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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 March 31, 2012
 

o
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 o

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 x No o

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 o
Accelerated filer  o
     
 
Non-accelerated filer  o  (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 o    No x

As of  April 30, 2012, there were 969,834 shares of common stock, $1.00 par value, outstanding.
 
 
 

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Nine Months Ended March 31, 2012
 
TABLE OF CONTENTS
 
 
 
PART I. FINANCIAL INFORMATION
   
     
 
Item 1.
Condensed Consolidated Financial Statements
   3
         
   
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and June 30, 2011
 
3
         
   
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
 
5
         
   
Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2012 and 2011 (Unaudited)
 
6
         
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2012 and 2011 (Unaudited)
 
7
         
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
8
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
12
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
16
         
 
Item 4.
Controls and Procedures
 
16
         
PART II. OTHER INFORMATION
   
     
 
Item 1.
Legal Proceedings
 
17
         
 
Item 1A.
Risk Factors
 
17
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
17
         
 
Item 3.
Defaults Upon Senior Securities
 
17
         
 
Item 4.
Mine Safety Disclosures
 
17
         
 
Item 5.
Other Information
 
17
         
 
Item 6.
Exhibits
 
17
         
 
SIGNATURES
 
18

 
2

 
 
PART I.  FINANCIAL INFORMATION
     
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
     
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
     
ASSETS
 
 
             
   
March 31,
   
June 30,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Audited)
 
CURRENT ASSETS
           
             
Cash and cash equivalents
  $ 167,772     $ 18,772  
Trade receivables, net of allowance for doubtful
               
accounts, of $16,283 and $15,383, respectively
    151,631       161,670  
Inventories:
               
Finished goods
    86,795       263,934  
Goods in process
    8,097       3,275  
Raw materials
    125,902       88,490  
Packaging materials
    138,033       188,025  
Prepaid expenses
    16,757       5,047  
Deferred income taxes
    7,213       6,900  
                 
Total current assets
    702,200       736,113  
                 
PROPERTY AND EQUIPMENT - NET
    473,888       497,909  
                 
TOTAL ASSETS
  $ 1,176,088     $ 1,234,022  
                 
                 
                 
The accompanying notes are an integral part of the
condensed consolidated financial statements.
 
 
3

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
     
LIABILITIES AND STOCKHOLDERS' EQUITY
     
 
   
March 31,
   
June 30,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Audited)
 
             
CURRENT LIABILITIES
           
             
Accounts payable
  $ 119,122     $ 104,796  
Current maturities of notes payable
    56,649       54,844  
Accrued expenses
    26,686       17,210  
Deferred income
    1,299       1,299  
                 
Total current liabilities
    203,756       178,149  
                 
LONG-TERM LIABILITIES
               
                 
Deferred income
    15,584       16,558  
Notes payable, less current maturities
    120,145       136,810  
Deferred income taxes
    76,544       100,219  
                 
Total long-term liabilities
    212,273       253,587  
                 
Total liabilities
    416,029       431,736  
                 
STOCKHOLDERS' EQUITY
               
                 
Capital stock issued and outstanding:
               
Prior cumulative preferred stock, $5 par value:
               
Series A (liquidation preference $2,122,500
               
and $2,100,000 respectively)
    500,000       500,000  
Series B (liquidation preference $2,077,500
               
and $2,055,000 respectively)
    500,000       500,000  
Cumulative preferred stock, $20 par value
               
Series A (liquidation preference $4,828,965
               
and $4,785,065 respectively)
    1,170,660       1,170,660  
Series B (liquidation preference $786,975
               
and $779,821 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
    (5,705,937 )     (5,663,710 )
                 
Total stockholders' equity
    760,059       802,286  
                 
TOTAL LIABILITIES AND
               
STOCKHOLDERS' EQUITY
  $ 1,176,088     $ 1,234,022  
                 
                 
                 
The accompanying notes are an integral part of the
condensed consolidated financial statements.
 
