNTING POLICIES (CONTINUED)

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.

 

ITEM 3		-		QUANTITATIVE AND QUALITATIVE DISCLSOURES 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 mended (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 December 31, 2009 is $7,116,338.
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)
February 11, 2010				/s/ Barry M. Yantis
Date		By:		Barry M. Yantis
				Chairman of the Board, Chief Executive Officer, President and Treasurer

 

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