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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, 2013
 
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)
  
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 February 6, 2014, 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 Three Months Ended December 31, 2013
 
TABLE OF CONTENTS
       
PART I       FINANCIAL INFORMATION
       
 
3
       
   
3
       
   
5
       
   
6
       
   
7
       
   
8
       
 
13
       
 
20
       
 
20
       
PART II     OTHER INFORMATION  
       
 
21
       
  Risk Factors
21
       
 
21
       
 
21
       
 
21
       
 
21
       
 
22
       
 
23
 
 
 

 


 
ITEM 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CHASE GENERAL CORPORATION AND SUBSIDIARY

ASSETS
             
   
December 31,
   
June 30,
 
   
2013
   
2013
 
   
(Unaudited)
       
CURRENT ASSETS
           
Cash and cash equivalents
  $ 438,648     $ 28,564  
Trade receivables, net of allowance for doubtful accounts of $16,796 and $16,196, respectively
    242,793       166,585  
Inventories:
               
Finished goods
    40,741       258,392  
Goods in process
    9,891       10,942  
Raw materials
    96,354       81,515  
Packaging materials
    94,097       158,283  
Prepaid expenses
    26,424       5,414  
Deferred income taxes
    6,518       6,863  
                 
Total current assets
    955,466       716,558  
                 
PROPERTY AND EQUIPMENT
               
Land
    35,000       35,000  
Buildings
    77,348       77,348  
Machinery and equipment
    732,999       717,985  
Trucks and autos
    188,594       188,594  
Office equipment
    31,094       30,826  
Leasehold improvements
    72,068       72,068  
Total
    1,137,103       1,121,821  
Less accumulated depreciation
    797,533       759,996  
                 
Total property and equipment, net
    339,570       361,825  
                 
TOTAL ASSETS
  $ 1,295,036     $ 1,078,383  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
3
 

 

 
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS EQUITY
             
   
December 31,
   
June 30,
 
   
2013
   
2013
 
   
(Unaudited)
       
             
CURRENT LIABILITIES
           
Accounts payable
  $ 109,666     $ 66,598  
Current maturities of notes payable
    48,634       54,172  
Accrued expenses
    15,863       27,466  
Income taxes payable
    87,846       3,711  
Deferred income
    1,299       1,299  
                 
Total current liabilities
    263,308       153,246  
                 
LONG-TERM LIABILITIES
               
Deferred income
    13,311       13,960  
Notes payable, less current maturities
    10,922       39,787  
Deferred income taxes
    83,109       93,973  
                 
Total long-term liabilities
    107,342       147,720  
                 
Total liabilities
    370,650       300,966  
                 
COMMITMENTS AND CONTENGENCIES
               
                 
STOCKHOLDERS EQUITY
               
Capital stock issued and outstanding:
               
Prior cumulative preferred stock, $5 par value:
               
Series A (liquidation preference $2,175,000 and $2,160,000, respectively)
    500,000       500,000  
Series B (liquidation preference $2,130,000 and $2,115,000, respectively)
    500,000       500,000  
Cumulative preferred stock, $20 par value:
               
Series A (liquidation preference $4,931,398 and $4,902,131, respectively)
    1,170,660       1,170,660  
Series B (liquidation preference $803,668 and $798,899, 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
    (5,541,610 )     (5,688,579 )
                 
Total stockholders equity
    924,386       777,417  
                 
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
  $ 1,295,036     $ 1,078,383  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
4
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
(Unaudited)

   
Three Months Ended
 
   
December 31
 
   
2013
   
2012
 
             
NET SALES
  $ 1,402,545     $ 1,475,203  
                 
COST OF SALES
    938,247       986,482  
                 
Gross profit on sales
    464,298       488,721  
                 
OPERATING EXPENSES
               
Selling
    161,115       164,742  
General and administrative
    95,111       91,803  
Loss on sale of equipment
    93       246  
                 