 
4

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
             
(Unaudited)
             
   
Three Months Ended
 
   
March 31
 
   
2012
   
2011
 
             
NET SALES
  $ 428,140     $ 376,491  
                 
COST OF SALES
    393,144       329,511  
                 
Gross profit on sales
    34,996       46,980  
                 
OPERATING EXPENSES
               
                 
Selling
    87,662       79,655  
General and administrative
    103,967       86,093  
Gain on sale of equipment
    (10,929 )     -  
                 
Total operating expenses
    180,700       165,748  
                 
Loss from operations
    (145,704 )     (118,768 )
                 
OTHER INCOME (EXPENSE)
               
Miscellaneous income
    550       861  
Interest expense
    (1,850 )     (2,133 )
                 
Total other income (expense)
    (1,300 )     (1,272 )
                 
Net loss before income taxes
    (147,004 )     (120,040 )
                 
CREDIT FOR INCOME TAXES
    (40,071 )     (51,191 )
                 
NET LOSS
    (106,933 )     (68,849 )
                 
Preferred dividends
    (32,018 )     (32,018 )
                 
Net loss applicable to common stockholders
  $ (138,951 )   $ (100,867 )
                 
NET LOSS PER SHARE OF COMMON STOCK - BASIC
  $ (0.14 )   $ (0.10 )
                 
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
    969,834       969,834  
                 
                 
                 
The accompanying notes are an integral part of the
condensed consolidated financial statements.
 
 
5

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
             
(Unaudited)
             
   
Nine Months Ended
 
   
March 31
   
2012
   
2011
 
             
NET SALES
  $ 2,552,201     $ 2,572,029  
                 
COST OF SALES
    1,968,646       1,831,878  
                 
Gross profit on sales
    583,555       740,151  
                 
OPERATING EXPENSES
               
                 
Selling
    328,383       310,626  
General and administrative
    323,646       283,362  
Gain on sale of equipment
    (10,929 )     (500 )
                 
Total operating expenses
    641,100       593,488  
                 
Income (loss) from operations
    (57,545 )     146,663  
                 
OTHER INCOME (EXPENSE)
               
Miscellaneous income
    1,326       1,721  
Interest expense
    (9,966 )     (7,901 )
                 
Total other income (expense)
    (8,640 )     (6,180 )
                 
Net income (loss) before income taxes
    (66,185 )     140,483  
                 
PROVISION (CREDIT) FOR INCOME TAXES
    (23,958 )     33,964  
                 
NET INCOME (LOSS)
    (42,227 )     106,519  
                 
Preferred dividends
    (96,054 )     (96,054 )
                 
Net income (loss) applicable to common stockholders
  $ (138,281 )   $ 10,465  
                 
NET INCOME (LOSS) PER SHARE OF COMMON
               
STOCK - BASIC
  $ (0.14 )   $ 0.01  
                 
               - DILUTED
  $ (0.14   $ 0.01  
                 
WEIGHTED AVERAGE SHARES OF COMMON
               
STOCK OUTSTANDING
    969,834       969,834  
                 
                 
                 
The accompanying notes are an integral part of the
condensed consolidated financial statements.
 
 
6

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
(Unaudited)
 
             
   
Nine Months Ended
   
March 31
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ (42,227 )   $ 106,519  
Adjustments to reconcile net income (loss) to net cash
               
 provided by operating activities:
               
Depreciation and amortization
    84,875       82,297  
Allowance for bad debts
    900       900  
Deferred income amortization
    (974 )     (974 )
Deferred income taxes
    (23,988 )     19,009  
Gain on sale of equipment
    (10,929 )     (500 )
Effects of changes in operating assets and liabilities:
               
Trade receivables
    9,139       31,927  
Inventories
    184,897       (39,423 )
Prepaid expenses
    (11,710 )     (30,514 )
Accounts payable
    14,326       (14,389 )
Accrued expenses
    9,476       1,326  
Income taxes payable
    -       14,758  
                 
Net cash provided by operating activities
    213,785       170,936  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale of equipment
    23,000       500  
Purchases of property and equipment
    (45,680 )     (18,425 )
                 
Net cash used in investing activities
    (22,680 )     (17,925 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from line-of-credit
    250,000       40,000  
Principal payments on line-of-credit
    (250,000 )     (40,000 )
Principal payments on notes payable
    (42,105 )     (73,310 )
                 
Net cash used in financing activities
    (42,105 )     (73,310 )
 
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
    149,000       79,701  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    18,772       106,508  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 167,772     $ 186,209  
                 
                 
                 
The accompanying notes are an integral part of the
condensed consolidated financial statements.
 
 
7

 
 
 
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, 2011 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, 2012 and for the three months and nine months ended March 31, 2011 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, 2011. The results of operations for the three and nine months ended March 31, 2012 and cash flows for the nine months ended March 31, 2012 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2012. 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.
 
No events have occurred subsequent to March 31, 2012, through May 11, 2012, 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, 2012.
 
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
   
Nine Months Ended
 
   
March 31
   
March 31
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income (loss)
  $ (106,933 )   $ (68,849 )   $ (42,227 )   $ 106,519  
                                 
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
  $ (138,951 )   $ (100,867 )   $ (138,281 )   $ 10,465  
                                 
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
  $ (.14 )   $ (.10 )   $ (.14 )   $ .01  
                                 
Diluted earnings per share
                  $ (.14 )   $ .01  
 
 
8

 
 
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, 2012 and 2011 totaled $7,404,500 and $7,276,428, respectively. Total dividends in arrears, on a per share basis, consist of the following:
 
    Nine Months Ended
March 31
 
   
2012
   
2011
 
6% Convertible
           
Series A
  $ 16     $ 16  
Series B
    16       15  
                 
5% Convertible
               
Series A
    63       62  
Series B
    63       62  
 
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.
 
NOTE 3 - NOTES PAYABLE
 
The Company’s long-term debt consists of:
 
       
March 31,
   
June 30,
 
Payee
 
Terms
 
2012
   
2011
 
                 
Nodaway Valley Bank
 
Line-of-credit agreement expiring on January 3, 2013 with a variable interest rate at prime, which was 5% at March 31, 2012. The line-of-credit is collateralized by substantially all assets of the Company.
  $ -     $ -  
                     
Ford Credit
 
$679 monthly payments including interest of 0%; final payment due March 2016, secured by a vehicle.
    32,600       38,713  
                     
Ford Credit
 
$517 monthly payments including interest of 0%; final payment due March 2016, secured by a vehicle.
    24,800       29,450  
                     
Honda
 
$508 monthly payments including interest of 1.9%; final payment was due December 15, 2011, secured by a vehicle.
    -       3,030  
 
 
9

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
 
NOTE 3 - NOTES PAYABLE (CONTINUED)
 
       
March 31,
   
June 30,
 
Payee  
Terms
 
2012
   
2011
 
                 
Nissan
 
$557 monthly payments including interest of 3.9%; final payment was due April 2012, secured by a vehicle.
    -       5,425  
                     
Toyota Financial Services
$502 monthly payments including interest of 4.9%; final payment due March 2015, secured by a vehicle.
    16,745       -  
                     
Toyota Financial Services
$305 monthly payments including interest of 2.9%; final payment due March 2015, secured by a vehicle.
    10,500       -  
                     
Nodaway Valley Bank
$3,192 monthly payments including interest of 6.25%; final payment due June 2015, secured by certain equipment.
    92,149       115,036  
                     
   
Total
    176,794       191,654  
   
Less current portion
    56,649       54,844  
   
Long-term portion
  $ 120,145     $ 136,810  
                     
Future minimum payments for the twelve months ending March 31 are:
               
                     
   
2013
  $ 56,649          
   
2014
    59,175          
   
2015
    46,620          
   
2016
    14,350          
                     
   
Total
  $ 176,794          
 
NOTE 4 - INCOME TAXES
 
The recognition of income tax expense related to uncertain tax positions is determined under the provisions of FASB ASC – 740-10. As of March 31, 2012, the Company has not identified any uncertain tax positions requiring recognition in the condensed consolidated financial statements. 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 2009, 2010 and 2011 are subject to examination by the IRS taxing authority.
 