Total operating expenses
    256,319       256,791  
                 
Income from operations
    207,979       231,930  
                 
OTHER INCOME (EXPENSE)
               
Miscellaneous income
    1,972       397  
Interest expense
    (555 )     (1,296 )
                 
Total other income (expense), net
    1,417       (899 )
                 
Net income before income taxes
    209,396       231,031  
                 
PROVISION FOR INCOME TAXES
    73,564       90,454  
                 
NET INCOME
  $ 135,832     $ 140,577  
                 
NET INCOME PER SHARE OF COMMON STOCK
               
- BASIC
  $ 0.11     $ 0.11  
- DILUTED
  $ 0.05     $ 0.05  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
5
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
   
Six Months Ended
 
   
December 31
 
   
2013
   
2012
 
             
NET SALES
  $ 2,313,805     $ 2,272,795  
                 
COST OF SALES
    1,596,601       1,570,127  
                 
Gross profit on sales
    717,204       702,668  
                 
OPERATING EXPENSES
               
Selling
    258,037       257,116  
General and administrative
    233,501       217,105  
Loss (gain) on sale of equipment
    93       (22,254 )
                 
Total operating expenses
    491,631       451,967  
                 
Income from operations
    225,573       250,701  
                 
OTHER INCOME (EXPENSE)
               
Miscellaneous income
    2,336       762  
Interest expense
    (3,141 )     (5,030 )
                 
Total other income (expense), net
    (805 )     (4,268 )
                 
Net income before income taxes
    224,768       246,433  
                 
PROVISION FOR INCOME TAXES
    77,799       95,305  
                 
NET INCOME
  $ 146,969     $ 151,128  
                 
NET INCOME PER SHARE OF COMMON STOCK
               
- BASIC
  $ 0.09     $ 0.09  
- DILUTED
  $ 0.04     $ 0.04  
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
6
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Six Months Ended
 
   
December 31
 
   
2013
   
2012
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 146,969     $ 151,128  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    43,294       45,560  
Allowance for bad debts
    600       600  
Deferred income amortization
    (649 )     (649 )
Deferred income taxes
    (10,519 )     55,034  
Loss (gain) on sale of equipment
    93       (22,254 )
Effects of changes in operating assets and liabilities:
               
Trade receivables
    (76,808 )     (113,798 )
Inventories
    268,049       191,078  
Prepaid expenses
    (21,010 )     (15,475 )
Accounts payable
    43,068       54,064  
Accrued expenses
    (11,603 )     (10,146 )
Income taxes payable
    84,135       40,271  
                 
Net cash provided by operating activities
    465,619       375,413  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale of equipment
    -       22,500  
Purchases of property and equipment
    (21,132 )     (2,225 )
                 
Net cash (used in) provided by investing activities
    (21,132 )     20,275  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from line-of-credit
    290,000       310,050  
Principal payments on line-of-credit
    (290,000 )     (350,050 )
Principal payments on notes payable
    (34,403 )     (30,488 )
                 
Net cash used in financing activities
    (34,403 )     (70,488 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    410,084       325,200  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    28,564       17,949  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 438,648     $ 343,149  
                 
The accompanying notes are an integral part of the unaudited 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, 2013 has been taken from audited consolidated financial statements at that date and condensed.  The condensed consolidated financial statements as of and for the three and six months ended December 31, 2013 and for the three and six months ended December 31, 2012 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, 2013.  The results of operations for the three and six months ended December 31, 2013 and cash flows for the six months ended December 31, 2013 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2014.  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 December 31, 2013, through the date of filing this form, 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, 2013.
 
8
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 2 - EARNINGS 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
   
Six Months Ended
 
   
December 31
   
December 31
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net income
  $ 135,832     $ 140,577     $ 146,969     $ 151,128  
                                 
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
  $ 103,814     $ 108,559     $ 82,933     $ 87,092  
                                 
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
  $ 0.11     $ 0.11     $ 0.09     $ 0.09  
                                 
Diluted earnings per share
  $ 0.05     $ 0.05     $ 0.04     $ 0.04  
                                 
 
9
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 2 - LOSS PER SHARE (CONTINUED)
 
Cumulative Preferred Stock dividends in arrears at December 31, 2013 and 2012 totaled $7,628,626 and $7,500,554, respectively.  Total dividends in arrears, on a per share basis, consist of the following:
   
Six Months Ended
 
   
December 31
 
   
2013
   
2012
 
             
6% Convertible
           
Series A
  $ 17     $ 16  
Series B
  $ 16     $ 16  
                 
5% Convertible
               
Series A
  $ 64     $ 63  
Series B
  $ 64     $ 63  
                 
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.
 
10
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
NOTE 3 - NOTES PAYABLE
 
The Company’s long-term debt consists of:
 
       
December 31,
   
June 30,
 
Payee
 
Terms
 
2013
   
2013
 
                     
Nodaway Valley Bank
 
$350,000 line-of-credit agreement expiring on January 3, 2014, with a variable interest rate at prime but not less than 5%. The line-of-credit agreement replaced two existing line-of-credit agreements that expired on January 3, 2013. The line-of-credit is collateralized by substantially all assets of the Company.
  $ -     $ -  
                     
Ford Credit
 
$679 monthly payments, interest of 0%; final payment due March 2016, secured by a vehicle.
    10,338       22,413  
                     
Ford Credit
 
$517 monthly payments, interest of 0%; final payment due March 2016, secured by a vehicle.
    13,950       17,050  
                     
Nodaway Valley Bank
 
$3,192, including interest of 5.75%; final payment due June 2015, secured by equipment.
    30,703       48,698  
                     
Toyota Financial Services
 
$305 monthly payments including interest of 2.9% due March 2015, secured by a vehicle.
    4,565       5,798  
                     
   
Total
    59,556       93,959  
   
Less current portion
    48,634       54,172  
   
Long-term portion
  $ 10,922     $ 39,787  
 
Upon expiration of the line-of-credit agreement on January 3, 2014, the Company entered into a $350,000 line-of-credit agreement that expires on January 3, 2015 with a variable interest rate at prime but not less than 5%.  The line-of-credit is collateralized by substantially all assets of the Company.  Management anticipates renewal of the line-of-credit agreement at similar terms upon expiration.
 
11
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
NOTE 3 - NOTES PAYABLE (CONTINUED)
 
Future minimum payments for the twelve months ending December 31 are:
 
2014
  $ 48,634  
2015
    9,372  
2016
    1,550  
         
Total
  $ 59,556  
 
NOTE 4 - INCOME TAXES
 
The Company follows the provisions for uncertain tax positions as addressed in Financial Accounting Standards Board Accounting Standards Codification 740-10.  The Company recognized no liability for unrecognized tax benefits at December 31, 2013.  The Company has no material tax positions at December 31, 2013 for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility.  The Company’s federal income tax returns for the fiscal years ended 2011, 2012 and 2013 are subject to examination by the IRS taxing authority.
 
NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
   
Six Months Ended
 
   
December 31
 
   
2013
   
2012
 
             
Cash paid for:
           
Interest
  $ 3,141     $ 5,030  
Income taxes
    4,105       -  
 
NOTE 6 - CONTINGENCIES
 
The Company has received correspondence from the legal counsel for the Public Building Commission of Chicago (PBC) in August 2012, alleging that the Company previously owned and operated a manufacturing facility in Chicago and that the Company is a liable party for environmental response costs incurred by the PBC in the amount of $822,642.  It is the opinion of management, after reviewing the letter with counsel, that further information is required to determine the validity of the claim, the likelihood of an unfavorable outcome to the Company, and an amount of potential loss to the Company, if any at all.  Management believes significant questions need to be resolved and answered before completing its assessment of the validity of the claim.  In the event that a loss were to be incurred by the Company in connection with this claim, the loss would be material.
 