 
10

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
 
 
NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
   
Nine Months Ended
 
   
March 31
 
   
2012
   
2011
 
Cash paid for:
           
Income taxes
  $ -     $ 197  
Interest
    9,966       8,157  
                 
Non-cash transaction:
               
Financing of vehicles
  $ 27,245     $ -  
Net book value of vehicles traded-in
  $ 14,962     $ -  
 
 
11

 
 
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, 2012 Compared with Three Months Ended March 31, 2011 and Nine Months Ended March 31, 2012 Compared with Nine Months Ended March 31, 2011
 
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
 
Nine Months Ended
   
March 31
 
March 31
   
2012
 
2011
 
2012
 
2011
                         
Net sales
    100 %     100 %     100 %     100 %
                                 
Cost of sales
    92       88       77       71  
                                 
Gross profit on sales
    8       12       23       29  
                                 
Operating expenses
    42       44       25       23  
Income (loss) from operations
    (34 )     (32 )     (2 )     6  
Net income (loss) before income taxes
    (34 )     (32 )     (3 )     5  
Provision (credit) for income taxes
    (9 )     (14 )     (1 )     1  
                                 
Net income (loss)
    (25 )%     (18 )%     (2 )%     4 %
 
NET SALES
 
Net sales increased $51,649 or 14% for the three months ended March 31, 2012 to $428,140 compared to $376,491 for the three months ended March 31, 2011. Gross sales for Chase Candy increased $5,064 to $384,609 for the three months ended March 31, 2012 compared to $379,545 for 2011. Gross sales for Seasonal Candy increased $35,964 to $46,608 for the three months ended March 31, 2012 compared to $10,644 for 2011.
 
The 1% increase in gross sales of Chase Candy of $5,064 for the three months ended March 31, 2012 over the same period ended March 31, 2011, is primarily due to the net effect of increased sales of the Cherry Mash Bar of $72,000 primarily due to two customers having increased orders in the third quarter offset by decreases of sales of the 12/12oz. Mini Mash bag to one customer by approximately $44,000, and decreased sales to Cherry Mash Merchandisers of approximately $19,000 for the second straight quarter. The 338% increase in gross sales of Seasonal Candy of $35,964 for the three months ended March 31, 2012 over the same period ended March 31, 2011, is primarily due to increased orders from one customer totaling approximately $34,000 from the clamshell seasonal product category.
 
 
12

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
NET SALES (CONTINUED)
 
Net sales decreased $19,828 or 1% for the nine months ended March 31, 2012 to $2,552,201 compared to $2,572,029 for the nine months ended March 31, 2011. Gross sales for Chase Candy decreased $54,707 to $1,193,037 for the nine months ended March 31, 2012 compared to $1,247,744 for 2011. Gross sales for Seasonal Candy increased $24,543 to $1,409,593 for the nine months ended March 31, 2012 compared to $1,385,050 for 2011.
 
The 4% decrease in gross sales of Chase Candy of $54,707 for the nine months ended March 31, 2012 over the same period ended March 31, 2011 is primarily due to the net effect of the following: 1) increased sales of Cherry Mash Bar of approximately $111,000 offset by; 2) decreased sales of the 12/12oz. Mini Mash bag to one customer by approximately $115,000 due to reduced distribution; 3) decreased sales of the 24/12oz. Mini Mash bag to another customer by approximately $35,000 due to the timing of Halloween orders and; 4) overall decreased sales to Cherry Mash Merchandisers of approximately $21,000. The 2% increase in gross sales of Seasonal Candy of $24,543 for the nine months ended March 31, 2012 over the same period ended March 31, 2011, is primarily due to the net effect of increased sales from two customers in the clamshell seasonal product category of approximately $102,000 offset by decreased sales from three customers in the bulk seasonal product category of approximately $69,000 and overall decreases in the generic seasonal product category of $6,000.
 
COST OF SALES
 
The cost of sales increased $63,633 to $393,144 increasing to 92% of related revenues for the three months ended March 31, 2012, compared to $329,511 or 88% of related revenues for the three months ended March 31, 2011.
 
The 19% increase in cost of sales of $63,633 is primarily due to the 14% increase in net sales of $51,649 and the raw material price increases in chocolate, peanuts, and sugar which were not passed along to customers. Direct costs of goods for materials manufactured and net change in inventories for the three months ended March 31, 2012, increased $74,735 or 83% to $164,705 as compared to $89,970 for the three months ended March 31, 2011. Increases in chocolate prices were primarily caused by civil unrest in cocoa producing areas of West Africa where decreased supply lead to increased costs. Increases in the price of peanuts was primarily caused by a drought in Texas where decreased supply lead to increased costs. Increases in the price of sugar were primarily caused by increased worldwide demand for sugar and unintentional decreased production levels by sugar producers primarily caused by a domestic drought and a lengthy strike at one domestic sugar company where increased demand and decreased supply lead to increased costs. Management does not anticipate the prices of these raw materials to return to previous levels in the near future. Management is considering and evaluating the need to increase prices charged to customers for future sales.
 