12
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY
 
 
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 December 31, 2013 Compared to Three Months Ended December 31, 2012, and Six Months Ended December 31, 2013 Compared to Six Months Ended December 31, 2012
 
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
   
Six Months Ended
 
   
December 31
   
December 31
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net sales
    100 %     100 %     100 %     100 %
Cost of sales
    67       67       69       69  
Gross profit on sales
    33       33       31       31  
Operating expenses
    18       17       21       20  
Income from operations
    15       16       10       11  
Other income (expense), net
    1       -       -       -  
Income before income taxes
    16       16       10       11  
Provision for income taxes
    5       6       3       4  
Net income
    11 %     10 %     7 %     7 %
 
13
 

 

 
CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
NET SALES
 
Net sales decreased $72,658 or 5% for the three months ended December 31, 2013 to $1,402,545 compared to $1,475,203 for the three months ended December 31, 2012.  Gross sales for Chase Candy decreased $3,800 to $557,297 for the three months ended December 31, 2013, compared to $561,097 for 2012.  Gross sales for Seasonal Candy decreased $76,060 to $847,480 for the three months ended December 31, 2013, compared to $923,540 for 2012.
 
The 1% decrease in gross sales of Chase Candy of $3,800 for the three months ended December 31, 2013 over the same period ended December 31, 2012, is primarily due to the net effect of the following:  1) decreased sales of the L276 Cherry Mash Distributor Pack division by approximately $1,000 versus the second quarter a year ago; 2) decreased sales of the L278 Bag of Bite Size Mini Mash division by approximately $17,000 versus the second quarter a year ago due to three customers decreasing orders; 3) increased sales of the L279/L299 Bulk Mini Mash by approximately $11,000 versus the second quarter a year ago; and 4) various other fluctuations netting an increase of approximately $3,000.
 
The 8% decrease in gross sales of Seasonal Candy of $76,060 for the three months ended December 31, 2013 over the same period ended December 31, 2012, is primarily due to the net effect of the following:  1) decreased orders from various customers in the Seasonal Candy category netting approximately $10,000 versus second quarter a year ago due to timing of orders and a sales price decrease of approximately 5%; 2) decreased orders from various customers in the clamshell seasonal product category totaling approximately $86,000 versus second quarter a year ago due to decreased orders and a sales price decrease of approximately 5%; and 3) increased orders in the generic seasonal product category by approximately $20,000 due to increased sales to one customer.
 
Net sales increased $41,010 or 2% for the six months ended December 31, 2013 to $2,313,805 compared to $2,272,795 for the six months ended December 31, 2012.  Gross sales for Chase Candy increased $96,876 to $1,065,394 for the six months ended December 31, 2013, compared to $968,518 for 2012.  Gross sales for Seasonal Candy decreased $63,760 to $1,263,207 for the six months ended December 31, 2013, compared to $1,326,967 for 2012.
 
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CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
NET SALES (CONTINUED)
 
The 10% increase in gross sales of Chase Candy of $96,876 for the six months ended December 31, 2013 over the same period ended December 31, 2012, is primarily due to the net effect of the following:  1) increased sales of the L276 Cherry Mash Distributor Pack division by approximately $73,000 versus the same period a year ago due to three customers increasing orders; 2) increased sales of the L212 Mini Mash division by approximately $4,000 versus the same period a year ago due to one customers increasing orders; 3) increased sales of the L279/L299 Bulk Mini Mash division by approximately $18,000 versus the same period a year ago; and 4) various other fluctuations netting an increase of approximately $2,000.
 
The 5% decrease in gross sales of Seasonal Candy of $63,760 for the six months ended December 31, 2013 over the same period ended December 31, 2012, is primarily due to the net effect of the following:  1) decreased orders from various customers in the Seasonal Candy category netting approximately $20,000 versus the same period a year ago due to timing of orders and a sales price decrease of approximately 5%; 2) decreased orders from various customers in the clamshell seasonal product category totaling approximately $85,000 versus the same period a year ago due to decreased orders and a sales price decrease of approximately 5%; and 3) increased orders in the generic seasonal product category by approximately $41,000 due to increased sales to one customer.
 
COST OF SALES
 
The cost of sales decreased $48,235 to $938,247 or 67% of related revenues for the three months ended December 31, 2013, compared to $986,482 or 67% of related revenues for the three months ended December 31, 2012.
 
The 5% decrease in cost of sales of $48,235 is primarily due to the 5% decrease in net sales of $72,658.
 
The cost of sales increased $26,474 to $1,596,601 or 69% of related revenues for the six months ended December 31, 2013, compared to $1,570,127 or 69% of related revenues for the six months ended December 31, 2012.
 
The 2% increase in cost of sales of $26,474 is primarily due to the 2% increase in net sales of $41,010.
 
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CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
COST OF SALES (CONTINUED)
 
The Company decreased total inventory $268,049 or 53% to $241,083 at December 31, 2013 from $509,132 held in inventory at June 30, 2013 due to the Company’s busy season coming to an end.  The Company decreased finished goods inventory 84% during the six months ended December 31, 2013 to $40,741 from the June 30, 2013 finished goods inventory levels of $258,392.  The Company decreased goods in process inventory 10% during the six months ended December 31, 2013 to $9,891 from the June 30, 2013 goods in process inventory levels of $10,942.  The Company increased raw materials inventory 18% during the six months ended December 31, 2013 to $96,354 from the June 30, 2013 raw materials inventory levels of $81,515.  The Company decreased packaging materials inventory 41% during the six months ended December 31, 2013 to $94,097 from the June 30, 2013 packaging materials inventory levels of $158,283.
 
SELLING EXPENSES
 
Selling expenses for the three months ended December 31, 2013 decreased $3,627 to $161,115, which is 11% of sales, compared to $164,742 or 11% of sales for the three months ended December 31, 2012.
 
The decrease of $3,627 in selling expenses for the three months ended December 31, 2013 is primarily due to lower commissions, lower premium promotions being paid, lower sample costs, and decreased advertising expense for the period.  Commissions, promotions, sample costs, and advertising decreased $2,672 to $112,422 for this period from $115,094 for the three months ended December 31, 2012.
 
Selling expenses for the six months ended December 31, 2013 increased $921 to $258,037, which is 11% of sales, compared to $257,116 or 11% of sales for the six months ended December 31, 2012.
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
General and administrative expenses for the three months ended December 31, 2013 increased $3,308 to $95,111 and increased to 7% of sales, compared to $91,803 or 6% of sales for the three months ended December 31, 2012.  The increased costs are primarily because of a $3,179 increase in insurance expense and a $2,109 increase in general taxes and licenses offset by a $3,871 decrease in professional fees.
 
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CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED)
 
General and administrative expenses for the six months ended December 31, 2013 increased $16,396 to $233,501 or 10% of sales, compared to $217,105 or 10% of sales for the six months ended December 31, 2012.  The increased costs are primarily because of a $5,493 increase in professional fees and an $8,372 increase in insurance expense.
 
OTHER INCOME (EXPENSE)
 
Other income and (expense) increased by $2,316 for the three months ended December 31, 2013 to $1,417, compared to $(899) for the three months ended December 31, 2012 primarily due to a decrease of $741 in interest expense and an increase of $1,575 in miscellaneous income.
 
Other income and (expense) increased by $3,463 for the six months ended December 31, 2013 to $(805), compared to $(4,268) for the six months ended December 31, 2012 primarily due to a decrease of $1,889 in interest expense and an increase of $1,574 in miscellaneous income.
 