The cost of sales increased $136,768 or 7% to $1,968,646 or 77% of related revenues for the nine months ended March 31, 2012, compared to $1,831,878 or 71% of related revenues for the nine months ended March 31, 2011.
 
 
13

 

CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
COST OF SALES (CONTINUED)
 
The 7% increase in cost of sales of $136,768 is primarily due to the 1% decrease in net sales of $19,828 offset by the raw material price increases in chocolate, peanuts, and sugar which were not passed along to customers. Direct costs of goods for materials manufactured and net change in inventories for the nine months ended March 31, 2012, increased $210,587 or 23% to $1,126,276 as compared to $915,689 for the nine months ended March 31, 2011. Increased chocolate prices were primarily caused by civil unrest in cocoa producing areas of West Africa where decreased supply lead to increased costs. Increases in the price of peanuts was primarily caused by a drought in Texas where decreased supply lead to increased costs. Increases in the price of sugar were primarily caused by increased worldwide demand for sugar and unintentional decreased production levels by sugar producers primarily caused by a domestic drought and a lengthy strike at one domestic sugar company where increased demand and decreased supply lead to increased costs. Management does not anticipate the prices of these raw materials to return to previous levels in the near future. Management is considering and evaluating the need to increase prices charged to customers for future sales. Direct labor cost decreased $43,908 or 13% to $303,833 as compared to $347,741 for the nine months ended March 31, 2011, which is primarily due to a decrease of 2,409 production hours worked for the nine months ended March 31, 2012 of 20,012 production hours compared to 22,421 production hours worked for the nine months ended March 31, 2012.
 
The Company decreased total inventory $184,897 or 34% to $358,827 at March 31, 2012 from $543,724 at June 30, 2011 due to the Company’s busy season coming to an end. The Company decreased finished goods inventory 67% at March 31, 2012 to $86,795 from June 30, 2011 of $263,934. The Company increased goods in process inventory 147% at March 31, 2012 to $8,097 from June 30, 2011 of $3,275. The Company increased raw materials inventory 42% at March 31, 2012 to $125,902 from June 30, 2011 of $88,490. The increase in raw materials inventory was primarily due to price increases in chocolate, peanuts, and sugar. The Company decreased packaging materials inventory 27% at March 31, 2012 to $138,033 from June 30, 2011 of $188,025.
 
SELLING EXPENSES
 
Selling expenses for the three months ended March 31, 2012 increased $8,007 to $87,662, which is 20% of net sales, compared to $79,655 or 21% of net sales for the three months ended March 31, 2011.
 
The increase of $8,007 or 10% in selling expenses for the three months ended March 31, 2012 is primarily due to higher commissions being paid as sales volume increased 14% during the same period and increased depreciation due to recent vehicles purchased. Commissions increased $3,176 to $12,926 for this period from $9,750 for the three months ended March 31, 2011. Depreciation increased $4,902 to $11,484 for this period from $6,582 for the three months ended March 31, 2011.
 
Selling expenses for the nine months ended March 31, 2012 increased $17,757 to $328,383, which is 13% of net sales, compared to $310,626 or 12% of net sales for the nine months ended March 31, 2011.
 
The increase of $17,757 or 6% in selling expenses for the nine months ended March 31, 2012 is primarily due to higher samples sent out in an effort to increase sales volume and increased depreciation due to recent vehicles purchased. Samples increased $5,386 to $33,115 for this period from $27,729 for the nine months ended March 31, 2011. Depreciation increased $12,231 to $32,390 for this period from $20,159 for the nine months ended March 31, 2011.
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
General and administrative expenses for the three months ended March 31, 2012 increased $17,874 to $103,967 and increased to 24% of net sales, compared to $86,093 or 23% of net sales for the three months ended March 31, 2011. These increased costs are primarily reflected in insurance expense, professional fees, general taxes and licenses and office salaries.
 