PROVISION FOR INCOME TAXES
 
The Company recorded income tax expense for the three months ended December 31, 2013 of $73,564 as compared to income tax expense of $90,454 for the three months ended December 31, 2012.  The Company recorded income tax expense for the six months ended December 31, 2013 of $77,799 as compared to income tax expense of $95,305 for the six months ended December 31, 2012.  The net income tax expense recorded for the three and six months ended December 31, 2013 is primarily due to recognizing income taxes related to current profitable operations.
 
NET INCOME
 
The Company reported net income for the three months ended December 31, 2013 of $135,832, compared to net income of $140,577 for the three months ended December 31, 2012.  This decrease of $4,745 is explained above.  The Company reported net income for the six months ended December 31, 2013 of $146,969, compared to net income of $151,128 for the six months ended December 31, 2012.  This decrease of $4,159 is explained above.
 
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CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
PREFERRED DIVIDENDS
 
Preferred dividends were $32,018 for the three months ended December 31, 2013 and 2012, which reflects additional preferred stock dividends in arrears 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.
 
Preferred dividends were $64,036 for the six months ended December 31, 2013 and 2012, which reflects additional preferred stock dividends in arrears 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, 2013 was $103,814 which is a decrease of $4,745 as compared to the net income for the three months ended December 31, 2012 of $108,559.
 
Net income applicable to common stockholders for the six months ended December 31, 2013 was $82,933 which is a decrease of $4,159 as compared to the net income for the six months ended December 31, 2012 of $87,092.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The table below presents the summary of cash flow for the fiscal period indicated.

   
Six Months Ended
 
   
December 31
 
   
2013
   
2012
 
             
Net cash provided by operating activities
  $ 465,619     $ 375,413  
Net cash (used in) provided by investing activities
  $ (21,132 )   $ 20,275  
Net cash used in financing activities
  $ (34,403 )   $ (70,488 )
 
Management has no material commitments for capital expenditures during the next 12 months.  The $34,403 of cash used in financing activities is due to principal payments on equipment and vehicle loans.  At December 31, 2013, the Company had $350,000 remaining on the line-of-credit, which could be utilized to help fund any working capital requirements.
 
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CHASE GENERAL CORPORATION AND SUBSIDIARY
 
ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
 
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.
 
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
 
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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CHASE GENERAL CORPORATION AND SUBSIDIARY
 
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, the Chief Executive Officer and Management 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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ITEM 1.     LEGAL PROCEEDINGS
 
The Company has received correspondence from the legal counsel for the Public Building Commission of Chicago (PBC) in August 2012, alleging that the Company previously owned and operated a manufacturing facility in Chicago and that the Company is a liable party for environmental response costs incurred by the PBC in the amount of $822,642.  It is the opinion of management, after reviewing the letter with counsel, that further information is required to determine the validity of the claim, the likelihood of an unfavorable outcome to the Company, and an amount of potential loss to the Company, if any at all.  Management believes significant questions need to be resolved and answered before completing its assessment of the validity of the claim.  In the event that a loss were to be incurred by the Company in connection with this claim, the loss would be material.
 
ITEM 1A.  RISK FACTORS
 
Not applicable to a smaller reporting company.
 
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None
 
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
 
 
 a.
None
 
 
 b.
The total cumulative preferred stock dividends contingency at December 31, 2013 is $7,628,626.
 
ITEM 4.     MINE SAFETY DISCLOSURES
 
 Not applicable.
 
ITEM 5.     OTHER INFORMATION
 
 
 a.
None
 
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PART II.  OTHER INFORMATION (CONTINUED)
 
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 December 31, 2013, formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of December 31, 2013 and June 30, 2013, (ii) Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2013 and 2012, (iii) Condensed Consolidated Statements of Income for the Six Months Ended December 31, 2013 and 2012, (iv) Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2013 and 2012, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
 
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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 7, 2014   /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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