General and administrative expenses for the nine months ended March 31, 2012 increased $40,284 to $323,646 and increased to 13% of net sales, compared to $283,362 or 11% of net sales for the nine months ended March 31, 2011. These increased costs are primarily reflected in insurance expense, professional fees, general taxes and licenses and office salaries.
 
 
14

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
OTHER INCOME (EXPENSE)
 
Other income and (expense) increased by $28 for the three months ended March 31, 2012 to $(1,300), compared to $(1,272) for the three months ended March 31, 2011 primarily due to an increase in interest expense.
 
Other income and (expense) increased by $2,460 for the nine months ended March 31, 2012 to $(8,640), compared to $(6,180) for the nine months ended March 31, 2011 primarily due to an increase in interest expense.
 
PROVISION FOR INCOME TAXES
 
The Company recorded a tax benefit for the three months ended March 31, 2012 of $(40,071) as compared to a tax benefit of $(51,191) for the three months ended March 31, 2011. The Company recorded a tax benefit for the nine months ended March 31, 2012 of $(23,958) as compared to a tax provision of $33,964 for the nine months ended March 31, 2011. The net tax expense recorded for the nine months ended March 31, 2011 is primarily due to recognizing taxes related to profitable operations for that period. The net tax benefit recorded for the nine months ended March 31, 2012 and the three months ended March 31, 2012 and 2011 is primarily due to losses recognized on operations for those periods.
 
 
NET INCOME
 
The Company reported a net loss for the three months ended March 31, 2012 of $(106,933), compared to net loss of $(68,849) for the three months ended March 31, 2011. This decrease of $38,084 is explained above.
 
The Company reported a net loss for the nine months ended March 31, 2012 of $(42,227), compared to net income of $106,519 for the nine months ended March 31, 2011. This decrease of $148,746 is explained above.
 
PREFERRED DIVIDENDS
 
These amounts reflect additional preferred stock dividends in arrears for the three and nine months ended March 31, 2012 and 2011, 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 loss applicable to common stockholders for the three months ended March 31, 2012 was $(138,951) which is a decrease of $38,084 as compared to the net loss for the three months ended March 31, 2011 of $(100,867), as explained above.
 
Net loss applicable to common stockholders for the nine months ended March 31, 2012 was $(138,281) which is a decrease of $148,746 as compared to the net income for the nine months ended March 31, 2011 of $10,465, as explained above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The table below presents the summary of cash flow for the fiscal period indicated.
 
   
2012
   
2011
 
             
Net cash provided by operating activities
  $ 213,785     $ 170,936  
Net cash used in investing activities
  $ (22,680 )   $ (17,925 )
Net cash used in financing activities
  $ (42,105 )   $ (73,310 )
 
 
15

 
 
CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
 
The $22,680 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 2012. The $42,105 of cash used in financing activities was for principal payments on equipment and vehicle loans. Management believes projected cash flow from operations, combined with its existing cash balances, will be sufficient to meet its funding requirements for the foreseeable future. The Company has $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.
 
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 DISCLOSURES ABOUT MARKET RISK
 
Not applicable to a smaller reporting company.
 
ITEM 4. - 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.
 
 
 
16

 
 
PART II. OTHER INFORMAITON
         
ITEM 1.
LEGAL PROCEEDINGS
       
   
a.
None
     
ITEM 1A.
 
RISK FACTORS
     
   
Not applicable to a smaller reporting company.
     
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
       
   
a.
None
     
ITEM 3.
 
DEFAULTS UPON SENIOR SECURITIES
       
   
a.
None
       
   
b.
The total cumulative preferred stock dividends contingency at March 31, 2012 is $7,404,500.
       
ITEM 4.
 
MINE SAFETY DISCLOSURES
     
   
Not applicable.
     
ITEM 5.
 
OTHER INFORMATION
       
   
a.
None
       
    b.  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
     
Exhibit 101
The following financial statements for the quarter ended March 31, 2012, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text
 
 
 
17

 
 
 
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 11, 2012
/s/ Barry M. Yantis
Date
Barry M. Yantis
Chairman of the Board, Chief Executive Officer and
Chief Financial Officer, President and Treasurer
 
18